Concept Behind Creditor's Turnover Ratio
The Creditors turnover ratio also knows as the accounts payable ratio is calculated by dividing the net credit purchases by the average trade creditors. It gives us the frequency with which payment is made to creditors in a business. It is similar to debtors turnover ratio where we analyse the speed with which amount is collected from debtors. It is a test of the company's liquidity position in the near term, typically one year. A company's creditors would encompass suppliers of raw materials in case of manufacturing companies or suppliers of spare parts, finished goods etc. It could also include service providers required in day to day operations of the business.
Let us take a numerical example. Consider the following figures for the year 2016.
Total purchases stand at USD 500,000 of which purchases worth USD 50,000 were made in cash. Good worth USD 25,000 were returned. Creditors at the end of the period were USD 60,000 and Bills Payable for the same period were USD 10,000.
Creditor Turnover Ratio = Annual Net Credit Purchase/Average Trade Creditors
Annual Net Credit Purchase will be calculated as Total Purchases Less cash purchases less good returned as we are dealing only with credit purchases. Average Trade creditors will include Creditors as well as bills payable.
Hence Annual Net Credit = 500000 - 50000 - 25000 = USD 425000
Average Trade Creditors would be = 60000 + 10000 = USD 70000
Credit Turnover Ratio = 425000/80000 = 5.31
This means the Company is paying its creditors 5 times a year on an average.Average trade creditors will be arrived at adding the opening as well as closing balances of creditors and dividing it by two. Further the average creditors does not account for any provisioning which is made for discounts on creditors if any.
This ratio is used in conjunction with the average payment period which indicated the number of days required by the company to pay its creditors.
Average Payment Period = Average accounts payable x No. of days in the year / Annual net credit purchases
or
No. of days in the year / Payable turnover ratio
Thus for the above case, Average Payment Period would be
365 / 5.31 = 68.7 days.
This implies that the Company pays its creditors every 69 days.
A high credit turnover ratio signifies that the company has good liquidity and pays its vendors promptly and help other creditors to take a call if they wish to associate with the Company. It could also be that the company is new to the creditor and may not be extending a higher credit period. It is an indicator of the credit worthiness of the Company.
It might also be possible that the company is making frequent payments without utilising the entire period of credit made available by the creditor. This could be due to cash discounts being enjoyed by the company. The number in itself would not mean anything until compared with the same ratio of companies with similar business within the industry.
This is also seen in conjunction with its debtor's turnover ratio as a company which collects money at a higher frequency than which it makes payments would be considered ideal. It would usually indicate a good liquidity position in the near term for the company.
Our services
Precise calculation of ratios requires understanding of various concepts in the financial statements, which items to use or exclude. Calculating ratios within the scope of accounts subject entails mathematics as well as thorough understanding of the finer nuances of the subject which many students find difficult without assistance beyond classroom sessions. Often students are hard pressed for time in today's increasingly lengthy and complex academic curriculums.
We help you with your assignments on various ratio calculations within the accounting domain so that you do not miss out on higher grades due to lack of time or inability to apply the theoretical knowledge to practical problem solving. All you need to do is log onto our website, submit your assignment details with a timeline and we will provide you with a very high quality assignment within the deadline.
Why Us For Accounting Assignment Help?
Timely delivery, error free output in terms of content and language and a professional touch is what defines us. While working on the assignment, our aim is to maximise your grades.
Not only do we stick to deadlines and provide one hundred percent unique and accurate solutions, we also include detailed notes on step wise calculation of the ratios and their analysis. We believe that in your professional life, not just good grades but a thorough understanding of the subject matter will go a long way in determining your success and hence we aim to build a strong foundation for your professional life.
Our team comprises individuals with higher degrees in finance and accounting and many of them have working knowledge of the subject in addition to complete understanding of academic curriculum requirements.
So get yourself some professional help and build a strong foundation for your career with us. Enrol today.
Accounting Assignment Help - Homework Help from Qualified and Experienced Expert Writers
We offer assignment help service online which is most popular and liked all over the world. Our experts are helping students for preparing accounts assignments with step by step explanations. The accounting writers not just help in writing assignments but also provide better learning of accounting concepts. Our accounting assignment help service has covered all sub-domains and topics under accounting. We offer accounting assignment help, accounting homework help, other writings services including accounting term papers writing help, essays, research papers, case studies or case analysis writing help, and paper editing, formatting and referencing services.
Few simple steps to get your accounting assignments done online!
- Ask an Expert - Submit requirement
- Get quote and make payment
- Work is allocated to Accounting Writers
- Sent to you after completion and quality check
- Unlimited revisions till you are done.
Glossary- Creditors Turnover Ratio Assignment Help, Creditors Turnover Ratio Homework Help, Creditors Turnover Ratio Assignment Tutors, Creditors Turnover Ratio Solutions, Creditors Turnover Ratio Answers, Activity Analysis Ratio Assignment Tutors