Accounting: Accounting Ratios: Debt Payment Period and Capital Turnover Ratio (For CBSE, ICSE, IAS, NET, NRA 2022)

Doorsteptutor material for NTSE/Stage-I-State-Level is prepared by world's top subject experts: get questions, notes, tests, video lectures and more- for all subjects of NTSE/Stage-I-State-Level.

It measures an average period for which the credit purchases remain unpaid or the average credit period actually availed.

Debt Payment period =

Significance

  • It indicates the ability of the firm to pay its trade creditors/suppliers.
  • A high ratio indicates the shorter payment period.
  • A low ratio indicates a longer payment period.

Example: Calculate creditors turnover ratio and debt payment period from the following information

Cash purchases ₹ 1,00, 000 Total purchases ₹ 4,07, 000

Opening sundry creditors ₹ 25,000 Closing sundry creditors ₹ 50,000

Closing bill payables ₹ 25,000 Opening bill payables ₹ 20,000

Purchase returns ₹ 7,0001

Solution:

Creditors Turnover Ratio =

Net purchases = Total purchases – Purchase returns

= ₹ 407000 – ₹ 7000 = ₹ 400000

Net credit purchases = Net purchases – cash purchases

= ₹ 4,00, 000 – ₹ 1,00, 000

= ₹ 3,00, 000

Average Creditors =

=

= 60,000

Creditors Turnover Ratio = = 5 times

Debt Payment period = = 73 days

Working Capital Turnover Ratio

It is the ratio between cost of sales and net working capital.

Working capital Turnover Ratio =

Working Capital = Current assets – Current liabilities

Average Working Capital =

Note: If the figure of cost of sales is not given, then the figure of sales can be used. On the other hand if opening working capital is not discussed then working capital at the year-end will be used.

Significance

  • It indicates the speed at which the working capital is utilized for business operations.
  • It measures a company՚s efficiency and the health of its short-term finances.
  • A higher ratio indicates efficient utilization of working capital
  • A low ratio indicates the working capital is not properly utilized.
  • Most analysts consider the ideal working capital ratio to be between 1.2 and 2.

Example:

Find out working capital turnover ratio for the year 2006.

Cash ₹ 10,000

Bills receivable ₹ 5,000

Sundry debtors ₹ 25,000

Stock ₹ 20,000

Sundry creditors ₹ 30,000

Cost of sales ₹ 1,50, 000

Solution:

Working capital Turnover Ratio =

Working Capital = Current assets – Current liabilities

Current Assets =

Current Liabilities = ₹ 30,000

Net Working Capital = 60000 – 30000 = ₹ 30,000

Cost of Sales = ₹ 1,50, 000

Working capital Turnover Ratio = = 5 times

Developed by: