Question 101:

Closing Trade Receivables ₹4,00,000; Cash Sales being 25% of Credit Sales; Excess of Closing Trade Receivables over Opening Trade Receivables ₹2,00,000; Revenue from Operations, i.e., Revenue from Operations, i.e., Net Sales ₹15,00,000. Calculate Trade Receivables Turnover Ratio.

 

Answer:

Therefore, Trades Receivable Turnover Ratio is 4 Times

Question 102:

A firm normally has trade Receivables equal to two months' credit Sales. During the coming year it expects Credit Sales of ₹7,20,000 spread evenly over the year (12 months). What is the estimated amount of Trade Receivables at the end of the year?

Answer:

 

Question 103:

Mercury Ltd. made Credit Sales of ₹4,00,000 during the financial period. If the collection period is 36 days and year is assumed to be 360 days, calculate:

(i) Trade Receivables Turnover Ratio;

(ii) Average Trade Receivables;

(iii) Trade Receivables at the end when Trade Receivables at the end are more than that in the beginning by ₹6,000.

 

Answer:

(i) Trade Receivables Turnover Ratio;

 

Formula for calculating Trade Receivables Turnover Ratio

Trade Receivables Turnover Ratio = no. of year / collection period

Trade Receivables Turnover Ratio = 360 / 36 =10 Times

(ii) Average Trade Receivables;

 

This formula is used for of calculating Trade Receivables Turnover Ratio = Credit revenue from operation /Average Trade Receivables

Trade Receivables Turnover Ratio= 4,00,000 /Average Trade Receivables = 10 Times

If Above formula is reversed, We can calculate Average Trade Receivables as follow;

Average Trade Receivables = 4,00,000/ 10 Times= 40,000

 

(iii) Trade Receivables at the end when Trade Receivables at the end are more than that in the beginning by ₹6,000.

 

∴ Closing Trade Receivables = x + 6,000

          Average receivables        = Opening Receivables +Closing Receivables/2

          40,000        = x+x+6,000/2

          Or, 80,000  = 2x+6,000

          Or,2x = 74,000

          Or,x   = 37,000

∴ Opening Trade Receivables = x = ₹37,000

Closing Trade Receivables = x + 6,000 = 43,000

Closing Trade Receivables =37,000 + 6,000 = 43,000

Question 104:

Calculate Trade Receivables Turnover Ratio in each of the following alternative cases:
Case 1: Net Credit Sales ₹4,00,000; Average Trade Receivables ₹1,00,000.
Case 2: Revenue from Operations (Net Sales) ₹30,00,000; Cash Revenue from Operations, i.e., Cash Sales ₹6,00,000; Opening Trade Receivables ₹2,00,000; Closing Trade Receivables ₹6,00,000.
Case 3: Cost of Revenue from Operations or Cost of Goods Sold ₹3,00,000; Gross Profit on Cost 25%; Cash Sales 20% of Total Sales; Opening Trade Receivables ₹50,000; Closing Trade Receivables ₹1,00,000.
Case 4: Cost of Revenue from Operations or Cost of Goods Sold ₹4,50,000; Gross Profit on Sales 20%; Cash Sales 25% of Net Credit Sales, Opening Trade Receivables ₹90,000; Closing Trade Receivables ₹60,000.

Answer:

Case 1

Trade receivable turnover ratio = Net sales/ Debtors+Bills receivable

Trade receivable turnover ratio = 4,00,000/1,00,000 = 4 Times

Case 2

Net Credit Sales = Total Sales −Cash Sales = 30,00,0006,00,000 = 24,00,000
Average Trade receivables= Opening TradeReceivables + Closing Trade Receivables/2

