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ABC Company: Accounts Receivable Turnover

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Analysts maintain that two of the most important ratios are inventory turnover and accounts receivable turnover.

You are analyzing ABC Company, a computer manufacturer. You notice that accounts receivable turnover this year is significantly lower than prior years. Provide three explanations that would be consistent with this observation. Explain whether these would be of concern to you.

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Solution Summary

Your response is 257 words and explains what "lower turnover" means (in terms of days), what causes a lower AR turnover and three "stories" that would lead to lower AR turnover. A discussion follows that indicates if the stories are a cause for concern and why or why not.

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Lower turnover means that customers are taking longer to pay.

Turnover of 1 = 365 days
Turnover of 2 = every six months
Turnover of 12 = once a month
Turnover of 24 = about every two weeks
So, the lower the turnover, the more days in AR (longer to collect)

AR turnover can be lower due to a lower numerator (sales) or a higher denominator (accounts receivable). So, here are three potential explanations:

1. Declining sales over the year (lowers numerator versus average AR)
Yes, this would be ...

Solution provided by:
Carol Sargent, PhD
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  • MSc, University of Virginia
  • PhD, Georgia State University
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