The turnover rate depends on the volume of credit card sales and the efficiency of credit card issuers. The credit card receivables ratio will be considered as a percentage of total credit card revenue, total credit revenue, and total sales revenue. Credit card receivable ratios based on credit card revenue, total credit revenue, and total sales revenue.
This report will show the relationship of credit card receivables to credit card income, which is the most accurate method:. The equation to show just the relationship of average credit card receivables as a percentage of total credit income is. However, the example showing credit card receivables estimated as a percentage of total credit sales does not recognize that credit card sales are $0.62 per dollar of sales revenue.
The final skew of credit card receivables occurs when any reference to credit sales is removed from the calculation. The ratio of credit card receivables expressed as a percentage of total income, which excludes both forms of loan income, is. Using average credit card receivables as a percentage of credit card revenue instead of total credit revenue or total sales revenue gives the most accurate and meaningful results.
The turnover ratio expresses the ratio of credit card income to average credit card receivables as the inverse of the previous ratio.
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This ratio uses the credit card turnover ratio to create an understandable correlation with the repeating cycle of credit card sales and collection of credit card receivables over an annual operating period in days. Essentially, this collection ratio tells us the average number of days it takes to collect on credit card receivables.
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Although the accounts receivable position is decreasing due to the increasing use of credit cards, they will still be used. Our discussion of accounts receivable ratios will follow the same approach as that for credit card ratios. The skewing effect shown for credit card receivables will also apply to accounts receivable; however, they will not be illustrated in depth for accounts receivable.
The three basic ratios that analyze receivables use average receivables and receivables income. This ratio is best expressed as receivables as a percentage of credit revenue receivables. If cash and credit card and receivables are not kept separately in the total value.
The ratios will therefore provide the best and most accurate evaluation of average accounts receivable if accounts receivable credit income is used. The equation to find accounts receivable as a percentage of accounts receivable credit income is: The ratio tells us that during the year, on average, 5.5 percent of accounts receivable credit income was in the form of accounts receivable during any given business day.
By adding up the accounts receivable for each month and dividing by 12 months, you can best calculate the annual average accounts receivable. Although far from the best method, the annual ratio could be calculated using total credit revenue or total sales revenue rather than the credit revenue of receivables. Note that calculating average receivables uses the same method used to find average credit card receivables—beginning receivables plus closing receivables divided by 2.
The equation to calculate the debtors' average collection period is Days in the period / Debtors turnover ratio for the period. The lower the collection period, the more efficient the ability to collect accounts receivable within the business operations. An operation that extends 30-day accounts receivable credit can expect to see an average collection period of 30 to 35 days.
An operation that extends 15-day accounts receivable credit may have an average collection period of 15 to 20 days. Examples are shown where total loan income and total income replaced credit card income and accounts receivable.
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If many equity investors with large shareholdings do this, it will depress the market price of the shares. Inventory turnover ratios are discussed in some detail in the section on cash conservation and working capital management in Chapter 11. For our purposes at this point, we will discuss only the basic turnover ratio and the subsequent ratio to determine the number of days inventory is held.
Cost of sales for the period / Average inventory during the period Inventory turnover can be determined on a monthly, quarterly, half-yearly or annual basis. The inventory turnover ratio expresses the number of times during a given period that inventory is theoretically brought to zero. Food and beverage supplies will vary depending on the geographic area and the size of the city or towns within a given geographic area.
Working capital turnover rate is a measure of the effectiveness of working capital use. In general, the rapid increase in the use of credit cards relative to accounts receivable has resulted in an increase in the working capital turnover rate. A hospitality business should probably try to find the most appropriate level of working capital and then compare future performance against this optimal level.
Too much working capital (i.e. too low a turnover ratio) means ineffective use of resources. Too little working capital (evidenced by a turnover ratio that is too high) can lead to cash problems if turnover starts to decline. Also note that, all other factors being equal, the higher the working capital turnover ratio, the lower the current ratio will be.
This means that if an establishment has few or no credit sales and very low inventory levels (for example, a motel that does cash-only business), it will have both a low current ratio and high working capital turnover. So, referring to the earlier section on current ratio, creditors prefer low working capital turnover, owners prefer high turnover, and management tries to maintain a reasonable balance between the two extremes to maximize profits by reducing the amount of money. locked into current assets, while maintaining sufficient liquidity to meet unexpected emergencies that require cash. Fixed asset turnover rate assesses the effectiveness of using fixed assets in generating revenue.
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This is expressed as a percentage of the related income as illustrated and discussed in the previous chapter using Appendix 3.4. Revenue per seat is calculated by dividing the period's revenue by the number of seats the restaurant has. The calculation is similar to the percentage-to-revenue example shown for the previous ratio.
This ratio can be calculated on a daily, monthly or annual basis by dividing the sales revenue by the occupied rooms during a certain period. For example, if 100 guests occupied 80 available rooms, the occupancy rate would be double. There are many individual jobs available for food and beverage operations as well as motel or hotel room operations.
The ratios that are most appropriate for the operation being analyzed should be selected for use. Sales revenue ᎏᎏᎏAverage working capital Operating days in the period ᎏᎏᎏᎏᎏ Inventory turnover ratio for the period. Cost of sales for the period ᎏᎏᎏᎏAverage inventory for the period Market price per share.
Selection of and discretion in using the right ratio for the right occasion should be exercised. E4.7 A restaurant and beverage company reported the following for the operating month of March, which had 23 operating days. For the month of March, you must calculate the turnover ratio of the food warehouse and the inventory period in days that it takes for the food warehouse to turnover.
With the recovered data and information obtained from outside sources, you believe that a balance can be reconstructed for the period ending on the date of the fire. The balance sheet for the previous three years showed that current assets represented an average of 25 percent of total assets. The owners are considering new furnishings for the bar at an estimated cost of $20,000 using their own funds.
Referring to the 4C Company's unadjusted trial balance, balance sheet and income statement (Case 2) for the year ended 31 December 2004, calculate each of the following. Credit card receivables average collection period (Credit card revenue is 60 percent of total sales revenue.).
