Issue on Average Payment Period on Chapter 14 Financial Performance Measurement (part b)

Pparaketamoli16y ago

I think I found a small "glitch" on the Average Payment Period on Chapter 14 Financial Performance Measurement (part b) - Video Lecture.

The ratio formulae states: Trade Payables / Purchases * 365.

But in the video lecture the lecturer uses the Cost of Sales as a denominator.

Logically - since the financial statement doesn't give a purchases account - shouldn't it be Opening Stock + Cost of Sales - Closing Stock = Purchases?

Can anyone please explain to me why he used Cost of Sales?

Thanks in advance

P.S That lecturer sounds like a nice chap :)

Pparaketamoli16y ago#1

I think I answered my own question:

"For a retail business, the cost of sale is the purchase price of the item. For a manufactured good, the cost of sale includes Direct Material, Direct Labor, and Factory Overhead associated with producing it."

So I guess we were talking about a retail business.. :)

John MoffatTutor16y ago#2

Strictly you should use purchases, which as you say is cost of sale as adjusted by the opening and close inventories.

However you have to make use of whatever information you have in the question. If you are given purchases then do use it. But if not then you really have no choice but to use cost of sales as an approximation - in the question in the lectures you do not have opening and closing inventories for both years and so you are not able to calculate a purchases figure.