Why is "Using total sales/purchases instead of credit" a common mistake in Efficiency Ratios?

Why it happens: Using the headline figures. How to avoid it: Receivables/payables days use CREDIT sales and CREDIT purchases (cash transactions don't create receivables/payables). Source: 9706 Examiner Reports

Why is "Using revenue instead of cost of sales for inventory turnover" a common mistake in Efficiency Ratios?

Why it happens: Confusing the base. How to avoid it: Inventory turnover uses COST OF SALES (inventory is held at cost), not revenue. Source: 9706 Examiner Reports

Why is "Using closing inventory instead of average" a common mistake in Efficiency Ratios?

Why it happens: Only the year-end figure is to hand. How to avoid it: Use AVERAGE inventory = (opening + closing) ÷ 2 when both are given. Source: 9706 Examiner Reports

Why is "Forgetting to multiply by 365 (days ratios)" a common mistake in Efficiency Ratios?

Why it happens: Stopping at the fraction. How to avoid it: The receivables/payables/inventory DAYS ratios are × 365. Source: 9706 Examiner Reports

Why is "Assuming fewer days is always better" a common mistake in Efficiency Ratios?

Why it happens: Treating 'low' as good universally. How to avoid it: Fewer receivables/inventory days is usually better, but too few credit days can lose customers; MORE payables days can help cash flow (within reason). Source: 9706 Examiner Reports

Why is "Interpreting a single ratio with no context" a common mistake in Efficiency Ratios?

Why it happens: Treating one figure as meaningful. How to avoid it: Compare with prior years, industry norms and the type of business; interpret the trend, not just one number. Source: 9706 Examiner Reports

Cambridge International A Levels Accounting (9706)

Efficiency Ratios

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Detailed Study Notes

Detailed notes on Accounting Information and Ratios for Cambridge International A Levels Accounting, covering key concepts, explanations, examples, and exam-focused revision points.

Efficiency Ratios — Cambridge AS & A Level Accounting 9706 Study Notes (2026-2028)

How well a business uses its assets and manages its working capital. Master the exact 9706 formulae for non-current asset turnover, trade receivables and trade payables turnover (in days), inventory turnover (in days and times) — and learn to interpret what each says about the business's efficiency. (Use the appendix formulae.)

At a glance

Non-current asset turnover (times) = Net revenue ÷ Total net book value of non-current assets.
Trade receivables turnover (days) = (Trade receivables ÷ Credit sales) × 365.
Trade payables turnover (days) = (Trade payables ÷ Credit purchases) × 365.
Inventory turnover (days) = (Average inventory ÷ Cost of sales) × 365.
Rate of inventory turnover (times) = Cost of sales ÷ Average inventory.
Days ratios: fewer days for receivables/inventory is usually better; more days for payables can help cash flow.
Use the formulae in the syllabus appendix — the only ones accepted.

What you’ll learn

Mapped to the Cambridge International A Level 9706 syllabus (2026-2028).

1.6.2 — Calculate efficiency ratios: non-current asset turnover, trade receivables turnover (days), trade payables turnover (days), inventory turnover (days), rate of inventory turnover (times).
1.6.2 — Evaluate the efficiency of an organisation by interpreting the ratios.
Note: candidates must use the formulae given in the appendix to section 3.

Non-current asset turnover

How much revenue each $ of non-current assets generates.

Non-current asset turnover measures how efficiently a business uses its non-current assets to generate sales:

$\text{Non-current asset turnover (times)} = \frac{\text{Net revenue}}{\text{Total net book value of non-current assets}}$

Interpretation:

A higher figure means more revenue per $ of assets — the assets are being used efficiently.
A low or falling figure suggests under-used assets (e.g. idle machinery, excess capacity) or recent investment not yet generating sales.

Example. Net revenue $600,000; net book value of non-current assets $300,000 → asset turnover = 600,000 ÷ 300,000 = 2 times (every $1 of assets generates $2 of sales).

Caution: an asset turnover can look 'better' simply because assets are heavily depreciated (a low book value), so compare with care.

Non-current asset turnover = net revenue ÷ net book value of non-current assets.
Higher = more revenue per $ of assets (efficient use).
Low/falling = under-used assets or recent investment not yet earning.
Heavily depreciated assets can flatter the ratio.

See the full worked example for efficiency ratios →

Trade receivables and trade payables turnover (days)

How long, on average, customers take to pay and the business takes to pay suppliers.

