question_answer

From the following balance sheet of Kushal Ltd as at 31st March, 2017 and additional information, calculate the debtors? turnover ratio and debt collection period. Balance Sheet As at 31st March, 2017

	Particulars	31st March, 2017 Amt (Rs.)
I.	EQUITY AND LIABILITIES
	1. Shareholders? Funds
	(a) Share Capital	5,00,000
	(b) Reserves and Surplus	2,00,000
	2. Non-current Liabilities	2,00,000
	(a) Long-term Borrowings	2,00,000
	(b) Deferred Tax Liabilities (Net)	50,000
	3. Current Liabilities
	(a) Trade Payables	2,00,000
	(b) Short-term Provisions	10,000
	Total	11,60,000
II.	ASSETS
	1. Non-current Assets
	Fixed Assets (Tangible assets)	7,00,000
	2. Current Assets
	(a) Trade Receivables	3,50,000
	(b) Inventories	1,10,000
	Total	11,60,000

Additional Information

(i) Credit sales of Rs. 15,00,000 and cash sales of Rs. 2,50,000.

(ii) Trade receivables in the beginning of the year were Rs. 4,50,000.

Write the value shown by the business in maintaining such a debtor?s turnover ratio. Industry average being 3.

Answer:

Debtors? or Trade Receivables Turnover Ratio \[=\frac{\text{Revenue}\,\,\text{From}\,\,\text{Operations}\,\text{(Net}\,\text{credit}\,\text{sales)}}{\text{Trade}\,\,\text{Receivables}\,\,\text{or}\,\,\text{Average}\,\,\text{Debtors*}}=\frac{15,00,000}{4,00,000}=3.75\,times\] *Average Debtors \[=\,\frac{3,50,000+4,50,000}{2}=Rs.\,4,00,000\] Debt Collection Period \[=\frac{\text{12}}{\text{Debtors }\!\!'\!\!\text{ }\,\,\text{Turnover}\,\,\text{Ratio}}=\frac{12}{3.75}=3.2\,months\] Value shown by the business is Efficiency Business shows efficiency in debt collection function which is reflected in such a Debtors turnover ratio.