Why we can increase the turnovers ratio by adding bad debts expense which decrea

Question

Why we can increase the turnovers ratio by adding bad debts expense which decreases the average of net receivable by increasing allowance for doubtful accounts? So does it mean if a company has a high amount of bad debts, the company will have high turnover ratio? It is kind of contradictory... Why we can increase the turnovers ratio by adding bad debts expense which decreases the average of net receivable by increasing allowance for doubtful accounts? So does it mean if a company has a high amount of bad debts, the company will have high turnover ratio? It is kind of contradictory...

Explanation / Answer

Ans: Turnover ratio is computed by dividing net sales by the average of net receivable, so if the bad debt expenses is high the average debtor balance will eventually comes down. So the turnover ratio will eventually be higher. Yes it is a lacuna of the formula , however many company also reduces the net sales by unrecoverable amount so that it gives somewhat clear image. But by adopting general formula due to bad debt expenses, turnovers ratio will be higher without it.

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