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Ratios: Accounts Payable Turnover quiz

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  • What does the accounts payable turnover ratio measure?
    It measures how efficiently a company pays off its accounts payable by comparing COGS (or purchases) to average accounts payable.
  • What is the typical numerator used in the accounts payable turnover ratio in most classes?
    Most classes use Cost of Goods Sold (COGS) as the numerator.
  • How do you calculate average accounts payable?
    Add the beginning accounts payable balance to the ending balance and divide by two.
  • What is the formula for accounts payable turnover ratio?
    Accounts Payable Turnover = COGS (or Purchases) / Average Accounts Payable.
  • How can purchases be estimated using inventory balances?
    Purchases can be estimated as COGS plus ending inventory minus beginning inventory.
  • What does a higher accounts payable turnover ratio indicate?
    It indicates that a company pays off its accounts payable more quickly.
  • Why might the numerator in the accounts payable turnover ratio be larger than the denominator?
    Because purchases (or COGS) accumulate over the year, while accounts payable is an average balance.
  • How is benchmarking used with the accounts payable turnover ratio?
    Benchmarking compares a company's ratio to industry averages or competitors to evaluate performance.
  • What does the accounts payable turnover ratio tell us about a company’s payment habits?
    It tells us how many times a company pays off its accounts payable during a year.
  • If you are given only COGS and average accounts payable, how do you calculate the ratio?
    Divide COGS by average accounts payable.
  • What financial statements might you use to estimate purchases for the ratio calculation?
    You would use the balance sheet (for inventory balances) and the income statement (for COGS).
  • What happens to the accounts payable balance when a company makes purchases?
    The accounts payable balance increases with purchases.
  • What effect does selling inventory have on the inventory account?
    Selling inventory decreases the inventory account through COGS.
  • Why is it important to compare your accounts payable turnover ratio to others in your industry?
    Because what is considered efficient can vary by industry, so comparison helps assess appropriateness.
  • What is the algebraic rearrangement to solve for purchases using inventory balances?
    Purchases = COGS + Ending Inventory - Beginning Inventory.