VCE Accounting Unit 4

1. 20.8
EVALUATING CREDITORS
TURNOVER RATIO

2. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Evaluating these figures… What does this figure mean?
20.8 EVALUATING CREDITORS
TURNOVER RATIO
Creditors Turnover
Ratio
=
Average Creditors
Credit Purchases of Stock
=
5000
40000
= 8.0
On average, at any
one time, the firm
has $5,000 of
creditors.
$5,000$5,000 $5,000 $5,000 x 8…
1 2 3 4

3. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Evaluating these figures… What does this figure mean?
Creditors
Turnover in
Days
=
Credit Purchases of Stock
Average Creditors x 365
=
40000
5000 x 365
= 46
days
20.8 EVALUATING CREDITORS
TURNOVER RATIO
It takes the firm 46 days to pay the $5,000 owing to creditors
46 days
On average, at any
one time, the firm
has $5,000 of
creditors.
$5,000
46 days
$5,000
46 days
$5,000
46 days
$5,000
46 days
$5,000
Etc…

4. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 How to interpret the figure…
Creditors
Turnover Ratio
= 8
<
The firm paid its total
creditors 8 times this period
Creditors
Turnover Ratio
= 5
The firm paid its total
creditors 5 times this period
< Creditors
Turnover Ratio
= 11
The firm paid its total creditors
11 times this period
The firm
paying
creditors
back more
frequently
The firm will
get more
discounts
from
creditors
The firm will
have a good
relationship
with its
suppliers
Liquidity –
the firm is
keeping less
cash within
the business
The firm is
paying
creditors
back less
frequently
The firm will
get fewer
discounts
from
creditors
The firm will
have a bad
relationship
with its
suppliers
Liquidity –
the firm is
keeping
more cash
within the
business
20.8 EVALUATING CREDITORS
TURNOVER RATIO

5. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 How to interpret the figure…
<
On average, amounts owing to
creditors are paid in
46 days
On average, amounts owing to
creditors are paid in
28 days
<
On average, amounts owing to
creditors are paid in
67 days
= 46
days
Creditors
Turnover
in Days
= 67
days
Creditors
Turnover
in Days
= 28
days
Creditors
Turnover
in Days
The firm will
get more
discounts
from
creditors
The firm will
have a good
relationship
with its
suppliers
The firm will
get fewer
discounts
from
creditors
The firm will
have a bad
relationship
with its
suppliers
Liquidity –
the firm is
keeping less
cash within
the business
Liquidity –
the firm is
keeping
more cash
within the
business
More
pressure to
sell stock
and collect
cash quickly
Less
pressure to
sell stock
and collect
cash quickly
20.8 EVALUATING CREDITORS
TURNOVER RATIO

6. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 But how long should it take to pay creditors?
 What is an acceptable time to take to collect amounts owing from
debtors?
7 days?
14 days?
28 days?
30 days?
90 days?
180 days?
20.8 EVALUATING CREDITORS
TURNOVER RATIO

7. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 How to evaluate Creditors Turnover? There are several ways:
 Comparison with turnover figures from previous reporting
periods – how did we do last period compared to past periods?
 Comparison with management’s budgeted expectations – what
did we expect to achieve?
 Credit terms offered – e.g. if the firm is offered 30 day terms
by suppliers then creditors should be paid within that time
frame
 Size of creditors’ accounts – larger creditors whom the firm
wishes to do business with in the future will be paid before
smaller creditors who will not be used again
20.8 EVALUATING CREDITORS
TURNOVER RATIO

8. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 How to evaluate Creditors Turnover? There are several ways:
 Comparison with turnover figures from previous reporting
periods – how did we do last period compared to past
periods?
= 57
days
Creditors
Turnover
in Days
Good result?
2014 2015
Creditors Turnover in Days 57
2014 2015
Creditors Turnover in Days 39 57
2014 2015
Creditors Turnover in Days 57
2014 2015
Creditors Turnover in Days 78 57
The firm is taking more time to pay
amounts owing to creditors and will not
receive discounts
The firm is keeping cash within the
business longer and there is less pressure
to sell stock and collect cash quickly
Cash is leaving the business faster than
last period and there is more pressure to
sell stock and collect cash quickly
The firm is taking less time to pay
amounts owing to creditors and will
receive discounts
20.8 EVALUATING CREDITORS
TURNOVER RATIO

9. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 How to evaluate Creditors Turnover? There are several ways:
 Comparison with management’s budgeted expectations – what
did we expect to achieve?
Creditors
Turnover Ratio
= 6.3 Good result?
Budget Actual
Creditors Turnover 6.3
Budget Actual
Creditors Turnover 9.1 6.3
Budget Actual
Creditors Turnover 6.3
Budget Actual
Creditors Turnover 3.9 6.3
The firm is taking more time than
expected to pay amounts owing to
creditors and will not receive discounts
The firm is keeping cash within the business
longer than expected and there is less
pressure to sell stock and collect cash
quickly
Cash is leaving the business faster than
expected and there is more pressure to
sell stock and collect cash quickly
The firm is taking less time than expected
to pay amounts owing to creditors and
will receive discounts
20.8 EVALUATING CREDITORS
TURNOVER RATIO

10. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 How to evaluate Creditors Turnover? There are several ways:
 Credit terms offered – e.g. if the firm is offered 30 day terms
by suppliers then creditors should be paid within that time
frame
= 46
days
Creditors
Turnover
in Days
Good result?
Supplier’s credit terms
60 days
Creditors Turnover = 46 days
Supplier’s credit terms
21 days
Creditors Turnover = 46 days
20.8 EVALUATING CREDITORS
TURNOVER RATIO

11. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
TASK
In-class Homework
SQ15 X
SQ16 X
Ex20.9 X
Ex20.10 X