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 2||Year 3|
|Net working capital||20,000||24,000|
|Cost of goods sold||150,000||160,000|
What is the working capital turnover ratio for Year 3?
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.
You might also be interested in...
Difference between Managerial and Financial Accounting
The overall objective in managerial accounting, which is often referred to as “cost accounting” is to provide useful information for internal decision makers to use. This is different from the overall objective of financial reporting as the general objective is to provide information for external users. In addition, managerial accounting is used for projections and […]
Which adjusting journal entries from FAR should I know for AUD?
There is a correlation between the risks that are relevant for a particular transaction cycle and the adjusting entries that you should be familiar with. For example, in the revenue cycle, the risk is that revenue is overstated, right? So you should be familiar with how to propose an adjusting entry to reverse the recognition […]
Tips for Studying for the CPA Exam During Busy Season
If you want to study for the CPA exam during busy season, then the most important thing you can do is create a plan that you can realistically stick to. If the plan is to crazy or aggressive, then it won’t take long for you to completely abandon the plan! Busy season is different for […]