efficiency ratios

Question 1

what do receivables and payable days measure

Answer 1

these ratios measure how efficiently an organisation collects the money owed to it and how long they take to pay for supplies bought on credit

Question 2

payable days definition

Answer 2

this ratio is designed to show how long, on average, it takes the company to pay debts owed to suppliers

also known as creditor days

Question 3

creditors collection period definition

Answer 3

show how long a firm is taking to pay the money it owes
- it’s the answer from the payable days ratio
therefore, the longer the payment period the longer the business keeps hold of its cash

Question 4

payables days calculation
(creditor days ratio)

Answer 4

payables / cost of sales x365

Question 5

what are the 3 standard credit terms

Answer 5

30, 60 or 90 days

Question 6

what is a benefit of having long payables days

Answer 6

get to keep hold of money for longer

Question 7

what is a negative of having long payables days

Answer 7

may gain a bad reputation for paying on time

Question 8

what is a problem with a worsening payables days figure

Answer 8

a worsening payables days figure for one year to the next may indicate cash-flow problems

Question 9

receivables days ratio definition

Answer 9

this ratio is designed to show how long, on average, it takes the company to collect debts pwned by customers

Question 10

debtors collection period definition
(receivables days)

Answer 10

debtors collection period shows how long a firm is having to wait for the money owed to it

therefore, shorter the collection period the better

Question 11

receivables days calculation

Answer 11

debtors / sales turnover x365

Question 12

why might offering long receivables days be a deliberate marketing strategy

Answer 12

if your competitors offer 30 days offering 60 days may allow you to gain more customers over your competitors

Question 13

what are 4 ways the receivables ratio can be improved

Answer 13

• reducing the amount of time for which credit is offered
• offering incentives for clients to pay on time, e.g cash discounts
• stepping up the efficiency of the credit control department
• aged-debtors analysis

Question 14

what is aged debtors analysis

Answer 14

a common approach to improving receivables days:

this means sorting your receivables into the age of their debts to you - oldest first.

Question 15

Inventory (stock) turnover ratio definition

Answer 15

this ratio measure a company’s success in converting inventories into sales

compares the value of inventories with sales achieved, valued at costs

Question 16

What businesses specifically does the inventory turnover ratio apply to

Answer 16

manufacturing businesses, as firms providing a services do not hold significant quantities of inventories

Question 17

inventory turnover ratio

Answer 17

cost of goods sold / average inventories held

these ratios are expressed as a number of times a year

Question 18

Inventory turnover ratio expressed as a number of days

Answer 18

(inventories x 360) / cost of sales