In analyzing liquidity and credit policies, what does a higher accounts receivable turnover ratio generally indicate?

• A. The company is taking longer to collect receivables, which may indicate weaker credit screening or collection efforts.
• B. The company has increased its inventory turnover, indicating faster movement of inventory relative to cost of goods sold.
• C. The company has a higher proportion of sales made on cash terms rather than on credit, causing the ratio to decrease.
• D. The company is collecting receivables more quickly, on average, and is more efficient in managing credit and collections.

Answer: (D)

Verified step by step guidance

1. Understand that the accounts receivable turnover ratio measures how many times a company collects its average accounts receivable during a period. It is a key indicator of the efficiency of credit and collection policies.
2. Recall the formula for accounts receivable turnover ratio: \[\text{Accounts Receivable Turnover} = \frac{\text{Net Credit Sales}}{\text{Average Accounts Receivable}}\]
3. Interpret a higher accounts receivable turnover ratio as meaning the company collects its receivables more frequently within the period, implying faster collection and better credit management.
4. Contrast this with a lower turnover ratio, which would indicate slower collection, possibly due to weaker credit screening or collection efforts.
5. Conclude that a higher accounts receivable turnover ratio generally indicates improved liquidity and efficiency in managing credit and collections, not longer collection periods or inventory turnover changes.