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How does the way we compute average accounts receivable- by averaging the beginning and ending balance-...

How does the way we compute average accounts receivable- by averaging the beginning and ending balance- potentially distort the accounts receivable turnover ratio? How could this potential distortion be mitigated?

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Answer #1

The potential distortions due to accounts receivable turnover ratio based on beginning and ending balance are:
1. It fails to record any abnormal transaction in between the year as it takes the average of beginning and ending balance.
2. Usually calculation are of previous years for total sales and not net sales. Any credit sales are not recorded in the accounts receivable turnover ratio.

These potential distortions can be mitigated if net sales are used for calculation and quarterly or monthly accounts receivables data are taken instead of annual averages.

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