ACCA Financial Management (F9) Certification Practice Exam

How is the Average Payables Period calculated?

1. (Payables / Cost of Sales) x 365

2. (Cost of Sales / Payables) x 365

3. (Total Purchases / Payables) x 365

4. (Payables / Total Sales) x 365

The correct answer is: (Payables / Cost of Sales) x 365

The Average Payables Period is a financial metric that indicates the average time a company takes to pay its suppliers. This is an important aspect of cash flow management and can provide insights into a company's operating efficiency and its relationship with suppliers. The correct formula for calculating the Average Payables Period is derived from the relationship between payables and the cost of sales incurred by the business. Specifically, it requires understanding how much the company owes to suppliers in relation to the cost of the goods sold over a certain period. By taking the total payables and dividing it by the cost of sales, you can determine how many times the cost of sales is covered by the amount owed in payables. Multiplying this ratio by 365 converts the period into days, which provides a clear indication of how long, on average, it takes the company to settle its debts with suppliers. This metric is vital for assessing liquidity, as a longer payables period may indicate that a firm is effectively managing its cash flows by utilizing its supplier credit. In contrast, a shorter period may suggest that the company is paying off its debts quickly, which may not always be ideal depending on the broader context of its cash management strategies. The other formulas provided in the choices do not accurately reflect the calculation