The result would be either an increase, or a decrease in inventory. The cost of sales in the income statement (statement of comprehensive income) shows what was sold, but the company may have purchased either more or less than it eventually sold. There is no single line item that tells how much a company purchased in a year. Or Accounts payable turnover ratio = Total purchases / ((Beginning accounts payable + Ending accounts payable) / 2) The formula is: Accounts payable turnover ratio = Total purchases / Average accounts payable Creditors can use the ratio to measure whether to extend a line of credit to the company.Ĭalculating the Accounts Payable Turnover RatioĪccounts-payable turnover is calculated by dividing the total amount of purchases made on credit by the average accounts-payable balance for any given period. Investors can use the accounts payable turnover ratio to determine if a company has enough cash or revenue to meet its short-term obligations. Accounts payable is listed on the balance sheet under current liabilities. In other words, the ratio measures the speed at which a company pays its suppliers. The accounts payable turnover ratio shows investors how many times per period a company pays its accounts payable. If a company is paying its suppliers very quickly, it may mean that the suppliers are demanding fast payment terms, or that the company is taking advantage of early payment discounts. A change in the turnover ratio can also indicate altered payment terms with suppliers, though this rarely has more than a slight impact on the ratio. If the turnover ratio declines from one period to the next, this indicates that the company is paying its suppliers more slowly, and may be an indicator of worsening financial condition. Meaning of Accounts Payable Turnover RatioĪccounts payable turnover is a ratio that measures the speed with which a company pays its suppliers. Just as accounts receivable ratios can be used to judge a company’s incoming cash situation, this figure can demonstrate how a business handles its outgoing payments. An accounts payable turnover ratio measures the number of times a company pays its suppliers during a specific accounting period.Īccounts payables turnover trends can help a company assess its cash situation. The ratio shows how many times in a given period (typically 1 year) a company pays its average accounts payable. Definition of Accounts Payable Turnover RatioĪccounts payable turnover ratio is an accounting liquidity metric that evaluates how fast a company pays off its creditors (suppliers).
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