Video: Turnover Ratios

In this lesson, Nick Palazzolo, CPA, makes sense of turnover ratios, also referred to as efficiency ratios, by walking through the concepts of accounts receivable turnover, days sales outstanding, and accounts payable turnover. With a focus on the operational efficiency of managing receivables and payables, Nick highlights the importance of turning sales into cash and effectively handling company liabilities. Throughout the session, he emphasizes the practical approach of 'plug and chug' with the provided formulas to calculate these ratios and shows how to interpret them to assess a company's financial efficiency. Nick assures that understanding and memorizing these formulas can be a straightforward way to score points on the exam, while also gaining a deeper understanding of a company's cash flow management.

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Video Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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We bring ourselves over to these turnover ratios, or I call them efficiency ratios. I don't believe this is an official term, but it will help you understand what we are doing here. We've got accounts receivable turnover ratio, days sales outstanding, and accounts payable turnover, and a few notes on all these formulas, if these sound more familiar. While this is in line with our cash conversion cycle, right, how long generally, how many days are you managing your accounts receivable? How many days generally are your payables outstanding?

So remember, you want your receivables to go down, you want to collect them sooner, and you want your payables to go up. You want to not have to pay your bills for as long as possible. Now, a good general rule is that for these turnover ratios, it's either sales or cost of goods sold in the numerator, as you see right here, sales, cost of goods sold, sales, cost of goods sold. And whatever account it's referring to is in the denominator, such as average accounts receivable, average payable. Now, what do I call them?

Efficiency ratios? Well, this ratio right here, accounts receivable turnover, it essentially dictates how efficient you are at turning your sales into accounts receivable. And accounts receivable is what the money is owed to you, right? I mean, yes, you could kind of say sales and cash, but generally companies go through receivables and then they receive the cash. So sales to accounts receivable, you want to be more efficient at converting sales to receivable and actually collect those, right?

You want to record those. So that's important, right? Also, accounts payable, you want to see how efficient you are at managing your cost of goods sold relative to your accounts payable, your average accounts payable.

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Conceptual Framework Objectives

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