Which ratio is used to measure how quickly credit sales are converted into cash?

• A. Accounts Receivable Turnover Ratio
• B. Debt-to-Equity Ratio
• C. Inventory Turnover Ratio
• D. Current Ratio

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the purpose of the question. The goal is to identify the ratio that measures how efficiently a company converts its credit sales into cash.
2. Step 2: Review the given options. Each ratio has a specific purpose: Accounts Receivable Turnover Ratio measures the efficiency of collecting receivables, Debt-to-Equity Ratio assesses financial leverage, Inventory Turnover Ratio evaluates inventory management, and Current Ratio measures short-term liquidity.
3. Step 3: Focus on the Accounts Receivable Turnover Ratio. This ratio is specifically designed to measure how quickly a company collects cash from its credit sales. It is calculated using the formula: $\frac{\mathrm{Net\; Credit\; Sales}}{\mathrm{Average\; Accounts\; Receivable}}$.
4. Step 4: Eliminate the other options. Debt-to-Equity Ratio, Inventory Turnover Ratio, and Current Ratio do not directly relate to the conversion of credit sales into cash. They serve different financial analysis purposes.
5. Step 5: Conclude that the Accounts Receivable Turnover Ratio is the correct answer, as it directly measures the efficiency of converting credit sales into cash.