Over the past year, Ardmore company reported sales of $5.1 million and COGS of $3.65 million. On average, inventory sold was 65 days and receivables collected were 43 days. If the cash conversion cycle was 58 days, calculate Ardmore’s average accounts payable. A. $500,000 B. $580,000 C. $820,000 D. $2,350,000 The correct answer was A. I was able to use figure out that the Accounts Payable Turnover was 7.3 (365/50). But they used the COGS divided by the turnover to get the Avg. Accts payable Balance. I thought you used PURCHASES. Am i missing something??? Thanks
Yea, AP Turnover is COGS/Average AP. Net Sales is used for Receivables Turnover First, need to do 65+45 = 108 to get your Operating Cycle To get your Payables Period you do: 108 - X = 58 ; X = 50 To get your Payables Turnover: 365/x = 50 x = 7.3 COGS/Average AP = AP Turnover 3,650,000/X = 7.3 X = 500000
when purchases isn’t available, cogs can be used as an estimate
A i hate this problem, it take 3 tedious steps find days payables (DPO) in the cash conv cycle then solve for payables turns you then have 7.3 = COGS/x —> solve for X X = 3.65M/7.3 = 500K
This is a terrible, terrible question. Where did this come from? Since when do we lure test takers into using crude estimates for certain financial ratios?