What is the accounts receivable turnover ratio?

• A. Average Accounts Receivable / Net Credit Sales
• B. Net Credit Sales / Beginning Accounts Receivable
• C. Net Credit Sales / Ending Accounts Receivable
• D. Net Credit Sales / Average Accounts Receivable

Answer: (D)

Accounts receivable turnover shows how many times your company collects its average accounts receivable during a period. It uses net credit sales, since those are the sales that create receivables, and it uses average accounts receivable to smooth out seasonal changes from the beginning to the end of the period. The correct formula is Net Credit Sales divided by Average Accounts Receivable, which is why the best answer is that option. Using average AR rather than beginning or ending AR gives a fuller picture of collection activity over the whole period. The other approaches mix up the order or use just the beginning or ending balance, which doesn’t accurately reflect the period’s average collection effort.