SingaporeAccountingSyllabus dot point

How do the turnover and collection-period ratios show how efficiently a business uses its inventory, receivables and payables?

Calculate and interpret efficiency ratios: inventory turnover and the receivables and payables periods

A focused answer to the O-Level Principles of Accounts outcome on efficiency ratios. Inventory turnover, the trade receivables and payables collection periods, and what they reveal about working-capital management.

Generated by Claude Opus 4.89 min answerUpdated 2026-06-06

Reviewed by: AI editorial process; not yet individually human-reviewed

Have a quick question? Jump to the Q&A page

Jump to a section

What this dot point is asking
The answer
Examples in context
Try this

What this dot point is asking

SEAB wants you to calculate and interpret the efficiency ratios: inventory turnover and the trade receivables and trade payables periods. The central insight is that these ratios show how quickly a business turns its working capital over, how fast it sells stock, collects from customers, and pays suppliers, which together drive its cash flow.

The answer

Inventory turnover

This shows how many times a year the business sells and replaces its inventory:

\text{Inventory turnover} = \frac{\text{Cost of sales}}{\text{Average inventory}}

(Average inventory $= \dfrac{\text{opening} + \text{closing inventory}}{2}$ .) A higher turnover means stock sells quickly, which is usually good. It can also be shown as days: $\dfrac{\text{average inventory}}{\text{cost of sales}} \times 365$ .

Trade receivables collection period

This shows how long, on average, customers take to pay:

\text{Receivables collection period} = \frac{\text{Trade receivables}}{\text{Credit sales}} \times 365 \text{ days}

A shorter period means cash is collected quickly, which helps cash flow. A lengthening period warns of weak credit control or rising bad-debt risk.

Trade payables payment period

This shows how long, on average, the business takes to pay its suppliers:

\text{Payables payment period} = \frac{\text{Trade payables}}{\text{Credit purchases}} \times 365 \text{ days}

Taking longer to pay can help cash flow, but paying too slowly risks losing suppliers' goodwill or cash discounts.

Working capital management

These ratios together describe how well the business manages its working capital (current assets less current liabilities). Ideally, a business sells stock quickly, collects from customers promptly, and pays suppliers in a reasonable time, so cash keeps flowing.

Worked example

A business reports: cost of sales $\$ 120,000 $; opening inventory$ \ $18,000$ ; closing inventory $\$ 22,000 $; credit sales$ \ $150,000$ ; trade receivables $\$ 25,000 $; credit purchases$ \ $100,000$ ; trade payables $\$ 20,000$. Calculate the three ratios (365 days).

Step 1: Average inventory and inventory turnover

Average inventory $= \dfrac{18\,000 + 22\,000}{2} = \$ 20,000 $. Inventory turnover$ = \dfrac{120,000}{20,000} = 6 \text{ times per year}$, so stock is sold and replaced every 61 days.

Step 2: Receivables collection period

\frac{25\,000}{150\,000} \times 365 = 60.8 \approx 61 \text{ days}

Customers take about 61 days to pay.

Step 3: Payables payment period

\frac{20\,000}{100\,000} \times 365 = 73 \text{ days}

The business takes about 73 days to pay suppliers.

Step 4: Comment

The business pays suppliers (73 days) more slowly than it collects from customers (61 days), which helps its cash flow. Stock turns over 6 times a year. Overall the working-capital cycle looks reasonably managed, though the 61-day collection period could be tightened.

Examples in context

Example 1. A slowing collection period bites. A wholesaler's receivables period drifts from 40 to 70 days. Cash is now tied up in unpaid invoices for far longer, so the business leans on its overdraft to pay suppliers. The ratio flags a credit-control problem before it becomes a cash crisis, prompting reminders and credit limits.

Example 2. Fast stock, healthy cash. A grocer turns inventory over 30 times a year (about every 12 days) and collects mostly in cash. Quick stock turnover and fast collection mean cash returns to the business rapidly, funding the next round of purchases. The efficiency ratios show why a low-margin grocer can still thrive on volume and speed.

Try this

Q1. Cost of sales is $\$ 90,000 $and average inventory is$ \ $15,000$ . State the inventory turnover. [2 marks]

Cue. Inventory turnover $= \dfrac{90\,000}{15\,000} = 6 \text{ times per year}$ .

Q2. Trade receivables are $\$ 30,000 $and credit sales$ \ $219,000$ . State the collection period in days. [2 marks]

Cue. $\dfrac{30\,000}{219\,000} \times 365 = 50 \text{ days}$ .

Q3. State one problem caused by a rising receivables collection period. [1 mark]

Cue. Cash flow strain (cash comes in more slowly) or a higher risk of bad debts.

Exam-style practice questions

Practice questions written in the style of SEAB exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.

Original7 marksA business reports: cost of sales

\

180\,000

; average inventory

30\,000

; credit sales

\

240\,000

; trade receivables

40\,000

; credit purchases

\

150\,000

; trade payables

25\,000

. Calculate (a) the inventory turnover (times per year), (b) the trade receivables collection period in days, (c) the trade payables payment period in days. Use 365 days.

Show worked answer →

(a) Inventory turnover $= \dfrac{\text{cost of sales}}{\text{average inventory}} = \dfrac{180\,000}{30\,000} = 6 \text{ times per year}$ .

(b) Receivables collection period $= \dfrac{\text{trade receivables}}{\text{credit sales}} \times 365 = \dfrac{40\,000}{240\,000} \times 365 = 60.8 \approx 61 \text{ days}$ .

(c) Payables payment period $= \dfrac{\text{trade payables}}{\text{credit purchases}} \times 365 = \dfrac{25\,000}{150\,000} \times 365 = 60.8 \approx 61 \text{ days}$ .

Markers reward inventory turnover of 6 times, a receivables collection period of about 61 days, and a payables payment period of about 61 days, each with the correct formula.

Original5 marksA business's trade receivables collection period has risen from 30 days to 55 days. (a) Explain what this means. (b) State two possible problems it could cause and one action the business could take.

Show worked answer →

(a) It means customers are now taking, on average, 55 days to pay instead of 30. The business is waiting much longer to collect the cash from its credit sales.

(b) Possible problems:

Cash flow strain: less cash is coming in, so the business may struggle to pay its own bills.
Higher risk of bad debts: the longer a debt is outstanding, the more likely some customers will not pay.

An action: tighten credit control, for example by sending reminders, setting credit limits, or offering a cash discount for prompt payment.

Markers reward explaining the longer collection time, two valid problems (cash flow, bad debt risk), and a sensible credit-control action.