Wednesday, 18 January 2012

Accounts Payables(AP) Analysis

Accounts Payable Turnover Definition:
The accounts payable turnover ratio indicates how many times a company pays off its suppliers during an accounting period. It measures how a company manages paying its own bills. A higher ratio is generally more favorable as payables are being paid more quickly. When placed on a trend graph accounts payable turnover analysis becomes simplified: the line raises and lowers just as the ratio does. Common adaptations used to calculate accounts payable turnover yield results like accounts payable turnover ratio in days, ap turnover in days, and more. A useful tool in managing and measuring the efficiency of paying bills is a Flash Report.

Accounts Payable Turnover Formula:

A solid grasp of the accounts payable turnover ratio formula is of utmost importance to any business person. Though some ratios may or may not apply to different business models everyone has bills to pay. The need to understand ap turnover is universal.

Accounts payable turnover = Cost of goods sold / Average accounts payable

Or = Credit purchases / average accounts payable.

Purchases = Cost of goods sold + ending inventory - beginning inventory.

Accounts Payable Turnover Calculation:

Accounts payable turnover is calculated by dividing total purchases made from suppliers by the average accounts payable amount during the same period.

Average Accounts payable is the average of the opening and closing balances for Accounts payable.

In real life, sometimes it is hard to get the number of how much of the purchases were made on credit. Investors can assume that all purchases are credit purchase as a shortcut. When this is done, it is important to remain consistent if the ratio is compared to that of other companies.

Example: assume annual purchases are $100,000; accounts payable at the beginning is $25,000; and accounts payable at the end of the year is $15,000.

The accounts payable turnover is: 100,000 / ((25,000 + 15,000)/2) = 5 times

An accounts payable turnover days formula is a simple next step.

365 days per year / 5 times per year = 73 days

Slightly different methods are applied to calculate ap days, ap turnover ratio in days, and other important metrics.This article outlines the fundamentals of how to calculate ap turnover.


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