Trade receivables turnover (collection period) — the average number of days customers take to pay: $\frac{\text{Trade receivables}}{\text{Credit sales}} \times 365$

Trade payables turnover (payment period) — the average number of days the business takes to pay suppliers: $\frac{\text{Trade payables}}{\text{Credit purchases}} \times 365$

Interpretation:

Receivables days: fewer is usually better — money is collected faster, improving cash flow. Too many days means slow collection (risk of irrecoverable debts); too few could mean credit terms are too tight, losing customers.
Payables days: taking longer to pay can help cash flow (an interest-free source), but too long risks losing supplier goodwill, discounts and credit terms.

Compare receivables and payables days: ideally a business collects from customers before it pays suppliers.

Receivables days = (trade receivables ÷ credit sales) × 365.
Payables days = (trade payables ÷ credit purchases) × 365.
Fewer receivables days is usually better (faster collection).
More payables days helps cash flow but risks supplier goodwill.

See the full worked example for efficiency ratios →

Inventory turnover (days and times)

How long inventory is held, and how many times it is sold and replaced.

Inventory turnover (days) — the average number of days inventory is held before sale: $\frac{\text{Average inventory}}{\text{Cost of sales}} \times 365$

Rate of inventory turnover (times) — how many times inventory is sold and replaced in the period: $\frac{\text{Cost of sales}}{\text{Average inventory}}$

(Average inventory = (opening + closing inventory) ÷ 2.)

Interpretation:

Fewer days / more times usually means inventory sells quickly — efficient, with less money tied up and less risk of obsolescence.
More days / fewer times means inventory is slow-moving — money is tied up, with risks of obsolescence, damage or storage cost. (But too fast could mean stock-outs and lost sales.)

The right level depends on the type of business — a baker turns inventory over far faster than a jeweller.

Inventory turnover (days) = (average inventory ÷ cost of sales) × 365.
Rate of inventory turnover (times) = cost of sales ÷ average inventory.
Fewer days / more times = inventory sells quickly (efficient).
More days / fewer times = slow-moving stock (tied-up cash, obsolescence).

See the full worked example for efficiency ratios →

Interpreting efficiency together

Efficiency ratios show how well working capital and assets are managed.

Efficiency ratios are most useful together and over time:

Slow receivables collection + fast supplier payment drains cash → the business may face a liquidity problem even if profitable.
Rising inventory days ties up cash and risks obsolescence.
A low asset turnover means the business is not generating enough sales from its assets.

Compare the ratios with previous years, industry norms and the business's own policies (e.g. its stated credit terms). A single figure means little; the trend and the context (type of business) tell the story.

Efficiency and profitability interact: collecting faster and holding less stock frees cash that can be reinvested to raise profit, and a higher asset turnover supports a higher ROCE.

Use efficiency ratios together and over time.
Slow collection + fast payment drains cash (liquidity risk).
Compare with prior years, industry norms and the business's own policies.
Efficiency feeds profitability (freed cash, higher asset turnover → ROCE).

See the full worked example for efficiency ratios →

Quick recap

Non-current asset turnover = net revenue ÷ net book value of non-current assets.
Receivables days = (trade receivables ÷ credit sales) × 365; payables days = (trade payables ÷ credit purchases) × 365.
Inventory turnover (days) = (average inventory ÷ cost of sales) × 365.
Rate of inventory turnover (times) = cost of sales ÷ average inventory.
Fewer receivables/inventory days is usually better; more payables days helps cash flow but risks goodwill.
Interpret together, over time, and in the context of the type of business.

Memorise this

Verbatim phrases and definitions Cambridge mark schemes credit.

Non-current asset turnover (times) = net revenue ÷ net book value of non-current assets.
Receivables days = (trade receivables ÷ credit sales) × 365.
Payables days = (trade payables ÷ credit purchases) × 365.
Inventory turnover (days) = (average inventory ÷ cost of sales) × 365; times = cost of sales ÷ average inventory.

How it’s examined

A core Paper 2/Paper 3 task: Calculate the efficiency ratios and Evaluate/comment on the business's efficiency, often comparing two years (2-8 marks). Examiner reports stress using credit sales/purchases (not total), using average inventory, and interpreting the ratios in context.

Sources: Cambridge International AS & A Level Accounting 9706 syllabus (2026-2028) — Appendix: summary of commonly used ratios; 9706 Paper 2 & Paper 3 past papers & mark schemes, 2022-2024; 9706 Examiner Reports, 2022-2024. Last reviewed 2026-06-18.

