12. CHAPTER 4 RATIO ANALYSIS : ACTIVITY RATIOS : TRADE RECEIVABLES TURNOVER RATIO, TRADE PAYABLES TURNOVER RATIO, WORKING CAPITAL TURNOVER RATIO

LEARNING OUTCOMES:

STUDENTS WILL BE ABLE TO:

CALCULATE,  SOLVE,  COMPUTE:
WORKING CAPITAL TURNOVER RATIO 

USING VARIOUS  FORMULAS
 AND KNOWING ITS SIGNIFICANCE

INTRODUCTION TO THE CLASS
 (RECAPITULATION FROM THE PREVIOUS CLASS)

TRADE RECEIVABLES TURNOVER RATIO
 (HEAR MY AUDIO FOR EXPLANATION)

 Trade Receivables Turnover Ratio

 It expresses the relationship between net credit revenue from operations and average trade receivables. it is calculated as follows:

= Net credit reve
nue from operations divided by Average trade receivables
where,

Average trade receivables = opening trade receivables + closing trade receivables divided by two

Significance.. the liquidity position of a firm depends upon the speed with which trade receivables are realised. This ratio indicates the number of times the receivables are converted into cash in an accounting period. This ratio also helps in working out the average collection period
Average collection period = months in a year/ days in a year divided by trade receivables turnover ratio
Higher trade receivables turnover means speedy collection from trade receivable.

Ques 1   (EXAMPLE)

Calculate the Trade receivables turnover ratio and Average collection period from the following information:
Total revenue from operations                      400000
Cash revenue from operations     20% of total revenue from operations

Trade receivables
 as at 1-4-2019                   40,000
Trade receivables as at 31-3- 2020               110000
return inwards                                                 20000.


ANS.

Trade receivables turnover ratio = net credit revenue from operations/ average trade receivables
cash revenue from operations= 20% of 400000 = 80000

Credit revenue from operations =total revenue from operations - cash revenue from operations - return inwards
= 4 lakh - 80000 - 20000 = 300000
Average trade receivables= opening trade receivers + closing trade receivables/2
= 40000 + 110000 /2 = 75000

Therefore, trade receivable turnover ratio =300000/75000 = 4 times 

DEBT COLLECTION PERIOD OR AVERAGE COLLECTION PERIOD (HEAR THE AUDIO)


Average collection period = months in a year /trade receivables turnover ratio 
= 12 / 4 = 3 months

TRADE PAYABLES TURNOVER RATIO & AVERAGE PAYMENT PERIOD OR AVERAGE AGE OF PAYABLES (LISTEN TO MY AUDIO)

Trade payables turnover Ratio

Indicates the pattern of payment of trade payable. As trade payable arise on account of credit purchases, it expresses relationship between net credit purchases and average trade payables.
= net credit purchases divided by average trade payables
where,

 Average trade payables = opening trade payables + closing trade payables divided by 2

Significance.. it reveals average payment period.

Average payment period = number of days /months in a year divided by trade payables turnover ratio.

Lower trade payables turnover ratio means credit allowed by the supplier is for a long period or it may reflect delayed payment to suppliers which is not a very good policy as it may affect the reputation of the business.

Ques  (EXAMPLE : WITH TRADE RECEIVABLES & TRADE PAYABLES RATIO (BOTH))

From the following information, calculate

i.     Trade receivables turnover ratio

ii.   Average collection period

iii   Trade payable turnover ratio

iv.   Average payment period.

 Revenue from operations 875000

                Creditors 90,000
                Bills receivable 48,000
                Bills payable 52,000
                Purchases 420000
                Debtors 59000

ANS.

Trade receivable turnover ratio= net credit revenue from operations/ average trade receivables
Net credit revenue from operations= 875000

Average trade receivables = debtors + bills receivable = 59000 + 48000 = 107000 

therefore,
 Trade receivable turnover ratio = 875000/ 107000 = 8.18 times

(ii) Average collection period = 365/ trade receivable turnover ratio 

= 365/ 8.18 = 45 days 

(iii) Trade payable turnover ratio= net credit purchases /average trade payables 

Net credit purchases = 420000 
Average trade payables = creditors + bills payable = 90000 + 52000 = 142000

Therefore,
 Trade payable turnover ratio = 420000/142000 = 2.96 times

(iv) Average payment period = 365/ trade payable turnover ratio

= 365/ 2.96 =123 days

WORKING CAPITAL TURNOVER RATIO (CLICK FOR THE EXPLANATION)

Working capital turnover ratio

=  net revenue from operations divided by working capital 

where, 

working capital = current assets - current liabilities

Significance ..High working capital turnover ratio is a good sign and implies efficient utilisation of resources, resulting in higher liquidity and profitability in the business.

Ques (EXAMPLE)

Compute working capital turnover ratio:
Cash revenue from operations       130000
Credit revenue from operations     380000
return inwards                                10,000
liquid assets                                  140000
current liabilities                           105000
inventory                                         90000

ANS.

working capital turnover ratio = net revenue from operations/ working capital

net revenue from operations = cash revenue from operations + credit revenue from operations - return inward 

= 130000 + 380000 - 10000 = 5 lakh

working capital = current assets (liquid assets + inventory) - current liabilities

= (140000 + 90000) - 105000 = 125000 

Therefore, 

working capital turnover ratio = 5 lakh/ 125000 = 4 times

CONCLUDING NOTES TO THE END OF THE CLASS  (HEAR THE CONCLUDING NOTES)