ACCA Performance Management (F5) Certification Practice Exam

What aspect does the payables payment period evaluate?

1. Time taken to pay suppliers

2. Efficiency of inventory turnover

3. Duration to collect receivables

4. Gross profit generation

The correct answer is: Time taken to pay suppliers

The payables payment period is a financial metric that assesses the average time a company takes to pay its suppliers after purchasing goods or services on credit. It is a critical indicator of a business's cash flow management and supplier relationships. When a firm stretches its payables payment period, it can effectively manage its cash flow by retaining cash longer, which can be used for other operational needs or investments. This timeframe reflects how well a company can leverage its payment terms to optimize liquidity without jeopardizing supplier relationships. A longer payables payment period can suggest effective cash management, but it must be balanced with maintaining good relationships with suppliers, as potential delays in payment might strain those relationships or lead to a loss of favorable terms. The other options, while relevant in the context of financial performance, do not pertain to the payables payment period. Inventory turnover focuses on how quickly inventory is sold and replaced, and the duration to collect receivables relates to the efficiency of collecting money owed by customers. Gross profit generation involves the profitability of sales relative to the cost of goods sold. None of these metrics directly relates to the time taken to settle payments with suppliers, which is the primary aspect evaluated by the payables payment period.