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Ratio Analysis - Creditors Turnover Ratio
The document provides a detailed overview of management accounting ratio analysis, particularly focusing on turnover ratios, which assess the efficiency of a firm in utilizing its financial assets and liabilities to generate revenue. It elaborates on various types of turnover ratios including the creditors turnover ratio and its calculation, as well as the concept of the average payment period for evaluating payment efficiency to vendors. Additionally, practical examples and formulas for calculating these ratios are included to aid understanding.
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Ratio Analysis - Creditors Turnover Ratio
- 1. MANAGEMENT ACCOUNTING RATIO ANALYSIS BY: SMT.UMAMINAJIGI REUR HEAD, DEPT. OF COMMERCE & MANAGEMENT SMT. V G DEGREE COLLEGE FOR WOMEN, KALABURAGI
- 2. MANAGEMENT ACCOUNTING RATIO ANALYSIS TURNOVERRATIOS – 3 CREDITORS TURNOVER RATIO
- 3. Classification of AccountingRatio Types of ratios are given below: 1. Liquidity Ratios 2. Leverage Ratio 3. Turnover Ratio 4. Profitability Ratio
- 4. Turnover Ratios orActivity Ratios or Performance Ratios Turnover ratios are used to determine how efficiently the financial assets and liabilities of an organization have been used for the purpose of generating revenues. These ratios measure the operating efficiency of an enterprise. The types of Turnover ratios are: – 1. Inventory Turnover Ratio or Stock Turnover Ratio. 2. Debtors Turnover Ratio. 3. Creditors Turnover Ratio. 4. Cash Turnover Ratio. 5. Working Capital Turnover Ratio. 6. Fixed Assets Turnover Ratio. 7. Capital Turnover Ratio or Sales to Net Worth Ratio.
- 5. CREDITORS TURNOVER RATIO Creditor’sTurnover Ratio is also known as Payables Turnover Ratio, Creditor’s Velocity and Trade Payables Ratio. It is an activity ratio that finds out the relationship between net credit purchases and average trade payables of a business. It finds out how efficiently the assets are employed by a firm and indicates the average speed with which the payments are made to the trade creditors. It is calculated by the following formula: Creditors 𝐓𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐑𝐚𝐭𝐢𝐨 = 𝐍𝐞𝐭 𝐀𝐧𝐧𝐮𝐚𝐥 𝐂𝐫𝐞𝐝𝐢𝐭 𝐏𝐮𝐫𝐜𝐡𝒂𝒔𝒆𝒔 𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐂𝐫𝐞𝐝𝐢𝐭𝐨𝐫𝐬(𝐂𝐫𝐞𝐝𝐢𝐭𝐨𝐫𝐬+𝐁/𝐏)
- 6. CREDITORS TURNOVER RATIO NetCredit Purchases = Total Purchases – Cash Purchases – Purchases Returns Calculation of Average Debtors : 𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐂𝐫𝐞𝐝𝐢𝐭𝐨𝐫𝐬 = 𝐎𝐩𝐞𝐧𝐢𝐧𝐠 𝐂𝐫𝐞𝐝𝐢𝐭𝐨𝐫𝐬 + 𝐂𝐥𝐨𝐬𝐢𝐧𝐠 𝐂𝐫𝐞𝐝𝐢𝐭𝐨𝐫𝐬 𝟐 Interpretation: Standard credit period is 30 days If the credit period is more than 30 days it indicates that sufficient credit period is received. If the credit period is less than 30 days it indicates that sufficient credit period is not received.