Take this whole topic with you

Step-by-step worked examples — Efficiency Ratios

Step-by-step solutions to past-paper-style questions on efficiency ratios, written exactly the way a tutor would explain them at the board.

Question type:

1Non-current asset turnover (3 marks)
Getting startedDirect calculation• 9706 Paper 2 style• efficiency, AO2
Question
Net revenue $900,000; net book value of non-current assets$ 360,000. Calculate the non-current asset turnover. (3 marks)
Step-by-step solution
1. Step 1
  Non-current asset turnover = net revenue ÷ net book value of non-current assets.
2. Step 2
  = 900,000 ÷ 360,000.
3. Step 3
  = 2.5 times.
Answer
Non-current asset turnover = 2.5 times.
Examiner tip
Each $1 of non-current assets generates$ 2.50 of sales.
2Receivables collection period (4 marks)
Getting startedDirect calculation• receivables days, AO2
Question
Trade receivables $40,000; credit sales$ 292,000. Calculate the trade receivables turnover (days). (4 marks)
Step-by-step solution
1. Step 1
  Receivables days = (trade receivables ÷ credit sales) × 365.
2. Step 2
  = (40,000 ÷ 292,000) × 365.
3. Step 3
  = 50 days.
Answer
Receivables turnover = 50 days.
Examiner tip
Use CREDIT sales (not total sales); customers take 50 days on average to pay.
3Payables payment period (4 marks)
Building confidenceDirect calculation• payables days, AO2
Question
Trade payables $30,000; credit purchases$ 219,000. Calculate the trade payables turnover (days). (4 marks)
Step-by-step solution
1. Step 1
  Payables days = (trade payables ÷ credit purchases) × 365.
2. Step 2
  = (30,000 ÷ 219,000) × 365.
3. Step 3
  = 50 days.
Answer
Payables turnover = 50 days.
Examiner tip
Use CREDIT purchases; the business takes 50 days on average to pay suppliers.
4Inventory turnover (days and times) (5 marks)
Building confidenceMulti-step problem• inventory turnover, AO2
Question
Opening inventory $18,000; closing inventory$ 22,000; cost of sales $200,000. Calculate (a) the inventory turnover in days and (b) the rate of inventory turnover in times. (5 marks)
Step-by-step solution
1. Step 1
  Average inventory = (18,000 + 22,000) ÷ 2 = 20,000.
2. Step 2
  (a) Inventory days = (20,000 ÷ 200,000) × 365 = 36.5 days.
3. Step 3
  (b) Rate = cost of sales ÷ average inventory = 200,000 ÷ 20,000 = 10 times.
Answer
(a) 36.5 days; (b) 10 times.
Examiner tip
Use AVERAGE inventory and COST OF SALES (not revenue).
5Interpret a rising collection period (5 marks)
StretchWord problem• interpretation, AO3
Question
A business's receivables collection period has risen from 40 days to 62 days. Explain what this indicates and the action it should take. (5 marks)
Step-by-step solution
1. Step 1
  Customers are now taking longer to pay (62 vs 40 days).
2. Step 2
  This ties up more cash in receivables, worsening cash flow/liquidity.
3. Step 3
  It also increases the risk of irrecoverable debts.
4. Step 4
  Possible causes: poor credit control, customers in difficulty, or relaxed credit terms.
5. Step 5
  Action: tighten credit control (chase debts, offer settlement discounts, review credit limits).
Answer
Slower collection ties up cash and raises bad-debt risk; tighten credit control (chasing, discounts, limits).
Examiner tip
Link the rise to cash flow and bad-debt risk, then give a control action.
6Trade-off in paying suppliers later (5 marks)
StretchWord problem• payables days, AO3
Question
A business has increased its payables payment period from 35 days to 70 days. Explain the benefits and risks of this. (5 marks)
Step-by-step solution
1. Step 1
  Benefit: it holds onto cash longer — an interest-free source of finance, improving cash flow.
2. Step 2
  It reduces the need for an overdraft to fund working capital.
3. Step 3
  Risk: suppliers may withdraw credit terms or demand cash on delivery.
4. Step 4
  The business may lose cash (settlement) discounts for prompt payment.
5. Step 5
  Prolonged late payment can damage supplier relationships and future supply.
Answer
