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A Discussion Paper on Accounts Payable Ratio

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  • Cenap Ilter
Abstract
Generally speaking, financial accounting textbooks are in harmony on the explanation of accounts payable and accrued liabilities/expenses. However, the same thing cannot be said for accounts payable turnover and days in accounts payable ratios. Different financial accounting textbooks and academic papers have different explanations for the accounts payable turnover ratio. The extant literature on the ratio is mainly comprised of two groups of authors. The first group relates the ratio to purchases and the second group relates the ratio to cost of goods sold (COGS). Purchases, in a purely theoretical sense, relate to periodic inventory method, whereas the perpetual inventory method relates purchases with inventory (being debit) and accounts payable (being credit). The second major group who explain the ratio by using the COGS figure ignore what is included in COGS. It should not include depreciation, amortisation, payroll and interest expenses to be meaningful for the purposes of the calculation of the ratio. In practice, manufacturing companies do not attempt to calculate these ratios due to the difficulty of obtaining the figures. These ratios can only be truly calculated from within the company if need be. Their accounting departments will be able to calculate the ratio correctly since they can reach the data. Any financial analyst not being able to reach a detailed breakdown of the expenses of the companies whose shares are being traded in stock exchanges will not able to calculate these ratios.

Suggested Citation

  • Cenap Ilter, 2019. "A Discussion Paper on Accounts Payable Ratio," Acta Oeconomica Pragensia, Prague University of Economics and Business, vol. 2019(3-4), pages 85-94.
    • Handle: RePEc:prg:jnlaop:v:2019:y:2019:i:3-4:id:630:p:85-94
    DOI: 10.18267/j.aop.630
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    References listed on IDEAS

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    1. Glantz, Morton, 2014. "Navigating the Business Loan," Elsevier Monographs, Elsevier, edition 1, number 9780128016985.
    2. A.K. Sharma & Satish Kumar, 2011. "Effect of Working Capital Management on Firm Profitability," Global Business Review, International Management Institute, vol. 12(1), pages 159-173, February.
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    More about this item

    Keywords

    cost of goods sold; purchases; expenses; accounts payable; accrued liabilities;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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