- 7. CREDITORS TURNOVER RATIO Calculationof Average 𝐂𝐫𝐞𝐝𝐢𝐭𝐨𝐫𝐬 (if B/P is given): 𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐂𝐫𝐞𝐝𝐢𝐭𝐨𝐫𝐬 = 𝐎𝐩𝐞𝐧𝐢𝐧𝐠 𝐂𝐫𝐞𝐝𝐢𝐭𝐨𝐫𝐬 + 𝐎𝐩𝐞𝐧𝐢𝐧𝐠 𝐁/𝐏 + 𝐂𝐥𝐨𝐬𝐢𝐧𝐠𝐂𝐫𝐞𝐝𝐢𝐭𝐨𝐫𝐬 + 𝐂𝐥𝐨𝐬𝐢𝐧𝐠 𝐁/𝑷 𝟐
- 8. AVERAGE PAYMENT PERIOD TheAverage Payment Period (APP), also called as Debt Payment Period, is a solvency ratio that measures the average number of days it takes for a business to pay its vendors for purchases made on credit. Average payment period is the average amount of time it takes a company to pay off credit accounts payable. It is calculated by dividing the number of months or days or weeks by the debtors turnover ratio. A𝐯𝐞𝐫𝐚𝐠𝐞 𝐏𝐚𝐲𝐦𝐞𝐧𝐭 𝐏𝐞𝐫𝐢𝐨𝐝 𝐌𝐨𝐧𝐭𝐡𝐬 = 𝐍𝐮𝐦𝐛𝐞𝐫 𝐨𝐟 𝐦𝐨𝐧𝐭𝐡𝐬 𝐂𝐞𝐫𝐝𝐢𝐭𝐨𝐫𝐬 𝐭𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐫𝐚𝐭𝐢𝐨
- 9. AVERAGE PAYMENT PERIOD A𝐯𝐞𝐫𝐚𝐠𝐞𝐏𝐚𝐲𝐦𝐞𝐧𝐭𝐏𝐞𝐫𝐢𝐨𝐝 𝐖𝐞𝐞𝐤𝐬 = 𝐍𝐮𝐦𝐛𝐞𝐫 𝐨𝐟 𝐰𝐞𝐞𝐤𝐬 𝐢𝐧 𝐚 𝐲𝐞𝐚𝐫 𝐂𝐞𝐫𝐝𝐢𝐭𝐨𝐫𝐬 𝐭𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐫𝐚𝐭𝐢𝐨 A𝐯𝐞𝐫𝐚𝐠𝐞𝐏𝐚𝐲𝐦𝐞𝐧𝐭 𝐏𝐞𝐫𝐢𝐨𝐝 𝐃𝐚𝐲𝐬 = 𝐍𝐮𝐦𝐛𝐞𝐫 𝐨𝐟 𝐝𝐚𝐲𝐬 𝐢𝐧 𝐚 𝐲𝐞𝐚𝐫 𝐂𝐞𝐫𝐝𝐢𝐭𝐨𝐫𝐬 𝐭𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐫𝐚𝐭𝐢𝐨 A𝐯𝐞𝐫𝐚𝐠𝐞 𝐏𝐚𝐲𝐦𝐞𝐧𝐭 𝐏𝐞𝐫𝐢𝐨𝐝 𝐌𝐨𝐧𝐭𝐡𝐬 = 𝐍𝐮𝐦𝐛𝐞𝐫 𝐨𝐟 𝐦𝐨𝐧𝐭𝐡𝐬 𝐂𝐞𝐫𝐝𝐢𝐭𝐨𝐫𝐬 𝐭𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐫𝐚𝐭𝐢𝐨
- 10. AVERAGE PAYMENT PERIOD A𝐯𝐞𝐫𝐚𝐠𝐞𝐏𝐚𝐲𝐦𝐞𝐧𝐭 𝐏𝐞𝐫𝐢𝐨𝐝 = 𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐂𝐫𝐞𝐝𝐢𝐭𝐨𝐫𝐬 𝐍𝐞𝐭 𝐜𝐫𝐞𝐝𝐢𝐭 𝐩𝐮𝐫𝐜𝐡𝐚𝐬𝐞𝐬 𝐩𝐞𝐫 𝐝𝐚𝐲 A𝐯𝐞𝐫𝐚𝐠𝐞 𝐏𝐚𝐲𝐦𝐞𝐧𝐭 𝐏𝐞𝐫𝐢𝐨𝐝 𝐖𝐞𝐞𝐤𝐬 = 𝐂𝐫𝐞𝐝𝐢𝐭𝐨𝐫𝐬 𝐂𝐫𝐞𝐝𝐢𝐭𝐩𝐮𝐫𝐜𝐡𝐚𝐬𝐞𝐬 * No. of days in a year