Benefit: free short-term finance / better cash flow. Risks: lost discounts, withdrawn credit, damaged supplier goodwill.
Examiner tip
Paying later helps cash flow but risks discounts and supplier goodwill.
7Interpret rising inventory days (4 marks)
StretchWord problem• inventory turnover, AO3
Question
A retailer's inventory turnover has slowed from 30 days to 48 days. Explain what this indicates. (4 marks)
Step-by-step solution
1. Step 1
  Inventory is now held longer before being sold (48 vs 30 days).
2. Step 2
  This ties up more cash in stock and increases the risk of obsolescence, damage or higher storage cost.
3. Step 3
  Possible causes: over-ordering, falling demand, or slow-moving lines.
4. Step 4
  The retailer should review purchasing and stock levels to free up cash and reduce risk.
Answer
Slower-moving stock ties up cash and risks obsolescence; review purchasing and stock levels.
Examiner tip
Slower inventory turnover = tied-up cash + obsolescence risk.
8Collect-before-pay comparison (5 marks)
StretchMulti-step problem• working capital, AO3
Question
A business has receivables days of 65 and payables days of 30. Explain the cash-flow implication and how it could improve. (5 marks)
Step-by-step solution
1. Step 1
  The business collects from customers in 65 days but pays suppliers in 30 days.
2. Step 2
  So it pays out cash 35 days before it receives it — a cash-flow strain.
3. Step 3
  It must fund this gap (e.g. with an overdraft), incurring interest.
4. Step 4
  To improve: collect faster (tighter credit control) and/or pay suppliers a little later (within terms).
5. Step 5
  Ideally the business should aim to collect before it pays to ease cash flow.
Answer
Paying (30 days) well before collecting (65 days) strains cash; collect faster and/or pay later to close the gap.
Examiner tip
The gap between receivables and payables days drives the cash-flow strain.
9Caution interpreting asset turnover (4 marks)
StretchWord problem• interpretation, AO3
Question
Company X has a non-current asset turnover of 4 times and Company Y has 2 times. Explain why this does not necessarily mean X uses its assets more efficiently. (4 marks)
Step-by-step solution
1. Step 1
  Asset turnover uses the net book value of non-current assets.
2. Step 2
  X's assets may be older and more heavily depreciated, giving a lower book value and so a higher ratio.
3. Step 3
  Or the companies may use different depreciation policies/revaluation, affecting the book value.
4. Step 4
  So the difference may reflect asset age/policy, not genuine efficiency — compare with care.
Answer
A higher ratio can result from older, more depreciated assets (lower book value) or different policies, not just better efficiency.
Examiner tip
Heavily depreciated assets flatter the ratio — a key limitation.
10Evaluate efficiency over two years (6 marks)
StretchWord problem• evaluation, AO3
Question
Year 1: receivables 42 days, payables 48 days, inventory 30 days. Year 2: receivables 58 days, payables 40 days, inventory 41 days. Evaluate the change in the business's efficiency and cash position. (6 marks)
Step-by-step solution
1. Step 1
  Receivables rose 42 → 58 days — customers pay slower, tying up cash and raising bad-debt risk.
2. Step 2
  Payables fell 48 → 40 days — the business now pays suppliers faster, using cash sooner.
3. Step 3
  Inventory rose 30 → 41 days — stock is slower-moving, tying up more cash.
4. Step 4
  All three moved the wrong way for cash flow: collecting slower, paying faster, holding stock longer.
5. Step 5
  The result is more cash tied up in working capital — a likely liquidity strain.
6. Step 6
  Action: tighten credit control, manage inventory down, and pay suppliers within (but not before) terms.
Answer
Efficiency worsened on all three: slower collection, faster payment, slower inventory → more cash tied up; improve credit control and stock management.
Examiner tip
All three ratios moved against cash flow; conclude on the liquidity strain and the actions.

