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Hi,
I was wondering today how useful some of the ratios are in practice. For instance, the receivable days figure (for this exam) takes the value of the receivables on the last day of the reporting period. In a normal business, wouldn’t the receivables value fluctuate from day to day, and week to week? Could this fluctuation cause the receivables days figure to be potentially meaningless?
Thanks for helping me clarify this!
Ratios, in financial statement analysis, are subject to the limitations of the financial statements. viz. historical data, creative accounting etc.
But they are still very useful for a general assessment of performance and position when combined with other information relating to the company and its environment.(which auditors are privy to).Typically, receivable days is calculated monthly and trend analysis can be done by assessing the movement throughout the year or by comparing corresponding prior period figures. Auditors frequently use such methods as part of analytical procedures on receivables.
It all depends on the perspective.
An alternative approach used in working capital management utilises average figures (op+cl/2) to calculate a turnover rate for the period.Finally, receivable days is admittedly not the most accurate indication of the efficiency of accounts receivable. Overdue debts over total receivables tends to give a better indication of credit control.
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