I am finding multiple different formulas that alter the numerator…Schweser says to use COGS/Ave Payable and Allen is saying to use Purchase/Ave payable… this wasnt really an issue until Schweser presented a question where they posted BOTH COGS and Purchases and used COGS over purchase. here is another difference in opinions: Investopedia says to us Purchases. CFA Concepts says to use COGS…can someone tell me what the CFAI book says? http://www.investopedia.com/terms/a/accountspayableturnoverratio.asp http://cfaconcepts.blogspot.com/2008/01/financial-ratios.html
Accounts Payable Turnover Ratio = COGS over Avg Accounts Payable. That is the right formula. Both Accounts Payable and Inventory Turnover ratios are with COGS on the Numerator. Accounts Receivable is Sales over Avg Accounts Receivable. I have confirmed that this is what the CFAI text book says. Regards CP
cpk123, actually the Accounts Payable Turnover ratio = Purchases / Avg trade payables as per CFA text (vol. 3, ed. 2008, pg. 587 and pg. 588). Did you confirm the definition by an earlier edition of CFA text book? On pg. 588, the text goes on to say that “…an implicit assumption is that the company makes all its purchases using credit. If the amount of purchases is not directly available, it can be computed as COGS + Ending Inventory - Beginning Inventory. Alternatively, COGS is sometimes used as an approximation of purchases.” …I would use the above explanation, as it’s provided by the CFAI.
That does not match what is in earlier versions of the text. I would love it if you could check the errata – for L1. I know there have been errors made before. COGS/Avg Payables is what it has been (and I had studied the same in my MBA Finance from India in 1995), do not know why that should change now!!! CP
cpk123, did you the quoted text in my post?! The text explicitly states what to do when the value of one of the items in the formula (i.e. purchases) is not found. In case it is found, we are advised to use it! Since the above wasn’t painfully evident to you, I did check the Errata, and nope, my page reference to SS8 was not found. In case you still don’t believe me, perhaps you’ll find the link sufficient, http://www.cfainstitute.org/cfaprog/resources/pdf/L1_Errata.pdf COGS is used as an approximation, since the value of purchases is not always supplied.
ok. that is something new in this year’s syllabus/LOS. Thanks CP
Mostarka needs to calm down.
HOLY COW! That list of errors is ridiculous! Just so I understand this correctly… In a Schweser Study Session 8 exam review a question is: Sales - 5000 COGS- 2500 ave Inve- xxx Ave trade payables- 500 A/R-xxx etc… Annual Purchases 2400 So in this questions, they provide BOTH COGS and Purchases! I believe Mostarka said that you should use purchases, YET Schweser uses COGS/Ave Trade Payables= 2500/500. Am I to assume Schweser is incorrect? What the heck are you supposed to do on the exam when they give you a financial statement with both COGS and Purchases? Mostarka is leaning towards Purchases (per CFAI materials), but a common technique seems to be COGS. I love studying conflicting materials.
You can send an email to Schweser with your question, let us know about their answer.
If inventory levels remain relatively constant, then there won’t be a materila difference between using purchases and CGS. Intuitively, purchases is the best number and you cans ee it in this extreme case: Say that you make no purchases one year, and just run down your inventory. How would your CGS figure be tied to AP?
yeeeaaaahh… I actually bought Allen Resources, but am borrowing some Schweser books too. I dont think i can email them unless i am the one that bought the books…if anyone else wants to do it go for it and let us know. Sorry!
to me it doesnt make sense to use COGS as a numerator when calculating account payable, purchases seems the most realistic measure.
Never with there be an income statement with COGS AND Purchases on it, so don’t worry about that situation.
Yet, you might find it in the exam, as a distractor.
hopeful231 Wrote: ------------------------------------------------------- > to me it doesnt make sense to use COGS as a > numerator when calculating account payable, > purchases seems the most realistic measure. what bothers me most about this is that this should be a gimme question. a simple formula to remember and move on…BUT the scweser question that presents both cogs and purchase and uses cogs. schweser is the top provider of cfa study materials so why would you go against them? you can reason all you want and think what is most logical all you want too. but if its not what they are looking for you will simply get the question wrong and lower your passing chances… *sigh* whatever, with my liuck this wont even be mentioned on the exam
> what bothers me most about this is that this > should be a gimme question. a simple formula to > remember and move on…BUT the scweser question > that presents both cogs and purchase and uses > cogs. > > schweser is the top provider of cfa study > materials so why would you go against them? you > can reason all you want and think what is most > logical all you want too. but if its not what they > are looking for you will simply get the question > wrong and lower your passing chances… *sigh* > whatever, with my liuck this wont even be > mentioned on the exam Dear SkipE99, Personally when it comes to memorizing formulas i believe in undestand the logic behind the formula it makes memorizing the formula easier. U rate Schweser very highly so I can only assume that u r presently using as a study guide. Kindly visit Schweser level 1, 2008, book3, page 274, bottom paragraph.
If you can understand the difference between using purchases, COGS, COGS + delta Inventory, etc. you are doing great and shouldn’t worry about this on the test. The test is not going to give you a question in which one definition is right and the other is wrong. As pointed out on this thread, there are situations in which any of those might be appropriate.