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CHAPTER FIVE: Liquidity Measurements > ACCOUNTS PAYABLE TURNOVER

ACCOUNTS PAYABLE TURNOVER

Description: A slightly less sophisticated version of the accounts payable days calculation is accounts payable turnover. This variation does not yield the number of days of outstanding accounts payable but rather the number of times per year that purchases are being paid off. For example, turnover of 12 times per year is the equivalent of 30 accounts payable days while turnover of 24 times per year is the equivalent of 15 accounts payable days. Accounts payable turnover is most understandable when tracked on a trend line; an increasing turnover trend indicates more rapid payment of accounts payable while a declining trend indicates the reverse.

Formula: Divide total annual purchases by the ending accounts payable balance. An alternative approach is to use the average accounts payable for the reporting period, since the ending figure may be disproportionately high or low. The amount of purchases should be derived from all nonpayroll expenses incurred during the year (payroll is not included because it is not a part of the accounts payable listed in the numerator). Also, depreciation and amortization should be excluded from the purchases figure since they do not involve cash payments. The formula is:


  

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