Model Answers — Efficiency Ratios

High-scoring sample answers for efficiency ratios on the Cambridge IGCSE paper, with examiner-style notes mapping each response to the mark scheme and assessment objectives.

Question 1
9706 Paper 2 style3 marks
Q (3 marks). Net revenue $750,000; net book value of non-current assets$ 250,000. Calculate the non-current asset turnover.
Model answer
Non-current asset turnover = net revenue ÷ net book value of non-current assets = 750,000 ÷ 250,000 = 3 times.
Why this scores
Marking (point-based, 3). Formula (1); calculation (1); 3 times (1).
Question 2
9706 Paper 2 style4 marks
Q (4 marks). Trade receivables $55,000; credit sales$ 401,500. Calculate the trade receivables turnover in days.
Model answer
Receivables days = (trade receivables ÷ credit sales) × 365 = (55,000 ÷ 401,500) × 365 = 50 days.
Why this scores
Marking (point-based, 4). Formula (1); use credit sales (1); × 365 (1); 50 days (1).
Question 3
9706 Paper 2 style5 marks
Q (5 marks). Opening inventory $24,000; closing inventory$ 26,000; cost of sales $375,000. Calculate (a) the inventory turnover in days and (b) the rate of inventory turnover in times.
Model answer
Average inventory = (24,000 + 26,000) ÷ 2 = $25,000. (a) Inventory days = (25,000 ÷ 375,000) × 365 = 24.33 days. (b) Rate of inventory turnover = 375,000 ÷ 25,000 = 15 times.
Why this scores
Marking (point-based, 5). Average inventory $25,000 (1); days 24.33 (2); times 15 (2).
Question 4
9706 Paper 2/3 style6 marks
Q (6 marks). Calculate: (a) receivables days (trade receivables $48,000; credit sales$ 350,400); (b) payables days (trade payables $36,000; credit purchases$ 262,800); (c) inventory days (average inventory $30,000; cost of sales$ 240,000).
Model answer
(a) Receivables days = (48,000 ÷ 350,400) × 365 = 50 days. (b) Payables days = (36,000 ÷ 262,800) × 365 = 50 days. (c) Inventory days = (30,000 ÷ 240,000) × 365 = 45.6 days.
Why this scores
Marking (point-based, 6). 2 marks each. Use credit figures and average inventory.
Question 5
9706 Paper 3 evaluation style6 marks
Q (6 marks). A business's receivables collection period has increased from 38 days to 60 days, while its credit policy still states 30 days. Evaluate this change and recommend action.
Model answer
What it shows. Customers are now taking 60 days to pay, far above the 38-day previous figure and double the stated 30-day credit policy. The business is not enforcing its own terms.

Consequences.

More cash is tied up in receivables, worsening cash flow and liquidity — the business may need an overdraft, incurring interest.

A longer collection period increases the risk of irrecoverable debts (the longer a debt is outstanding, the less likely it is paid).

Possible causes. Weak credit control (debts not chased), customers in financial difficulty, or terms being relaxed to win sales.

Recommended action.

Tighten credit control: send statements/reminders, chase overdue accounts, and set/enforce credit limits.

Offer cash (settlement) discounts to encourage prompt payment.

Review the creditworthiness of customers before granting credit.

Conclusion. The rise to 60 days is a clear efficiency and liquidity concern, well above policy; the business should act to bring collection back toward its 30-day terms.
Why this scores
Marking (point-based, ~6). Above policy / slower (~1.5); cash flow + bad-debt risk (~2); causes (~1); recommended actions (~1.5).
Question 6
9706 Paper 3 evaluation style5 marks
Q (5 marks). A business has deliberately lengthened its payables payment period from 30 days to 65 days. Discuss whether this is a good policy.
Model answer
Arguments for. Paying suppliers later keeps cash in the business for longer — an interest-free source of short-term finance that improves cash flow and reduces the need for borrowing.

Arguments against.

The business may lose cash (settlement) discounts for prompt payment, which can be costly.

Suppliers may withdraw credit terms, demand cash on delivery, or raise prices to compensate.

Persistent late payment damages supplier relationships, risking disrupted supply of goods.

Conclusion. Lengthening the payment period to 65 days helps cash flow in the short term, but going well beyond agreed terms is risky. The business should pay within the credit terms agreed with suppliers — a moderate payment period balances cash-flow benefit against the risk of lost discounts and damaged goodwill. So it is acceptable only if it stays within (or close to) the agreed terms.
Why this scores
Marking (point-based, ~5). For (free finance / cash flow) (~1.5); against (lost discounts / withdrawn credit / goodwill) (~2.5); conclusion 'within terms' (~1).
Question 7
9706 Paper 3 style5 marks
Q (5 marks). A business has receivables days of 70, inventory days of 50 and payables days of 30. Explain the implication for the business's cash flow and how it could improve.
Model answer
The business holds inventory for 50 days and then waits 70 days to collect from customers, but pays suppliers in only 30 days. So cash is tied up for a long time (it pays out for goods long before it collects the cash from selling them), and it pays suppliers well before it receives money from customers.

