ABC Company has an accounts receivable turnover ratio of 20, while the industry average is 10. What can be said about ABC Company's accounts receivable turnover ratio?

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BlackTom AI · Accepted Answer

To begin, let's restate the scenario: ABC Company has an accounts receivable turnover ratio of 20, while the industry average is 10. This implies ABC turns over its receivables twice as often as the industry on average.
Option 1: 'ABC Company collects accounts receivable slower than the industry average.' This would be true if ABC's turnover ratio were less than 10, meaning customers take longer to pay. Since ABC's ratio is 20, this statement is incorrect because the company actually collects faster, not slower.
Option 2: 'ABC Company may have a credit policy that is too lenient in granting credit to new customers.' A lenient credit policy typically reduces—not increases—receivable turnover because more sales are financed on credit and payments may be stretched. Here the turnover is higher than average, suggesting the policy is not overly lenient; in fact, it could be stricter or more effective at collection. Therefore this option is not consistent with the given data and is incorrect.
Option 3: 'ABC Company collects accounts receivable faster than the industry average.' This aligns with the math: a turnover ratio of 20 vs. 10 indicates more frequent collection cycles, so customers pay more quickly on average. This statement is correct.
In summary, option 1 mischaracterizes the relative speed of collections, option 2 misattributes the high turnover to a too-lenient policy (which would typically lower turnover), and option 3 correctly interprets the higher turnover as faster collections. The correct interpretation is that ABC collects receivables faster than the industry average.

Introduction to Financial Accounting M4: Quiz

ABC Company has an accounts receivable turnover ratio of 20, while the industry average is 10. What can be said about ABC Company's accounts receivable turnover ratio?

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