Accounts Payable Turnover

The accounts payable turnover ratio is computed by taking the total purchases from suppliers made on credit and then dividing them by the average accounts payable during the same period. This number shows how many times per period the company pays its average payables amount. For example, if a company has 45,500 in credit purchases from suppliers in a year and has an average accounts 

Total inventory purchases Average accounts payabley 

Since there is no single place to find credit purchases within financial statements, it is necessary to use the following formula to calculate purchases made  

Purchases = Cost of goods sold + Ending inventory - Starting inventory = 46,172 + 4,409 - 5,081 = 45,500 

If the account payable turnover ratio is trending down from one period to another, this indicates that the company is taking longer to pay its suppliers than it was before. It may also indicate the financial condition of the company is worsening. If the ratio is trending up, the company is paying its suppliers at a faster rate. 

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Consider the financial performance shown in Table 3-1 for Amazon.com and Nordstrom Inc. In 2013, Amazon Nordstrom achieved ROE = 274/9,746 = 2.81 percent (613/1,913 = 32.04 percent) and ROA = [274 -l-141 X (1 - 0.35)1/40,159 = 0.91 percent [613 -I-160 X (1 -0.35)1/8,089 = 8.86 percent). The difference between ROE and ROA is referred to as return on financial leverage (ROFL). In 2013, Amazon (Nordstrom had ROEL = 2.81 - 0.91 = 1.90 percent (32.04 — 8.86 = 23.18 percent). ROFL captures the amount of ROE that can be attributed to financial leverage (such as accounts payable and debt). In Amazon s case, a significant portion of the financial leverage in 2013 came from accounts payable rather than debt. Thus, an important ratio that defines financial leverage is accounts payable turnover (APT). 

Describe key financial measures of firm performance. The key financial measures of firm performance include return on equity return on assets accounts payable turnover profit margin asset turnover and accounts receivable turnover inventory turns property, plant, and equipment turns and cash-to-cash cycle. 

As with the accounts receivable turnover ratio, accounts payable turnover can be stated in the number of days it takes to pay suppliers as follows ... 

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