Your Ask Joey ™ Answer

How to calculate working capital turnover ratio?

The working capital turnover ratio is used by a company’s management team, investors, and/or creditors to determine how efficiently and effectively the company uses its assets. This is a topic that is often tested on the BEC section of the CPA exam. Candidates should understand how to calculate and interpret the working capital turnover ratio. The formula for the working capital turnover ratio is sales (net) divided by average working capital :

Example Working Capital Turnover Ratio Calculation

Topa Industries has the following financial information for Years 2 and 3:

Year 2Year 3
Current assets$50,000$60,000
Current liabilities30,00036,000
Net working capital20,00024,000
Sales (net)300,000320,000
Cost of goods sold150,000160,000

What is the working capital turnover ratio for Year 3?

A) 13.3

B) 14.5

C) 16.0

D) 13.6

14.5 is correct. The calculation would be sales of $320,000 divided by average working capital of $22,000, which equals a working capital turnover ratio of 14.5 times. Average working capital would be the average of $20,000 and $24,000.

Back To All Questions

You might also be interested in...

  • CECL Excel Workbook

    If you would like to use the Excel workbook that was used to create the Universal CPA lecture on CECL for debt securities, please click the link below to download the Excel workbook: CECL Calculation workbook (Universal CPA Review)

  • Journal Entry for Direct Materials Variance

    Journal Entry for Direct Materials Variance In the current year, Mission Burrito budgeted 6,000 pounds of production and actually used 4,000 pounds. Material cost was budgeted for $5 per pound and the actual cost was $8 per pound. What would the debit or credit to the direct material efficiency variance account be for the current...

  • Understanding Variance Analysis

    Variance Analysis Variance analysis is a method for companies to compare its actual performance vs its budgeted amount for that cost measurement (related to the flexible budget). The differences between the standard (budgeted) amount of cost and the actual amount that the organization incurs is referred to as a variance. By analyzing variances, the company...