The age distribution of accounts receivable is compiled directly from accounts receivable listings. Doing so can be very time consuming. A short average collection period is desirable. Compare your average collection period to those of other businesses and take action to speed up collections if it increases. Cost of goods sold is taken from the income statement.
Average inventory is one-half the sum of beginning and ending inventory.
Higher turnover ratios are better as long as they can be attained without loss of profitability. This ratio also is most useful for comparisons and in trend analysis of your business operations. Given the asset base of the business, this ratio indicates how effectively a business is generating sales. The ratio is calculated as the quotient of net sales divided by total assets. If a business must be liquidated, the timing of liquidation generally will have less effect on the level of recovery for a business with a high asset turnover ratio than will be the case for a business having a low asset turnover ratio.