This creates a significant cash-flow strain: the business must fund the gap, typically with an overdraft, incurring interest, and risking liquidity problems even if it is profitable.

To improve, the business could:

collect from customers faster (tighter credit control, settlement discounts) to cut receivables days;

hold less inventory / sell stock faster to cut inventory days;

pay suppliers a little later (within agreed terms) to lengthen payables days.

Together these would shorten the working capital cycle and ease the cash-flow pressure.
Why this scores
Marking (point-based, ~5). Long time cash tied up / pays before collecting (~2); cash-flow strain/overdraft (~1.5); actions to shorten the cycle (~1.5).
Question 8
9706 Paper 2/3 style4 marks
Q (4 marks). A retailer's rate of inventory turnover has fallen from 12 times to 8 times. Explain what this indicates and one possible cause.
Model answer
The fall from 12 times to 8 times means the retailer is now selling and replacing its inventory less often — inventory is held for longer before sale (its inventory days have increased).

This ties up more cash in stock and increases the risk of obsolescence, damage or extra storage costs. A possible cause is over-ordering or a fall in demand (so stock is not selling as quickly), or a build-up of slow-moving lines. The retailer should review its purchasing and stock levels to free up cash and reduce the risk of unsold stock.
Why this scores
Marking (point-based, 4). Selling/replacing less often, held longer (~2); tied-up cash / obsolescence + a cause (~2).
Question 9
9706 Paper 2 style2 marks
Q (2 marks). State the formula for the trade payables turnover in days, and what the answer represents.
Model answer
Trade payables turnover (days) = (trade payables ÷ credit purchases) × 365. It represents the average number of days the business takes to pay its suppliers.
Why this scores
Marking (point-based, 2). Formula with credit purchases (1); meaning — average payment period (1).
Question 10
9706 Paper 3 evaluation style6 marks
Q (6 marks). Year 1: receivables 45 days, inventory 35 days, payables 50 days. Year 2: receivables 60 days, inventory 48 days, payables 38 days. Evaluate the change in the business's working-capital efficiency.
Model answer
Each ratio has moved in a direction that worsens cash flow:

Receivables days rose (45 → 60): customers now pay more slowly, tying up more cash and increasing the risk of irrecoverable debts.

Inventory days rose (35 → 48): stock is held longer, tying up more cash and risking obsolescence.

Payables days fell (50 → 38): the business now pays suppliers faster, so cash leaves the business sooner.

Taken together, the business is collecting later, holding stock longer, and paying earlier — so the gap between cash going out and cash coming in has widened sharply, putting more cash tied up in working capital and creating a likely liquidity strain (it may need a larger overdraft).

Recommended action: tighten credit control to speed up collection, reduce/clear inventory, and (within agreed terms) lengthen the payment period to suppliers.

Conclusion: working-capital efficiency has clearly deteriorated on all three measures, and the business should act to shorten its working-capital cycle before its liquidity is threatened.
Why this scores
Marking (point-based, ~6). Each ratio's change + cash-flow effect (~3.5); combined strain on cash/liquidity (~1.5); recommended actions + conclusion (~1).

Key Formulae — Efficiency Ratios

The formulae you need to memorise for efficiency ratios on the Cambridge IGCSE paper, with every variable defined in plain English and a note on when to use it.

Non-current asset turnover (times)
$\frac{Net\ revenue}{Total\ net\ book\ value\ of\ non\text{-}current\ assets}$
$Net revenue$
sales for the period
$Net book value$
cost less accumulated depreciation of non-current assets
When to use
To measure revenue generated per $ of non-current assets.
Example
900,000 ÷ 360,000 = 2.5 times.
Trade receivables turnover (days)
$\frac{Trade\ receivables}{Credit\ sales} \times 365$
$Trade receivables$
amounts owed by credit customers
$Credit sales$
sales made on credit
When to use
To find the average collection period in days.
Example
(40,000 ÷ 292,000) × 365 = 50 days.
Trade payables turnover (days)
$\frac{Trade\ payables}{Credit\ purchases} \times 365$
$Trade payables$
amounts owed to credit suppliers
$Credit purchases$
purchases made on credit
When to use
To find the average payment period in days.
Example
(30,000 ÷ 219,000) × 365 = 50 days.
Inventory turnover (days)
$\frac{Average\ inventory}{Cost\ of\ sales} \times 365$
$Average inventory$
(opening + closing inventory) ÷ 2
$Cost of sales$
cost of the goods sold
When to use
To find how long inventory is held on average.
Example
(20,000 ÷ 200,000) × 365 = 36.5 days.
Rate of inventory turnover (times)
$\frac{Cost\ of\ sales}{Average\ inventory}$
$Cost of sales$
cost of the goods sold
$Average inventory$
(opening + closing inventory) ÷ 2
When to use
To find how many times inventory is sold and replaced.
Example
200,000 ÷ 20,000 = 10 times.

