![]() *For the purpose of calculation of ratios accountants assume that the year has 360 days. Number of Days Receivables Outstanding = (40 / 100) * 360 The calculation of number of days outstanding ratio therefore is as follows: However in this case we shall consider the accounts payables to be 40% of all credit purchases Number of Days Outstanding Ratio Hence we can use the same example to understand the calculation of this ratio as well. The calculation of this ratio is just like the calculation of accounts receivable turnover ratio. This formula converted to a percentage shows the average amount of payables that are outstanding. The FormulaĪccounts Payable Turnover Ratio = Net Credit Purchase / Average Accounts Payables *Īverage Accounts Payables = (Beginning Accounts Payables + Ending Accounts Payables) / 2 In that case, the firm may be better off using its own money to buy products at a lower price from vendors that charge a lower price. However, due care must be taken that vendors are not passing off the finance charges in the form of higher prices for products purchased. By doing so, they are using the vendors money to temporarily finance their own business without any cost attached. Since there are no interest charges involved and this is purely trade credit, the objective of the firm ideally should be to pay its bills as late as possible. Just like accounts receivable turnover ratio show the financing that the firm is providing to its buyers interest free, the accounts payable turnover ratio show the financing that the firm is able to receive from its vendors and suppliers free of cost.
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