Accounts Payable Turnover Ratio Analysis

Definition: Accounts Payable Turnover Ratio shows how many times trade payables turnover during an accounting period. A lower ratio may indicate that the firm is having difficulty to pay its creditors.

Formula:
Accounts Payable Turnover Ratio = Cost of Goods Sold / Average Accounts Payable

Example:
Makemoney Ltd has the following data:
Trade creditors at start of year: $10,000
Trade creditors at end of year: $12,000
Total Purchases: $20,000
Purchases returns: $4,000
Stocks at start of year: $2,000
Stocks at end of year: $3,000

Then,
Average Accounts Payable = (10,000 + 12,000) / 2 = $11,000
Cost of Goods Sold = 2,000 + (20,000 - 4,000) -3,000 = $15,000
Accounts Payable Turnover Ratio = 15,000 / 11,000 = 1.36 times

* Next: Days in Accounts Payable Ratio
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