To calculate the accounts receivable turnover ratio for Tropica Traders Ltd., we will follow these steps:
A) Calculate Net Credit Sales
Net Credit Sales is calculated by subtracting Sales Returns from Credit Sales.
\[ \text{Net Credit Sales} = \text{Credit Sales} - \text{Sales Returns} \] \[ \text{Net Credit Sales} = K72,000 - K4,500 = K67,500 \]
B) Calculate Average Accounts Receivable
Average Accounts Receivable is calculated by taking the sum of the beginning and ending accounts receivable, divided by 2.
\[ \text{Average Accounts Receivable} = \frac{\text{Accounts Receivable on January 1} + \text{Accounts Receivable on December 31}}{2} \] \[ \text{Average Accounts Receivable} = \frac{K5,000 + K9,000}{2} = \frac{K14,000}{2} = K7,000 \]
C) Calculate Accounts Receivable Turnover Ratio
The Accounts Receivable Turnover Ratio is calculated by dividing the Net Credit Sales by the Average Accounts Receivable.
\[ \text{Accounts Receivable Turnover Ratio} = \frac{\text{Net Credit Sales}}{\text{Average Accounts Receivable}} \] \[ \text{Accounts Receivable Turnover Ratio} = \frac{K67,500}{K7,000} \approx 9.64 \]
Interpretation of the Accounts Receivable Turnover Ratio
The Accounts Receivable Turnover Ratio of approximately 9.64 indicates that Tropica Traders Ltd. collects its average receivables about 9.64 times over the fiscal year. This is a strong indicator of the company's ability to manage its credit sales effectively and collect outstanding amounts from its customers. A higher ratio signifies efficient payment collection and indicates that the company may have a strong business relationship with its customers or effective credit policies.
Conversely, if the ratio is significantly lower, it may suggest potential issues in the collection process, such as extended credit terms or customers being unable to pay on time.