Formula = [accounts payable/COGS] X number of days Anyone understand the logic of this?
COGS/Accounts Payable is the Acct Payable Turnover and this tells you the rate a company pays off its suppliers. So dividing 365days from this turnover ratio would tell you how many days on average it takes to pay off your purchases.
EDIT: I need to learn to type faster Okay. the number of days relates to the COGS number, so if you are analyzing a full year P&L it is 365, if its a quarterly result use 91, etc. So take an extreme case. For a full year accounts payable= cgs the ratio is 1. Multiply this by 365 you get 365. This says that your accounts payable is equal to a full years sales (or we should say the cost of thos sales), which makes sense with my given that AP=CGS. If A/P = half of CGS, the ratio is 1/2 which gives you 182, which says that accounts payable is half a years worth of CGS which is what we did in our ratio. If the ratio is 1/10, then the days figure is 36.5, etc. Hope this helps.