Ratio for Credit Collection Time

Steps:

• Identify the question: It asks for the ratio measuring time to collect payments from credit sales.
• Recall financial ratios: Trade receivables turnover calculates sales divided by average receivables, indicating collection efficiency.
• Convert to time: Divide 365 by the turnover ratio to get average days to receive payment.
• Match to options: Only trade receivables turnover directly relates to inbound credit payments.

Why D is correct:

• Trade receivables turnover = Net credit sales / Average trade receivables; the collection period (365 / turnover) directly shows days to receive payments.

Why the others are wrong:

• A. Current ratio assesses overall short-term liquidity (current assets / current liabilities), not payment timing.
• B. Liquid (acid test) ratio measures immediate liquidity (quick assets / current liabilities), excluding inventory but ignoring collections.
• C. Trade payables turnover tracks days to pay suppliers (purchases / average payables), focusing on outflows, not inflows.

Final answer: D