Which of the following best describes the information provided by the accounts receivable turnover ratio?

• A. It indicates the proportion of credit sales to total sales.
• B. It reflects the company's ability to pay its short-term liabilities.
• C. It shows the average time inventory is held before being sold.
• D. It measures how efficiently a company collects its accounts receivable during a period.

Answer: (D)

Verified step by step guidance

1. Understand the concept of the accounts receivable turnover ratio: This ratio measures how efficiently a company collects its accounts receivable during a specific period. It reflects the frequency with which receivables are converted into cash.
2. Recognize the formula for the accounts receivable turnover ratio: The formula is \( \text{Accounts Receivable Turnover Ratio} = \frac{\text{Net Credit Sales}}{\text{Average Accounts Receivable}} \). This ratio helps assess the effectiveness of credit and collection policies.
3. Analyze the options provided: Evaluate each statement to determine its relevance to the accounts receivable turnover ratio. For example, the proportion of credit sales to total sales is unrelated to this ratio, as it focuses on collection efficiency rather than sales composition.
4. Eliminate incorrect options: The ability to pay short-term liabilities is measured by liquidity ratios like the current ratio or quick ratio, not the accounts receivable turnover ratio. Similarly, the average time inventory is held before being sold is assessed using the inventory turnover ratio.
5. Select the correct answer: Based on the analysis, the correct description is that the accounts receivable turnover ratio measures how efficiently a company collects its accounts receivable during a period.