ACCA Performance Management (F5) Certification Practice Exam

What is the formula for the payables payment period ratio?

1. Payables / Cash purchases x 365

2. Payables / Credit purchases x 365

3. Payables / Total purchases x 100

4. Payables / Credit sales x 365

The correct answer is: Payables / Credit purchases x 365

The payables payment period ratio is an important metric used to assess how long a company takes to pay its suppliers. The correct formula for calculating the payables payment period involves using credit purchases rather than total purchases or sales figures. Using credit purchases in the formula allows for a more accurate measure of how efficiently a company is managing its obligations to suppliers, as it focuses on the transactions that extend credit terms rather than including cash purchases that do not affect payables. When you take the average payables and divide it by credit purchases, you can determine the average number of days it takes for the company to settle its outstanding balances with suppliers. The multiplication by 365 converts the ratio into days, providing a clearer perspective on the company's payables management over a standard year. Therefore, the relationship between payables and credit purchases reveals essential insights into the company's liquidity and working capital management practices. This metric is especially useful for stakeholders interested in understanding how well the company manages its cash flow regarding supplier payments.