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.
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