As the title suggestions, why do we use COGS when calculating DPO and not total operating expenses?
The DIO already capture the COGS, wouldn’t using COGS in DPO be double counting?
Logically, the AP comes from all credit expenses including non-COGS?
It seems all major finance websites and sources are using COGS in DPO calculations.
Would be great if someone can help clarify the logic in using COGS in DPO calculations. Thx
Is this a Level 1 question? I don’t recall seeing the Cash Conversion Cycle again in Level 2.
I don’t think double counting matters here, because NDP (or DPO as you’re calling it) is subtracted from the DOH (what you call DIO) and the DSO.
DIO = How long it takes for inventory to get sold
DSO = How long it takes for the company to get paid after they sell inventory
DPO = How long it takes for the company to pay back their suppliers
Also, the DPO formula typically uses Trade Payables, not Accounts Payable. Trade Payables is specifically related to inventory, meanwhile Accounts Payable often includes other stuff not related to inventory (for example, if a retail store pays a contractor for renovations on account, that would be considered in AP, not TP).