T.S. Grewal Class 12 Vol 3 Chapter 4 Q.106 - Accounting Ratios

Question 106

From the information given below, calculate the Trade Receivables Turnover Ratio: Credit Revenue from Operations, i.e., Credit Sales ₹8,00,000; Opening Trade Receivables ₹1,20,000; and Closing Trade Receivables ₹2,00,000.

State, giving reason, which of the following would increase, decrease, or not change the Trade Receivables Turnover Ratio:
(i) Collection from Trade Receivables ₹40,000. (ii) Credit Revenue from Operations, i.e., Credit Sales ₹80,000. (iii) Sales Return ₹20,000. (iv) Credit Purchase ₹1,60,000.

Solution

Average Trade Receivables = (1,20,000 + 2,00,000) ÷ 2 = ₹1,60,000

Trade Receivables Turnover Ratio = 8,00,000 ÷ 1,60,000 = 5 times

(i) Collection from Trade Receivables ₹40,000 — Increase
Reason: Collecting from receivables reduces Closing Trade Receivables, which reduces Average Trade Receivables.
Closing Trade Receivables = 2,00,000 − 40,000 = ₹1,60,000
Average Trade Receivables = (1,20,000 + 1,60,000) ÷ 2 = ₹1,40,000
Trade Receivables Turnover Ratio = 8,00,000 ÷ 1,40,000 = 5.71 times (Increased from 5 to 5.71)

(ii) Additional Credit Sales ₹80,000 — Decrease
Reason: Both Credit Sales and Closing Trade Receivables increase, which in turn increases Average Trade Receivables.
Credit Sales = 8,00,000 + 80,000 = ₹8,80,000
Closing Trade Receivables = 2,00,000 + 80,000 = ₹2,80,000
Average Trade Receivables = (1,20,000 + 2,80,000) ÷ 2 = ₹2,00,000
Trade Receivables Turnover Ratio = 8,80,000 ÷ 2,00,000 = 4.4 times

(iii) Sales Return ₹20,000 — Increase
Reason: Both Credit Sales and Closing Trade Receivables decrease by the same amount.
Credit Sales = 8,00,000 − 20,000 = ₹7,80,000
Closing Trade Receivables = 2,00,000 − 20,000 = ₹1,80,000
Average Trade Receivables = (1,20,000 + 1,80,000) ÷ 2 = ₹1,50,000
Trade Receivables Turnover Ratio = 7,80,000 ÷ 1,50,000 = 5.2 times

(iv) Credit Purchase ₹1,60,000 — No Change
Reason: Credit Purchases affect Trade Payables, not Trade Receivables, so this ratio is unaffected.