- 11. Illustration 1: From thefollowing information calculate Creditors turnover ratio (CTR) and Average payment period (APP). Total Purchases Rs.9,60,000, Cash sales 25% of Credit purchases, Creditors at beginning Rs. 80,000, Creditors at the end Rs. 72,000. Bills payable at beginning Rs. 28,000 and B/P at the end Rs.32,000. Calculation of Credit Purchases: Net Credit Purchases = Total Purchases – Cash Purchases – Purchase Returns = 9,60,000 – 25% of Credit Purchases - Nil If Credit Purchases -- 100 Add: Cash Purchase -- 25 Total Purchases -- 125 Solution 1:
- 12. Total Purchases Rs.9,60,000,Cash sales 25% of Credit purchases, Creditors at beginning Rs. 80,000, Creditors at the end Rs. 72,000. Bills payable at beginning Rs. 28,000 and B/P at the end Rs.32,000. 1. Calculation of Credit Purchases: Net Credit Purchases = Total Purchases – Cash Purchases – Purchase Returns = 9,60,000 – 25% of Credit Purchases - Nil If Credit Purchases -- 100 Add: Cash Purchase -- 25 Total Purchases -- 125 If Total Purchases is 125 , Credit Purchase is 100 For Total Purchase 9,60,000 …… ? Credit Purchases = 7,68,000 Solution 1: = 𝟗, 𝟔𝟎, 𝟎𝟎𝟎 𝟏𝟐𝟓 ∗ 𝟏𝟎𝟎 = 𝟕, 𝟔𝟖, 𝟎𝟎𝟎
- 13. Total Purchases Rs.9,60,000,Cash sales 25% of Credit purchases, Creditors at beginning Rs. 80,000, Creditors at the end Rs. 72,000. Bills payable at beginning Rs. 28,000 and B/P at the end Rs.32,000. Creditors 𝐓𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐑𝐚𝐭𝐢𝐨 = 𝐍𝐞𝐭 𝐀𝐧𝐧𝐮𝐚𝐥 𝐂𝐫𝐞𝐝𝐢𝐭 𝐏𝐮𝐫𝐜𝐡𝒂𝒔𝒆𝒔 𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐂𝐫𝐞𝐝𝐢𝐭𝐨𝐫𝐬(𝐂𝐫𝐞𝐝𝐢𝐭𝐨𝐫𝐬+𝐁/𝐏) Calculation of Average 𝐂𝐫𝐞𝐝𝐢𝐭𝐨𝐫𝐬 (if B/P is given): 𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐂𝐫𝐞𝐝𝐢𝐭𝐨𝐫𝐬 = 𝐎𝐩𝐞𝐧𝐢𝐧𝐠 𝐂𝐫𝐞𝐝𝐢𝐭𝐨𝐫𝐬 + 𝐎𝐩𝐞𝐧𝐢𝐧𝐠 𝐁/𝐏 + 𝐂𝐥𝐨𝐬𝐢𝐧𝐠𝐂𝐫𝐞𝐝𝐢𝐭𝐨𝐫𝐬 + 𝐂𝐥𝐨𝐬𝐢𝐧𝐠 𝐁/𝑷 𝟐
