A high accounts receivable turnover indicates

Question

BlackTom AI · Accepted Answer

When interpreting what a high accounts receivable turnover implies, we should examine what the ratio measures and what would cause it to rise.
Option 1: 'customers are making payments quickly.' This is the most direct interpretation. A high turnover means net credit sales are being collected from receivables more rapidly relative to the average accounts receivable, which corresponds to customers paying faster and/or more aggressive collection practices.
Option 2: 'a large portion of the company’s sales are on credit.' While high credit sales can contribute to a higher turnover if collections are efficient, simply having many credit sales does not guarantee a high turnover. If those receivables sit for a long time, turnover could still be low. Therefore, this statement is not a definitive result of high turnover.
Option 3: 'many customers are not paying their receivables.' This would actually reduce turnover, as deteriorating collection would increase average accounts receivable or decrease net credit sales, leading to a lower ratio. So this option contradicts a high turnover.
Option 4: 'the company’s sales have increased.' An increase in sales can affect turnover, but not necessarily in the short term. If receivables grow proportionally or faster than sales, turnover might stay the same or even fall. Therefore, while possible, this is not the most direct or reliable implication of a high turnover compared to Option 1.
In summary, a high AR turnover is best explained by faster collection of receivables relative to their average balance, i.e., customers paying quickly, which aligns most closely with Option 1.

A high accounts receivable turnover indicates

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