Page 70 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 4: Ratio Analysis

Particulars ` Notes
Total Gross sales 2,00,000
Cash Sales (included in above) 40,000
Sales Returns 14,000
Total Debtors 18,000
Bills Receivable 4,000
Provision for Doubtful Debts 2,000
Total Creditors 20,000
Calculate average collection period.
Solution:
To find out the average collection period, first debtors turnover ratio has to computed

Debtors Turnover Ratio = NetCreditSales
Bills Re ceivable + Debtors
Net Credit Sales = Gross Sales – Cash Sales – Sales Return
= 2,00,000 – 40,000 – 14,000 = 1,46,000

,
,
Debtor Turnover Ratio = 146000 = 664 times
.
4 000 + 18 000
,
,
Debtors Velocity = 365 days = 365 days = 55 days

.
Debtors Turnover Ratio 664 times
4.6.3 Creditors Turnover Ratio
It shows effectiveness of the firm in making use of credit period allowed by the creditors during

the moment of credit purchase.

Creditors Turnover Ratio = Credit Purchase or Credit Purchase
Average Creditors Bills Payable Sundry Creditors+

y

!
Caution Standard norm of the ratio: Lesser the ratio is better the position of the fi rm in
liquidity management means enjoying the more credit period from the creditors and vice
versa.
365 days/ 52 weeks/ 12 months
Creditors Velocity =
Creditors Turnover Ratio
!

Caution Standard norm of the ratio: Greater the duration is better the liquidity

management of the firm in availing the credit period of the creditors and vice versa.

Example: Find out the value of creditors from the following:
Sales `1,00,000 Opening stock `10,000
Gross profit on sales 10% Closing stock `20,000

Creditors velocity 73 days Bills payable `16,000
Note: All purchases are credit purchases

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