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

• A. The company is taking longer to collect cash from customers, increasing its average collection period.
• B. The company collects its receivables quickly and/or extends relatively tight credit terms.
• C. The company has a higher proportion of uncollectible accounts, causing bad debt expense to increase.
• D. The company is carrying more inventory relative to sales, resulting in slower inventory turnover.

Answer: (B)

Verified step by step guidance

1. Understand the definition of the accounts receivable (AR) turnover ratio: it measures how many times a company collects its average accounts receivable balance during a period. The formula is: \[ \text{AR Turnover Ratio} = \frac{\text{Net Credit Sales}}{\text{Average Accounts Receivable}} \]
2. Interpret what a high AR turnover ratio means: a higher ratio indicates that the company is collecting its receivables more frequently within the period, implying efficient collection processes.
3. Relate the AR turnover ratio to the average collection period, which is the average number of days it takes to collect receivables. The formula is: \[ \text{Average Collection Period} = \frac{365}{\text{AR Turnover Ratio}} \] A high AR turnover ratio results in a lower average collection period, meaning faster collection.
4. Evaluate the given options in the problem: a high AR turnover ratio does not mean the company is taking longer to collect cash (that would be a low turnover ratio), nor does it directly indicate higher bad debts or inventory issues.
5. Conclude that a high AR turnover ratio generally indicates the company collects its receivables quickly and/or has tight credit policies, which aligns with the correct answer.