Depreciation Schedule (unit of production method 1

AKA: Sales to receivables ratio

CALCULATION:

Divide net credit sales by the average accounts receivable for that period DO NOT include cash sales because they do not create receivables.

INTERPRETATION

Measures how many times a business can turn its accounts receivable into cash during a period.

Example:

M&M’s balance sheet shows $20,000 in accounts receivable, $75,000 of gross credit sales, and $25,000 of returns. Last year’s balance sheet showed $10,000 of accounts receivable. Net credit sales = 75,000 – 25,000 = 50,000 Average accounts receivable = (10,000 + 20,000) / 2 = 15,000 Accounts Receivable Turnover Ratio = 50,000 / 15,000 = 3.33 This means that M&M collects their receivables about 3.3 times a year or once every 110 days. (365 days / 3.33 = 109.61)

Accounts Receivable Turnover Ratio

Accounts Receivable Turnover Ratio =

Net credit sales

Net receivables

Accounts Receivable Turnover Ratio: