Question

Calculate Trade Receivables Turnover Ratio

• A. 8.18 times
• B. 8.23 : 1
• C. 0.0818
• D. 8.81 : 1
• A. 30 days
• B. 60 days
• C. 45 days
• D. 15 days
• A. 29.6 times
• B. 2.96 times
• C. 0.296
• D. 2.69 : 1
• A. 123 days
• B. 121 days
• C. 132 days
• D. 133 days
• A. Liquidity Ratio
• B. Solvency Ratio
• C. Activity Ratio
• D. Profitability Ratio

Answer 1

The Correct Option is B

Calculation of Trade Receivables Turnover Ratio 

The Trade Receivables Turnover Ratio measures how efficiently a company collects its receivables. It is calculated by dividing Revenue from Operations by Average Trade Receivables.

Formula

The formula for the Trade Receivables Turnover Ratio is:

\( \text{Trade Receivables Turnover Ratio} = \frac{\text{Revenue from Operations}}{\text{Average Trade Receivables}} \)

Calculation

Given the data:

• Revenue from Operations: (Please provide the revenue from operations amount here)
• Average Trade Receivables: (Please provide the average trade receivables amount here)

Assuming provided data (adjust as needed):

• Revenue from Operations : 875000
• Average Trade Receivables: 106391

Substituting value, it is calculated as:

\( \text{Trade Receivables Turnover Ratio} = \frac{875000}{106391} = 8.23 \)

Result

The Trade Receivables Turnover Ratio is 8.23 : 1.

Conclusion

Therefore, the correct answer is Option 2.

Answer 2

Trade Receivables Turnover Ratio 

The Trade Receivables Turnover Ratio is calculated by dividing Revenue from Operations by the total trade receivables (Trade Debtors + Bills Receivable). This ratio helps assess the efficiency of the firm's credit collection.

Calculation

Given values:

• Revenue from Operations: ₹ 8,75,000
• Trade Debtors: ₹ 59,000
• Bills Receivable: ₹ 48,000

The formula for the Trade Receivables Turnover Ratio is:

\( \text{Trade Receivables Turnover Ratio} = \frac{\text{Revenue from Operations}}{\text{Trade Debtors + Bills Receivable}} \)

Substituting the given values:

\( \text{Trade Receivables Turnover Ratio} = \frac{8,75,000}{59,000 + 48,000} \)

\( \text{Trade Receivables Turnover Ratio} = \frac{8,75,000}{1,07,000} \)

\( \text{Trade Receivables Turnover Ratio} = 8.23 : 1 \)

Interpretation

This ratio of 8.23 : 1 indicates that the receivables are collected approximately 8.23  times during the period. A higher ratio generally suggests a more efficient credit and collection policy.

Answer 3

Calculation of Average Collection Period 

The Average Collection Period measures the average number of days it takes for a company to collect its receivables. It is calculated using the formula: (365 / Trade Receivables Turnover Ratio).

Formula

The formula for the Average Collection Period is:

\( \text{Average Collection Period} = \frac{365}{\text{Trade Receivables Turnover Ratio}} \)

Calculation

Assuming a Trade Receivables Turnover Ratio of 8.23 (From question 27) or calculated above:

\( \text{Average Collection Period} = \frac{365}{8.23} \)

\( \text{Average Collection Period} = 44.35 \)

Rounded to the nearest whole number, the Average Collection Period is approximately 44 days.

Conclusion

Therefore, as per the options, correct answer will be Option 3. Average collection period is 45 days.

Answer 4

Average Collection Period 

The Average Collection Period can be derived from the Trade Receivables Turnover Ratio. It indicates the average number of days it takes for a company to collect its receivables.

Calculation

Using the Trade Receivables Turnover Ratio from Question 27 (assumed to be 8.18):

The formula for the Average Collection Period is:

\( \text{Average Collection Period} = \frac{365}{\text{Trade Receivables Turnover Ratio}} \)

Substituting the value:

\( \text{Average Collection Period} = \frac{365}{8.18} \)

\( \text{Average Collection Period} = 44.62 \text{ days} \)

Rounded to the nearest whole number, the Average Collection Period is approximately 45 days.

Interpretation

An Average Collection Period of approximately 45 days indicates that, on average, it takes the company 45 days to collect its receivables. This can be compared to industry benchmarks and the company's credit terms to assess the effectiveness of its collection efforts. A shorter period is generally preferred.

Answer 5

Trade Payables Turnover Ratio 

The Trade Payables Turnover Ratio is calculated by dividing Purchases by the total trade payables (Creditors + Bills Payable). This ratio indicates how many times a company pays off its payables during a period.

Calculation

Given values:

• Purchases: ₹ 4,20,000
• Creditors: ₹ 90,000
• Bills Payable: ₹ 52,000

The formula for the Trade Payables Turnover Ratio is:

\( \text{Trade Payables Turnover Ratio} = \frac{\text{Purchases}}{\text{Creditors + Bills Payable}} \)

Substituting the given values:

\( \text{Trade Payables Turnover Ratio} = \frac{4,20,000}{90,000 + 52,000} \)

\( \text{Trade Payables Turnover Ratio} = \frac{4,20,000}{1,42,000} \)

\( \text{Trade Payables Turnover Ratio} = 2.96 \)

Interpretation

This ratio of 2.96 indicates that the company pays off its payables approximately 2.96 times during the period. A higher ratio may indicate that the company is not taking full advantage of available credit terms from its suppliers, while a very low ratio might suggest difficulty in paying suppliers on time.

Answer 6

Average Payment Period 

The Average Payment Period indicates the average number of days it takes a company to pay its suppliers. It is derived from the Trade Payables Turnover Ratio.

Calculation

Using the Trade Payables Turnover Ratio from the previous calculation (2.96):

The formula for the Average Payment Period is:

\( \text{Average Payment Period} = \frac{365}{\text{Trade Payables Turnover Ratio}} \)

Substituting the value:

\( \text{Average Payment Period} = \frac{365}{2.96} \)

\( \text{Average Payment Period} = 121.31 \text{ days} \)

Rounded to the nearest whole number, the Average Payment Period is approximately 121 days.

Interpretation

An Average Payment Period of approximately 121 days indicates that, on average, it takes the company 123 days to pay its suppliers. This figure is compared to industry standards and credit terms. A longer payment period might improve a company's cash flow, but could also strain relationships with suppliers. A shorter payment period may lead to better supplier relationships, but may reduce available cash.

Answer 7

Activity Ratios 

The ratios we have discussed (Trade Receivables Turnover Ratio, Average Collection Period, Trade Payables Turnover Ratio, and Average Payment Period) measure the efficiency of a company's asset usage. Therefore, these ratios are classified as Activity Ratios.

Purpose of Activity Ratios

• Assess how effectively a company utilizes its assets to generate revenue.
• Indicate the speed at which various accounts (e.g., receivables, payables, inventory) are converted into sales or cash.
• Help identify potential operational inefficiencies.

Examples of Activity Ratios Discussed

• Trade Receivables Turnover Ratio: Measures how efficiently a company collects its receivables.
• Average Collection Period: Indicates the average number of days it takes to collect receivables.
• Trade Payables Turnover Ratio: Measures how efficiently a company pays its suppliers.
• Average Payment Period: Indicates the average number of days it takes to pay suppliers.