ACCA Financial Management (F9) Certification Practice Exam

How is the payable turnover ratio calculated using credit purchases?

1. Purchases divided by sales revenue

2. (Payables divided by credit purchases) x 365

3. (Credit purchases divided by Payables) x 365

4. (Payables divided by average inventory) x 365

The correct answer is: (Credit purchases divided by Payables) x 365

The payable turnover ratio is a financial metric that measures how efficiently a company manages its accounts payable. It indicates how frequently the company pays off its suppliers or vendors within a given time period, typically a year. To calculate the payable turnover ratio using credit purchases, the correct approach involves taking the total credit purchases for a period and dividing that figure by the average accounts payable during the same period. The formula encapsulates the relationship between the purchases made on credit and outstanding payables. Option C provides the correct formula: (Credit purchases divided by Payables) x 365. This equation gives a numerical representation of how many times, on average, a company pays off its suppliers during the year. Multiplying by 365 converts this ratio into a time frame, allowing for interpretation over a full year—essentially, it indicates how many days, on average, it takes the company to pay its suppliers. This calculation is crucial for assessing a company's liquidity and cash flow management, as it highlights how quickly the company meets its short-term financial obligations to suppliers. A lower number may suggest the company is delaying payments, whereas a higher number indicates prompt payment, which could foster better supplier relationships. The other options either misapply the components needed to measure the payable turnover ratio