frgna
November 21, 2012, 12:47pm
#1
Formula for payables turnover (per Schweser quicksheet) is: Purchases / Avg Payables
I’ve always understood ‘purchases’ to be calced as: Beginning Inv + Purchases - COGS = Ending Inventory
And then solve for Purchases.
However I saw in a practice question (can’t remember where) that instead of solving for Purchases they just did COGS / Avg Payables.
Can anyone clarify which we are supposed to use - COGS or Purchases - in calculating things like cash conversion cycle etc?
Thanks in advance
We always use purchases over average account payables. If we have a source, then maybe we can check it out.
If there is nothing about change in inventory, then we have to assume that:
beginning inventory = ending inventory
Hence (rearrange above formula):
purchases = COGS
hence:
Purchases /average payables = COGS / average payables = payables turnover
Azam
November 21, 2012, 2:50pm
#4
If Purchases not given thn use COGS as numerator otherwise.
frgna
November 21, 2012, 8:03pm
#5
The example I had showed two yrs of balance sheet and an income statement for the most recent yr, so you could get purchases.
My answer came out slightly different than what the book said but close enough to the answer (I think it was Qbank - I’ll see if I can track it down).
Purchases = ending inventory + COGS - beginning inventory
If i am not mistaken…
frgna
November 21, 2012, 8:35pm
#7
Actually it was in the CFAI sample questions, that set of 20 - see problem 9.
Not a big deal there, as the answer using purchases (solving the way I described) makes the total answer 21.96, and the choices were 23, 26 and 28, but still frustrating.