How is the receivables turnover ratio calculated?

The receivables turnover ratio is a key financial metric used to assess how efficiently a company collects its accounts receivable. It specifically indicates how many times a company is able to turn its receivables into cash during a specific period, usually a year.

The correct calculation involves dividing total sales by average accounts receivable. This ratio provides insight into the effectiveness of a company’s credit policies and its collection efforts. A higher ratio implies that the company collects its receivables more frequently, suggesting efficient management and strong cash flow.

In this case, using sales in the numerator captures the total revenue generated within the period, which is essential for determining how well outstanding receivables are being converted into cash. On the other hand, calculating it by dividing accounts receivable by sales would not yield meaningful information related to turnover; it would indicate the amount of sales per dollar of receivables, which does not reflect efficiency in collections. Similarly, net income is not a relevant factor for calculating the turnover of receivables, nor does total assets relate to how efficiently accounts receivable are managed in this context.