Chartered Financial Analyst (CFA) Level 1 Practice Exam

How is Receivables Turnover calculated?

1. Average receivables / revenue from credit sales

2. Revenue or revenue from credit sales / average receivables

3. Credit sales / average receivables

4. Total sales / average receivables

The correct answer is: Revenue or revenue from credit sales / average receivables

Receivables Turnover is calculated by dividing revenue or revenue from credit sales by average receivables. This ratio measures how efficiently a company utilizes its assets by indicating how many times, on average, receivables are collected during a specific period. The logic behind this calculation is that it reflects the effectiveness of a company in managing its credit policies and collecting the amounts owed by customers. A higher Receivables Turnover ratio suggests that a company is efficient in collecting its receivables, while a lower ratio may indicate potential issues in credit policies or collection processes. Using revenue from credit sales specifically focuses on the sales made on credit, providing a clearer view of how quickly the company is able to convert its receivables into cash from those sales. This gives investors and analysts a more accurate picture of liquidity and operational efficiency regarding credit management. The other options are less representative of the Receivables Turnover concept, as they do not correctly attribute the relationship between sales and the average accounts receivable balance as per the standard calculation.