Calculate efficiency ratios for assets, receivables, payables and inventory
Apply each syllabus formula with its correct sales, purchases, cost and balance basis, then interpret what the result can suggest.
Exam scope and assessment notes
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. These original lessons cover objectives 1.6.1–1.6.2: stakeholder information needs, communication, the listed profitability, liquidity and efficiency ratios, interpretation, improvement measures and limitations. Ratio formulae follow the official syllabus appendix; use its formulae in candidate responses. Practice is self-checked, not an official Cambridge grade; timed Papers 1–4 and human subject-teacher review remain outstanding.
Before you begin
- Use the Topic 1.5 statements and distinguish revenue, gross profit, operating profit, profit for the year, assets, liabilities and equity before selecting a ratio.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
Trade receivables are $12,000 and credit sales are $144,000. Which additional factor converts the ratio to days under the syllabus formula?
What you will learn
- Calculate all five efficiency ratios in Topic 1.6.2
- Select the correct credit or average balance data
- Interpret efficiency changes with operational evidence
Match each turnover ratio with its denominator
Non-current asset turnover = net revenue ÷ total net book value of non-current assets, expressed in times. Trade receivables turnover (days) = trade receivables ÷ credit sales × 365 days. Trade payables turnover (days) = trade payables ÷ credit purchases × 365 days.
Inventory turnover (days) = average inventory ÷ cost of sales × 365 days. Rate of inventory turnover (times) = cost of sales ÷ average inventory. Use year-end balances where appropriate unless the question specifies average balances; for inventory days and turnover times, the syllabus formula explicitly uses average inventory.
Interpret the operating cycle with context
Lower receivable days may indicate faster collection, but also check credit terms, customer mix and bad-debt risk. Higher payable days may preserve cash but could reflect late payment and strain supplier relationships. Faster inventory turnover may reduce storage cost, yet stock-outs can lose sales; slower turnover may reflect deliberate stockholding or obsolete goods.
Asset turnover compares net revenue with the net book value of non-current assets. A higher result does not automatically mean more productive equipment: old, heavily depreciated assets can reduce the denominator. Compare the business model, asset age and capacity use before drawing a conclusion.
Pause and explain
Average inventory is $18,000 and cost of sales is $108,000. What is the rate of inventory turnover in times?
Worked example
A company reports net revenue $240,000; non-current assets at net book value $80,000; receivables $15,000 on credit sales $180,000; payables $18,000 on credit purchases $120,000; average inventory $20,000; and cost of sales $120,000. Calculate all five efficiency ratios.
Show the worked solution
- Non-current asset turnover = 240,000 ÷ 80,000 = 3 times.
- Receivable days = 15,000 ÷ 180,000 × 365 ≈ 30.4 days; payable days = 18,000 ÷ 120,000 × 365 = 54.75 days.
- Inventory days = 20,000 ÷ 120,000 × 365 ≈ 60.8 days.
- Inventory turnover rate = 120,000 ÷ 20,000 = 6 times.
Answer Non-current asset turnover 3 times; receivables 30.4 days; payables 54.75 days; inventory 60.8 days; inventory turnover rate 6 times.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Credit sales are $219,000, receivables $18,000, credit purchases $146,000 and payables $20,000. Calculate receivable days and payable days using 365 days.
Give me a hint
Use the matching credit-flow figure for each balance.
Compare my reasoning
- Receivable days = 18,000 ÷ 219,000 × 365 ≈ 30.0 days.
- Payable days = 20,000 ÷ 146,000 × 365 ≈ 50.0 days.
- Receivables are collected in about 30 days on this measure; supplier balances remain outstanding about 50 days, subject to the limitations of year-end balances.
Receivable days ≈30.0; payable days ≈50.0. Interpret them alongside agreed customer and supplier terms and the timing of balances.
Look for these in your work
- Credit-sales denominator used
- Credit-purchase denominator used
- Days and interpretation qualified
Opening inventory is $16,000, closing inventory $24,000, cost of sales $160,000 and net revenue $240,000. Calculate average inventory, inventory turnover days, turnover rate and non-current asset turnover if net book value of non-current assets is $80,000.
Give me a hint
Calculate average inventory first, then use the two separate inventory formulas.
Compare my reasoning
- Average inventory = (16,000 + 24,000) ÷ 2 = $20,000.
- Inventory days = 20,000 ÷ 160,000 × 365 = 45.625 days; turnover rate = 160,000 ÷ 20,000 = 8 times.
- Non-current asset turnover = 240,000 ÷ 80,000 = 3 times.
Average inventory $20,000; inventory turnover 45.625 days (about 45.6 days); turnover rate 8 times; non-current asset turnover 3 times.
Look for these in your work
- Average inventory correct
- Days and times formulas distinguished
- Asset-turnover formula correct
Receivable days improve from 52 to 34, while bad debts rise and customer complaints about credit restrictions increase. Evaluate the change and suggest a balanced next step.
Give me a hint
A lower ratio is not sufficient evidence when the policy may harm sales or customer relationships.
Compare my reasoning
- Faster collection can release working capital.
- Rising bad debts and complaints suggest the policy may be poorly targeted or customers may be under pressure.
- Segment customers, review credit limits and payment history, and compare contribution and bad-debt cost before tightening terms further.
Faster collection may help cash flow, but rising bad debts and complaints make the result ambiguous. Review customer segments, collection causes, sales contribution and bad-debt cost, then adjust terms selectively and monitor outcomes.
Look for these in your work
- Potential benefit identified
- Conflicting evidence recognized
- Targeted evidence-led action proposed
Common mistakes
- Using total sales instead of credit sales for receivables days when credit sales are supplied
- Using closing inventory when the formula specifies average inventory
- Assuming longer payables days are always beneficial to the business
What can you explain now?
What denominator is used for inventory turnover (days)?
Compare with the explanation
Cost of sales
Inventory turnover days = average inventory ÷ cost of sales × 365 days.
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Make it stick
Write the five efficiency-ratio formulas exactly as given in the 2026–2028 syllabus appendix.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.