Key Definitions and Keywords — Efficiency Ratios

Definitions to memorise and the exact keywords mark schemes credit for efficiency ratios answers — sharpened from recent examiner reports for the 2026 Cambridge IGCSE sitting.

Non-current asset turnover
Examiner keyword
Net revenue ÷ net book value of non-current assets; revenue generated per $ of non-current assets.
Trade receivables turnover (days)
Examiner keyword
(Trade receivables ÷ credit sales) × 365; the average collection period for credit customers.
Trade payables turnover (days)
Examiner keyword
(Trade payables ÷ credit purchases) × 365; the average period taken to pay suppliers.
Inventory turnover (days)
Examiner keyword
(Average inventory ÷ cost of sales) × 365; the average number of days inventory is held.
Rate of inventory turnover (times)
Examiner keyword
Cost of sales ÷ average inventory; how many times inventory is sold and replaced in the period.
Average inventory
Examiner keyword
(Opening inventory + closing inventory) ÷ 2; used in the inventory turnover ratios.

Common Mistakes and Misconceptions — Efficiency Ratios

The traps other students keep falling into on efficiency ratios questions — taken from recent Cambridge IGCSE examiner reports and mark schemes — and how to avoid them.

✕Using total sales/purchases instead of credit
9706 Examiner Reports
Why it happens
Using the headline figures.
How to avoid it
Receivables/payables days use CREDIT sales and CREDIT purchases (cash transactions don't create receivables/payables).
✕Using revenue instead of cost of sales for inventory turnover
9706 Examiner Reports
Why it happens
Confusing the base.
How to avoid it
Inventory turnover uses COST OF SALES (inventory is held at cost), not revenue.
✕Using closing inventory instead of average
9706 Examiner Reports
Why it happens
Only the year-end figure is to hand.
How to avoid it
Use AVERAGE inventory = (opening + closing) ÷ 2 when both are given.
✕Forgetting to multiply by 365 (days ratios)
9706 Examiner Reports
Why it happens
Stopping at the fraction.
How to avoid it
The receivables/payables/inventory DAYS ratios are × 365.
✕Assuming fewer days is always better
9706 Examiner Reports
Why it happens
Treating 'low' as good universally.
How to avoid it
Fewer receivables/inventory days is usually better, but too few credit days can lose customers; MORE payables days can help cash flow (within reason).
✕Interpreting a single ratio with no context
9706 Examiner Reports
Why it happens
Treating one figure as meaningful.
How to avoid it
Compare with prior years, industry norms and the type of business; interpret the trend, not just one number.

Efficiency Ratios

Detailed Study Notes

At a glance

What you’ll learn

Quick recap

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How it’s examined

Take this whole topic with you

1Non-current asset turnover (3 marks)

2Receivables collection period (4 marks)

3Payables payment period (4 marks)

4Inventory turnover (days and times) (5 marks)

5Interpret a rising collection period (5 marks)

6Trade-off in paying suppliers later (5 marks)

7Interpret rising inventory days (4 marks)

8Collect-before-pay comparison (5 marks)

9Caution interpreting asset turnover (4 marks)

10Evaluate efficiency over two years (6 marks)

Non-current asset turnover (times)

Trade receivables turnover (days)

Trade payables turnover (days)

Inventory turnover (days)

Rate of inventory turnover (times)

Non-current asset turnover

Trade receivables turnover (days)

Trade payables turnover (days)

Inventory turnover (days)

Rate of inventory turnover (times)

Average inventory

✕Using total sales/purchases instead of credit

✕Using revenue instead of cost of sales for inventory turnover

✕Using closing inventory instead of average

✕Forgetting to multiply by 365 (days ratios)

✕Assuming fewer days is always better

✕Interpreting a single ratio with no context