In the table below is data for two companies in a competitive industry

The turnover ratios are calculated as below:

Accounts Receivable Turnover Ratio

The value of accounts receivable turnover ratio for each company is calculated as below:

Accounts Receivable Turnover Ratio = Net Sales/Average Receivable

Using the values provided in the question, we get,

Company A = 132,470/5,551 = 23.86

Company B = 93,440/7,318 = 12.77

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Inventory Turnover Ratio

The value of inventory turnover ratio for each company is determined as follows:

Inventory Turnover Ratio = Cost of Goods Sold/Average Inventory

Using the values provided in the question, we get,

Company A = 43,645/7,358 = 5.93

Company B = 49,828/8,714 = 5.72

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Accounts Payable Turnover Ratio

The value of accounts payable turnover ratio for each company is arrived as below:

Accounts Payable Turnover Ratio = Cost of Goods Sold/Average Payable

Using the values provided in the question, we get

Company A = 43,645/7,054 = 6.19

Company B = 49,828/8,663 = 5.75

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Evaluation:

Based on the values calculated above, it can be concluded that Company A is operating more efficiently than Company B. This is evident from the fact that Company A is able to collect its receivables faster than Company B as it has a high accounts receivable turnover ratio of 23.86. Inventory turnover ratio indicates how quickly the company is able to sell its inventory and replace it. Again, for Company A, this ratio is higher at 5.93 as compared to Company B having a ratio of 5.72. Further, Company A is able to pay its suppliers more quickly as compared to Company B. This is indicated by the value of high accounts payable turnover ratio for Company A (6.19) when compared with Company B (5.75).