Activity (or turnover) ratios - class-XII

Accounts receivable turnover is the number of times per year that a business collects its average accounts receivables.

Inventory turnover ratio determines the number of times stock is turned into sales during the accounting period under consideration. It expresses the relationship between the cost of goods sold and stock of goods. The formula for its calculation is as follows:

Inventory turnover ratio shows how many times a company's inventory is sold and replaced over a period of time. It is an efficiency ratio. The equation for inventory turnover equals the cost of goods sold divided by the average inventory.

Collection is more than the current sales, In such situation closing balance of receivables will be less than the opening balance. As credit is more than the debit.

Debtors turnover ratios is an activity ratio measuring how efficiently a firm uses it assets. This can be calculated as:

Turnover ratio is a measurement of the number of times a company's inventory is replaced during a given period of time. It is calculated by dividing cost of goods sold by average inventory during a given period of time. It indicates the number of times the capital has been rotated in the process of doing business as well as the efficiency with which the capital employed is totated in the business.

Change in average balance of debtors does not have any relation with average payable. 

Turnover ratio is a measurement of the number of times a company's inventory is replaced during a given period of time. It is calculated by dividing cost of goods sold by capital employed during a given period of time. 

Debt Turnover ratio = Net credit sales/ Average trade receivables = $4$

Inventory Turnover = [Cost of goods sold/Sales] / Average inventory.

Inventory turnover ratio measures the activity of a firm's inventory i.e. the number of times inventory is sold or used in a time period such as a year. The equation for inventory turnover equals the cost of goods sold divided by the average inventory.

The average payment period (APP) is defined as the number of days a company takes to pay off credit purchases. It is calculated as accounts payable/ (total annual purchases/360).  As the average payment period increases, cash should increases as well, but working capital remains the same. APP ratio may indicate the firm is experiencing stock outs and lost sales.

By monitoring average collection policy, the firm can see if its term are generally being met. ABC company's credit collection would be considered poor if collection period is more than 45 days i.e. Customers on average are significantly slower in paying than company policies allow.

Average debtors = (Rs. 40,000 + Rs. 1,20,000)/2 = Rs. 80,000

Net Asset Turnover ratio = Sales/ Net Asset

Inventory turnover ratio = Cost of goods sold(COGS) / Average inventory

Turnover ratios are used by management to evaluate the efficiency with which the firm manages and utilizes its assets. For example Fixed asset turnover ratio measures how efficiently the assets are used to generate sales.

A falling finished goods turnover ratio indicates that goods are not being sold as quickly as they are produced, which suggests a decline in market demand for the product.

Capacity ratio X Efficiency ratio = Activity ratio

Inventory turnover ratio = Cost of goods sold / Average inventory. Large inventory accumulation in anticipation of price rise means high inventory levels relative to sales, resulting in a low turnover ratio. This indicates goods are being stockpiled rather than sold.

Debtor collection period is the time that it takes to convert balances from account receivables back into cash flow. This can apply to an individual transaction or to the business's overall transaction history for a period of time. The lower the debtor collection period the more efficient is the company in collecting payment from its customers.

Credit policy of an organization consists of various elements like cash discount, collection period etc. Collection period means the period of credit allowed to the customer by the organization against the credit sales.

Stock turnover ratio = Cost of goods sold/ average inventory

Stock turnover ratio = Cost of goods sold/Average inventory

Activity ratios are used to assess the efficiency with which the firm manages and utilises  its assets. These ratios usually compare the revenue growth with respect to the asset deployed giving an idea of where the company is headed, towards growth or decline.

Average accounts payable = (Rs. 4,00,000 + Rs. 2,00,000)/2

Total assets turnover ratio = Sales / Total assets