As per Creditors Turnover Ratio it is calculated as the formula Creditors Turnover Ratio = Net Credit Purchases/Average Creditors. Interpretation says "Lower the ratio means easy credit terms will be available for the firm". According to this interpretation
Year 1 = 90000/25000 = 3.60
Year 2 = 120000/30000 = 4.00
Year 3 = 130000/50000 = 2.30
Year 3 is the best choice for the creditors. Creditors worth Rs.50000 are outstanding against net credit purchase of Rs.130000; whereas, anybody can say Year 2 is the best choice because creditors only for Rs.30000 are outstanding against net credit purchase of Rs.120000. It means the firm is paying off its creditors on or before due date which is a very good sign for any supplier.
Anybody please remove my doubt, as i have to undergo an exam which is fast approaching.
Thanks
CAclubindia
