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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 year“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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