Activity Ratios

What are Activity Ratios?

Activity ratio is the ratio or the measure of the ability of an organization to convert the accounts of the balance sheet into revenues. Activity ratio presents a clear picture of a company’s ability to convert its assets, liability and capital into sales that will generate revenue for the company. There are a number of different types of activity ratios however the most common of them are:-

Inventory Turnover Ratio

Accounts receivable Ratio

Total Assets Turnover Ratio

Inventory Turnover Ratio

It is the ratio that shows how quickly a firm or a business converts its inventory into sales. That means how many times in an accounting period the total inventory is sold out. The formula or inventory turnover ratio is quite simple as it can be calculated by dividing total cost of goods sold with average inventory of that particular accounting period. Different product industries have different value of the inventory turnover ratio.

Accounts Receivable Turnover Ratio

This ratio indicates the ability of a company to collect cash from the customers that owed by the customers. Account receivable is the amount of the credit that is owed by the customers and business has to collect that amount from customers. This ratio can be calculated by dividing total sales in cash with the amount of account receivable for that period of time.

Asset Turnover Ratio

The ability of a business to use the assets in order to generate sales is called asset turnover ratio. This ratio can be calculated by dividing the total sales of a company with the total assets of a company in a given accounting period.






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