Creditors Turnover Ratio Formula & Example

Definition: Creditors Turnover Ratio (also known as Accounts Payable Turnover Ratio) is calculated by taking the total purchases made and dividing it by the average accounts payable during the period. It is used to measure the rate at which a firm pays off its suppliers.

Formula:
Creditors Turnover Ratio = Credit Purchases / Average Trade Creditors
Or,
Accounts Payable Turnover (APT) Ratio = Cost of Goods sold / Accounts Payable

Example 1:
A company has total cost of production $26 million and total short term credits is $13 million. Then the APT Ratio = 26 million / 13 million = 2

Example 2:
Moneyonline Ltd has the following information:
Trade creditors at 1 Jan 2010: $6,000
Trade creditors at 31 Dec 2010: $8,000
Total Purchases (including cash purchases $2,000): $12,000

Then,
Credit Purchases = 12,000 - 2,000 = $10,000
Average Trade Creditors = (6,000 + 8,000) / 2 = $7,000
Creditors Turnover Ratio = 10,000 / 7,000 = 1.43

* Next: Debtors Turnover Ratio Examples
0 comments: