Turnover ratio

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Accounts Manager
49 Points Joined November 2011

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 

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On 08 August 2017 at 22:13 Report
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Service
297 Points Joined November 2009

Year 2 will be considered best.

It simply means that in

- Year 1 Creditors were paid 3.6 times a year,

- Year 2 they were paid 4 times a year and

- Year 3 they were paid 2.3 times a year

It is also important to calculate average age of creditors in days... i.e. 365/Creditors Turnover ratio...

So in Year 1 the creditors were paid after 101 days, in Year 2 they were paid after 91 days and in Year 3 they were paid after 159 days

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On 10 August 2017 at 16:43
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Accounts Manager
49 Points Joined November 2011

Thank you very much Mr. Michelle 

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On 12 August 2017 at 08:29


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