Plumeria Inc. has recently calculated the accounts receivable turnover for the current year to be 15. In prior years, the same ratio was always higher. Which of the following statements would be the best interpretation for the reason for the ratio's change?
A) The company had less cash sales in the current year than in prior years.
B) The company had more sales in the current year than in prior years.
C) The company had fewer accounts receivables in the current year than in prior years.
D) The company took longer to collect on their accounts receivables in the current year than in prior years.

Question

Quizplus · Accepted Answer

A lower accounts receivable turnover ratio indicates that it took the company longer to collect on its accounts receivables in the current year than in prior years. A higher ratio would mean that the company was collecting its receivables more quickly, which is generally considered favorable. Factors that could cause a lower ratio include changes in credit policy, difficulty in collecting from customers or a higher volume of sales on credit. Choices A and B are not related to the accounts receivable turnover ratio, while choice C would actually result in a higher ratio, not a lower one.