SOLUTION
Average Trade receivables = Opening Trade Receivables + Closing Trade Receivables / 2
Average Trade receivables = 1,20,000 + 2,00,000 / 2
= 1,60,000
Trade receivable turnover ratio = Net sales / Average receivables
Trade receivable turnover ratio = 8,00,000 / 1,60,000
= 5 Times
(i) Collection from Trade Receivables Rs. 40,000- Increase
Reason: Collection from Trade Receivables will result in decrease in the amount of closing Trade Receivables which will reduce the amount of average Trade Receivables.
Closing Trade Receivables = 2,00,000 − 40,000
= Rs. 1,60,000
Average Trade receivables = Opening Trade Receivables + Closing Trade Receivables / 2
Average Trade receivables = 1,20,000 + 1,60,000 / 2
= 1,40,000
Trade receivable turnover ratio = Net sales / Average receivables Trade receivable turnover ratio
= 8,00,000 / 1,40,000
= 5.71 Times (Increased from 5 to 5.71 times)
(ii) Credit Revenue from Operations, i.e., Sales Rs. 80,000 – Decrease
Reason: This transaction will result in increase in both credit sales as well as closing Trade Receivables. Increase in closing Trade Receivables, in turn, will lead to an increase in the average Trade Receivables.
Credit Sales = 8,00,000 + 80,000
= Rs. 8,80,000
Closing Trade Receivables = 2,00,000 + 80,000
= Rs. 2,80,000
Average Trade receivables = Opening Trade Receivables + Closing Trade Receivables / 2
Average Trade receivables = 1,20,000 + 2,80,000 / 2 = 2,00,000
Trade receivable turnover ratio = Net sales / Average receivables
Trade receivable turnover ratio = 8,80,000 / 2,00,000 = 4.4 Times
(iii) Sales Return Rs. 20,000- Increase
Reason: This transaction will result in decrease in both sales and average Trade Receivables.
Credit Sales = 8,00,000 − 20,000
= Rs. 7,80,000
Closing Trade Receivables = 2,00,000 − 20,000
= Rs. 1,80,000
Average Trade receivables = Opening Trade Receivables +Closing Trade Receivables / 2
Average Trade receivables = 1,20,000 + 1,80,000 / 2
= 1,50,000
Trade receivable turnover ratio = Net sales / Average receivables
Trade receivable turnover ratio = 1,80,000 / 1,50,000
= 5.2 Times
(iv) Credit Purchase Rs. 1,60,000- No Change
Reason: Credit Purchase does not affect the Debtors Turnover Ratio