Average Trade receivables=2,00,000+600,000/2 = 4,00,000

Trade receivable turnover ratio = Net sales/ Average Trade receivables

Trade receivable turnover ratio = 24,00,000/4,00,000 = 6 Times

Case 3

Cost of Goods Sold = 3,00,000

Gross Profit = 25% on Cost

Gross Profit = 25/100×3,00,000=75,000

Total Sales = Cost of Goods Sold + Gross Profit

= 3,00,000 + 75,000 = 3,75,000

Cash Sales = 20% of Total Sales

Cash sales =3,75,000×20/100=75,000

Credit Sales = Total Sales − Cash Sales

= 3,75,000 − 75,000 = 3,00,000

Average trade receivable= Opening Trade receivables+Closing Trade receivables/2

Average trade receivable= 50,000+1,00,000/2=75,000

Trade receivable turnover ratio= Net sales/ Average receivables

Trade receivable turnover ratio= 3,00,000/75,000= 4 Times

Case 4

Let Sales be = x

Gross profit=x×20/100=20x/100

Sales = Cost of goods sold+Gross profit

Or. X =4,50,000+20x/100

Or, x-20/100=4,50,000

Or, x=4,50,000×100/80=5,62,500

Sales = x = 5,62,500

Let Credit Sales be = a

Cash Sales = a×25/100=25a/100

Sales =Cash Sales +Credit Sales

Or, 5,62,500=25a/100+a

Or, 5,62,500=125a/100

Or, a=5,62,500×100/125=4,50,000

Credit Sales= a = 4,50,000
Average Trade receivables= Opening Trade Receivables +Closing Trade Receivables/2

Average Trade receivables= 90,000+60,000/2=75,000

Trade receivable turnover ratio= Net sales/ Average receivables

Trade receivable turnover ratio= 4,75,000/75,000= 6 Times

Question 105:

From the information given below, calculate 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 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.

Answer:

Average Trade receivables= Opening Trade Receivables +Closing Trade Receivables/2

Average Trade receivables= 1,20,000+2,00,000/2=1,60,000

Trade receivable turnover ratio= Net sales/ Average receivables

Trade receivable turnover ratio= 8,00,000/1,60,000= 5 Times

 

(i) Collection from Trade Receivables ₹40,000- Increase

Reason: Collection from Trade Receivables will result in decrease in the amount of closing Trade Receivables which will reduce the amount of average Trade Receivables.

Closing Trade Receivables = 2,00,000 − 40,000 = ₹1,60,000

Average Trade receivables= Opening Trade Receivables +Closing Trade Receivables/2

Average Trade receivables= 1,20,000+1,60,000/2=1,40,000

Trade receivable turnover ratio= Net sales/ Average receivables

Trade receivable turnover ratio= 8,00,000/1,40,000= 5.71 Times (Increased from 5 to 5.71 times)

(ii) Credit Revenue from Operations, i.e. Sales ₹80,000- Decrease

Reason: This transaction will result in increase in both credit sales as well as closing Trade Receivables. Increase in closing Trade Receivables, in turn, will lead to an increase in the 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= Opening Trade Receivables +Closing Trade Receivables/2

Average Trade receivables= 1,20,000+2,80,000/2=2,00,000

Trade receivable turnover ratio= Net sales/ Average receivables

Trade receivable turnover ratio= 8,80,000/2,00,000= 4.4 Times

 

(iii) Sales Return ₹20,000- Increase

Reason: This transaction will result in decrease in both sales and average Trade Receivables.

Credit Sales = 8,00,000 − 20,000= ₹7,80,000

Closing Trade Receivables = 2,00,000 − 20,000 = ₹1,80,000

Average Trade receivables= Opening Trade Receivables +Closing Trade Receivables/2

Average Trade receivables= 1,20,000+1,80,000/2=1,50,000

Trade receivable turnover ratio= Net sales/ Average receivables

Trade receivable turnover ratio= 1,80,000/1,50,000= 5.2 Times

(iv) Credit Purchase ₹1,60,000- No Change

Reason: Credit Purchase does not affect the Debtors Turnover Ratio