How do you compute accounts payable turnover and what does it indicate about payments to suppliers?

How do you compute accounts payable turnover and what does it indicate about payments to suppliers?

• A. Purchases ÷ Average Accounts Payable; higher turnover indicates quicker payment to suppliers and stronger liquidity management.
• B. Cost of Goods Sold ÷ Average Inventory; indicates inventory turnover.
• C. Net Purchases ÷ Average Accounts Payable; indicates collections.
• D. Sales ÷ Average Accounts Payable; indicates credit policy.

Answer: (C)

Accounts payable turnover shows how quickly a company pays its suppliers during a period. It’s calculated as net purchases divided by average accounts payable (beginning plus ending balance divided by two). Using net purchases—purchases minus returns and allowances (and sometimes including freight-in if you treat it as part of purchases)—reflects the actual credit purchases the company is settling. Dividing by the average accounts payable smooths out timing differences, giving a rate of payables activity. A higher ratio means payables are being settled more quickly, signaling stronger or more aggressive cash management and/or shorter payment terms. A lower ratio indicates slower payments, suggesting longer payables on average or looser payment practices. This metric specifically relates to payments to suppliers, not collections from customers (that would be accounts receivable turnover). Using net purchases ensures the calculation accurately reflects the true amount owed for the period, rather than using gross purchases which miss refunds or allowances.

Accounts payable turnover shows how quickly a company pays its suppliers during a period. It’s calculated as net purchases divided by average accounts payable (beginning plus ending balance divided by two). Using net purchases—purchases minus returns and allowances (and sometimes including freight-in if you treat it as part of purchases)—reflects the actual credit purchases the company is settling. Dividing by the average accounts payable smooths out timing differences, giving a rate of payables activity.

A higher ratio means payables are being settled more quickly, signaling stronger or more aggressive cash management and/or shorter payment terms. A lower ratio indicates slower payments, suggesting longer payables on average or looser payment practices. This metric specifically relates to payments to suppliers, not collections from customers (that would be accounts receivable turnover). Using net purchases ensures the calculation accurately reflects the true amount owed for the period, rather than using gross purchases which miss refunds or allowances.