Page 134 - DMGT403_ACCOUNTING_FOR_MANAGERS

Unit 6: Financial Statements: Analysis and Interpretation

1,46,000 Notes
Debtor Turnover Ratio = 6.64 times
4,000 + 18,000
365 days 365 days
Debtors Velocity = = 55 days
Debtors Turnover Ratio 6.64 times
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.

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

Notes Standard norm of the ratio:

Lesser the ratio is better the position of the firm 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

Notes 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
Solution: To find out the volume of purchases, the formula of cost of goods sold should be taken
into consideration.
Cost of goods sold = Opening Stock + Purchases – Closing Stock

= 10,000 + Purchases – 20,000
Cost of goods sold = Sales – Gross Profit
= 1,00,000 – 10% on 1,00,000 = 90,000

The next step is to apply the found value in the early equation
Purchases = 90,000 – 10,000 + 20,000 = 1,00,000
To find out the value creditors, the creditor velocity and creditors turnover ratio

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