## From the information given below, calculate Trade Receivables Turnover Ratio: Credit Revenue from Operations, i.e., Credit Sales Rs. 8,00,000; Opening Trade Receivables Rs. 1,20,000; and Closing Trade Receivables Rs. 2,00,000. State giving reason, which of the following would increase, decrease or not change Trade Receivables Turnover Ratio: (i) Collection from Trade Receivables Rs. 40,000. (ii) Credit Revenue from Operations, i.e., Credit Sales Rs. 80,000. (iii) Sales Return Rs. 20,000. (iv) Credit Purchase Rs. 1,60,000.

SOLUTION

Average Trade receivables = 1,20,000 + 2,00,000 / 2
= 1,60,000

Trade receivable turnover ratio = Net sales /  Average receivables
Trade receivable turnover ratio = 8,00,000 / 1,60,000
= 5 Times

(i) Collection from Trade Receivables Rs. 40,000- Increase
Reason: Collection from Trade Receivables will result in decrease in the amount of closing Trade Receivables which will reduce the amount of average Trade Receivables.

Closing Trade Receivables = 2,00,000 − 40,000
= Rs. 1,60,000

Average Trade receivables = 1,20,000 + 1,60,000 / 2
= 1,40,000

Trade receivable turnover ratio = Net sales /  Average receivables Trade receivable turnover ratio
= 8,00,000 / 1,40,000
= 5.71 Times (Increased from 5 to 5.71 times)

(ii) Credit Revenue from Operations, i.e., Sales  Rs. 80,000 – Decrease
Reason: This transaction will result in increase in both credit sales as well as closing Trade Receivables. Increase in closing Trade Receivables, in turn, will lead to an increase in the average Trade Receivables.

Credit Sales = 8,00,000 + 80,000
= Rs. 8,80,000

Closing Trade Receivables = 2,00,000 + 80,000
= Rs. 2,80,000

Average Trade receivables = 1,20,000 + 2,80,000 / 2 = 2,00,000

Trade receivable turnover ratio = Net sales /  Average receivables
Trade receivable turnover ratio = 8,80,000 / 2,00,000 = 4.4 Times

(iii) Sales Return Rs. 20,000- Increase
Reason: This transaction will result in decrease in both sales and average Trade Receivables.

Credit Sales = 8,00,000 − 20,000
= Rs. 7,80,000

Closing Trade Receivables = 2,00,000 − 20,000
= Rs. 1,80,000