In financial statement analysis, a high accounts receivable (A/R) turnover ratio generally indicates which of the following?

• A. The company is accumulating receivables and taking longer to convert them into cash.
• B. The company is collecting its receivables quickly and/or extending credit primarily to customers who pay promptly.
• C. The company has a large amount of uncollectible accounts and is writing off receivables frequently.
• D. The company has a high proportion of sales made on credit with slow customer payment patterns.

Answer: (B)

Verified step by step guidance

1. Understand the definition of the accounts receivable turnover ratio: it measures how many times a company collects its average accounts receivable during a period. The formula is \(\text{A/R Turnover} = \frac{\text{Net Credit Sales}}{\text{Average Accounts Receivable}}\).
2. Interpret what a high A/R turnover ratio means: since the ratio shows how often receivables are collected, a higher number indicates that the company is collecting its receivables more frequently within the period.
3. Analyze the implications of collecting receivables quickly: this suggests efficient credit and collection policies, meaning customers pay their debts promptly, improving cash flow.
4. Contrast this with a low A/R turnover ratio, which would indicate slower collection, accumulation of receivables, or potential credit issues.
5. Conclude that a high A/R turnover ratio generally indicates the company is collecting its receivables quickly and/or extending credit primarily to customers who pay promptly.