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- July 20, 2022 at 9:42 pm #661482
The management accounts show actual results for the year to date, January to October inclusive. In October, Esperence Co received

a claim from a customer as a result of a defective product.Which of the following is the correct formula for calculating

the payables payment period using the management accounts

of Esperence Co?

A Payables/Cost of sales × 304

B Payables/Cost of sales × 365

C Payables/Revenue × 304

D Payables/Revenue × 365Dear sir,

Correct ans is A

My question is why A not B?

I didnt get the logic why the period for which the books were prepared is taken into account and not the whole yearJuly 21, 2022 at 7:52 am #661505“x 365” is the normal calculation for efficiency calculations where sales (in receivables collection period) and cost of sales (in payment period and inventory holding) are for a year.

If the accounts are for a period less than a year, 365 has to be replaced with the number of days in the period – so Jan to Oct is 10 months = 304 days.

Here is another way of looking at it … with made up numbers to help …

Suppose trade payables at 31 Oct are $100k … and cost of sales for the 10 months to 31 Oct is $1m … at a glance – without doing any real calculation – we can see that the average payment period is one month (approx 30 days).

$1m for 304 days = $3,289 a day. Therefore, the number of days cost of sales in payables is $100k/$3,289 = 30.4 days

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