- 14. Total Purchases Rs.9,60,000,Cash sales 25% of Credit purchases, Creditors at beginning Rs. 80,000, Creditors at the end Rs. 72,000. Bills payable at beginning Rs. 28,000 and B/P at the end Rs.32,000. 2. Calculation of Average 𝐂𝐫𝐞𝐝𝐢𝐭𝐨𝐫𝐬 (if B/P is given): 𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐂𝐫𝐞𝐝𝐢𝐭𝐨𝐫𝐬 = 𝐎𝐩𝐞𝐧𝐢𝐧𝐠 𝐂𝐫𝐞𝐝𝐢𝐭𝐨𝐫𝐬 + 𝐎𝐩𝐞𝐧𝐢𝐧𝐠 𝐁/𝐏 + 𝐂𝐥𝐨𝐬𝐢𝐧𝐠𝐂𝐫𝐞𝐝𝐢𝐭𝐨𝐫𝐬 + 𝐂𝐥𝐨𝐬𝐢𝐧𝐠 𝐁/𝑷 𝟐 𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐂𝐫𝐞𝐝𝐢𝐭𝐨𝐫𝐬 = 𝟖𝟎, 𝟎𝟎𝟎 + 𝟐𝟖, 𝟎𝟎𝟎 + 𝟕𝟐, 𝟎𝟎𝟎 + 𝟑𝟐, 𝟎𝟎𝟎 𝟐 𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐂𝐫𝐞𝐝𝐢𝐭𝐨𝐫𝐬 = 𝟏, 𝟎𝟖, 𝟎𝟎𝟎 + 𝟏, 𝟎𝟒, 𝟎𝟎𝟎 𝟐 = 𝟏, 𝟎𝟔, 𝟎𝟎𝟎 𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐂𝐫𝐞𝐝𝐢𝐭𝐨𝐫𝐬 = 𝟏, 𝟎𝟔, 𝟎𝟎𝟎
- 15. Total Purchases Rs.9,60,000,Cash sales 25% of Credit purchases, Creditors at beginning Rs. 80,000, Creditors at the end Rs. 72,000. Bills payable at beginning Rs. 28,000 and B/P at the end Rs.32,000. Creditors 𝐓𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐑𝐚𝐭𝐢𝐨 = 𝐍𝐞𝐭 𝐀𝐧𝐧𝐮𝐚𝐥 𝐂𝐫𝐞𝐝𝐢𝐭 𝐏𝐮𝐫𝐜𝐡𝒂𝒔𝒆𝒔 𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐂𝐫𝐞𝐝𝐢𝐭𝐨𝐫𝐬(𝐂𝐫𝐞𝐝𝐢𝐭𝐨𝐫𝐬+𝐁/𝐏) Creditors 𝐓𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐑𝐚𝐭𝐢𝐨 = 𝟕,𝟔𝟖,𝟎𝟎𝟎 𝟏,𝟎𝟔,𝟎𝟎𝟎 = 𝟕. 𝟐𝟓 𝐭𝐢𝐦𝐞𝐬 Creditors 𝐓𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐑𝐚𝐭𝐢𝐨 = 𝟕. 𝟐𝟓 𝐭𝐢𝐦𝐞𝐬 3. Calculation of Creditors Turnover Ratio :
- 16. AveragePayment Period Weeks= Number of weeks in a year Cerditors turnover ratio AveragePayment Period Days = Number of days in a year Cerditors turnover ratio Average Payment Period Months = Number of months Cerditors turnover ratio 4. Calculation of Average Payment Period: A𝐯𝐞𝐫𝐚𝐠𝐞𝐏𝐚𝐲𝐦𝐞𝐧𝐭 𝐏𝐞𝐫𝐢𝐨𝐝 𝐃𝐚𝐲𝐬 = 𝟑𝟔𝟓 𝟕.𝟐𝟓 = 𝟓𝟎. 𝟑𝟒 = 𝟓𝟎 𝐃𝐚𝐲𝐬 A𝐯𝐞𝐫𝐚𝐠𝐞𝐏𝐚𝐲𝐦𝐞𝐧𝐭 𝐏𝐞𝐫𝐢𝐨𝐝 𝐖𝐞𝐞𝐤𝐬 = 𝟓𝟐 𝟕.𝟐𝟓 = 𝟕. 𝟏𝟕 𝐖𝐞𝐞𝐤𝐬 A𝐯𝐞𝐫𝐚𝐠𝐞 𝐏𝐚𝐲𝐦𝐞𝐧𝐭 𝐏𝐞𝐫𝐢𝐨𝐝 𝐌𝐨𝐧𝐭𝐡𝐬 = 𝟏𝟐 𝟕.𝟐𝟓 = 𝟏. 𝟕 𝐌𝐨𝐧𝐭𝐡𝐬
- 17.