Lesson eLearning

A textile manufacturer, ThreadCo, has the following data for the financial year: Net credit sales Rs.10,50,000, average accounts receivable Rs.75,000, net profit Rs.1,20,000, net sales Rs.12,00,000, interest expense Rs.20,000, and long‑term debt Rs.80,000. Compute (a) Receivables Turnover Ratio, (b) Average Collection Period in days, (c) Net Profit Ratio, (d) Interest Coverage Ratio, and (e) Comment on the company’s liquidity, profitability, and solvency based on these ratios.

hard 5 marks Class 12 · Accountancy · Accounting Ratios
Answer
Receivables Turnover: 14.0 ; Average Collection Period: 26.1 days ; Net Profit Ratio: 10.0% ; Interest Coverage Ratio: 6.0 ; Comment: Strong liquidity, good profitability, high coverage indicates solid solvency.

Step-by-step solution

  1. Compute Receivables Turnover Ratio: divide Net credit sales by average accounts receivable.
  2. Substitute the values: 10,50,000 ÷ 75,000 = 14.0.
  3. Compute Average Collection Period: divide 365 by the turnover ratio.
  4. Calculate: 365 ÷ 14.0 ≈ 26.1 days.
  5. Compute Net Profit Ratio: divide Net profit by Net sales and multiply by 100%.
  6. Substitute: (1,20,000 ÷ 12,00,000) × 100% = 10.0%.
  7. Compute Interest Coverage Ratio: divide Net profit by interest expense.
  8. Substitute: 1,20,000 ÷ 20,000 = 6.0.
  9. Interpret liquidity: Receivables turnover of 14.0 indicates quick collection, and a 26.1‑day collection period is efficient.
  10. Interpret profitability: Net profit ratio of 10.0% shows good profitability relative to sales.
  11. Interpret solvency: Interest coverage ratio of 6.0 implies the company comfortably covers interest, indicating solid solvency.
Common mistake: Using net sales instead of credit sales for receivables turnover; not converting ratio to days.

Concept tested: Receivables Turnover, Profitability, Solvency Ratios

Published · How this solution was prepared and checked

← All Accounting Ratios questions