What financial statement ratios facilitate the measurement of a company's effectiveness in collecting cash from customers?What is measured by each of these ratios? How should each of these ratios be interpreted?
What will be an ideal response?
Two ratios help management, or other users, measure a company's collection period. The accounts receivable turnover ratio tells how many times the net accounts receivable balance is "turned over" (converted into cash) each year. The higher the turnover, the shorter the collection period. The average number of days to collect accounts receivable measures how many days, on average, it takes a company to collect its accounts receivable. Because longer collection periods increase costs, shorter periods are obviously more desirable.
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