Accounts Payable Turnover Ratio

Accounts payable turnover is the ratio of net credit purchases of a business to its average accounts payable during the period. It measures short term liquidity of business since it shows how many times during a period, an amount equal to average accounts payable is paid to suppliers by a business.

Formula

Accounts payable turnover is usually calculated as:

Payables = Net Credit Purchases
TurnoverAverage Accounts Payable

To calculate average accounts payable, divide the sum of accounts payable at the beginning and at the end of the period by 2. Net credit purchases figure in the denominator is not easily discoverable since such information is not usually available in financial statements. It is to be search for in the annual report of the company. Sometimes cost of goods sold is used in the denominator instead of credit purchases.

Analysis

Accounts payable turnover is a measure of short-term liquidity. A higher value indicates that the business was able to repay its suppliers quickly. Thus higher value of accounts payable turnover is favorable. This ratio can be of great importance to suppliers since they are interested in getting paid early for their supplies. Other things equal, a supplier should prefer to sell to a company with higher accounts payable turnover ratio.

Examples

Example 1: Company γ purchased goods having invoice value of $243,200 on credit during the year ended Dec 31, 2010. It returned goods costing $5,900 to suppliers. Accounts payable of the company on Jan 1, 2010 and Dec 31, 2011 were $23,000 and $34,900 respectively. Calculate its accounts payable ratio.

Solution
Net Credit Purchases = $243,200 − $5,900 = $237,300
Average Accounts Payable = ( $23,000 + $34,900 ) / 2 = $28,950
Accounts Payable Turnover Ratio = $237,300 / $28,950 ≈ 8.2

Written by Irfanullah Jan