Chartered Financial Analyst (CFA) Level 1 Practice Exam

What does a higher Payable Turnover ratio indicate?

1. Slower payments to suppliers

2. Faster turnover of inventory

3. Greater efficiency in settling obligations to suppliers

4. Higher levels of credit sales

The correct answer is: Greater efficiency in settling obligations to suppliers

A higher Payable Turnover ratio indicates greater efficiency in settling obligations to suppliers. This ratio measures how quickly a company pays off its suppliers. A higher ratio suggests that the company is managing its payable accounts effectively, resulting in quicker payments to suppliers. This can imply good liquidity and a strong relationship with suppliers, as suppliers are likely to favor businesses that pay promptly. An efficient payment process can also enhance opportunities for purchasing discounts and improve cash flow management. While some other choices might touch upon aspects related to a business's operations, they do not accurately reflect the meaning of the Payable Turnover ratio. For example, slower payments to suppliers would lead to a lower ratio, while faster turnover of inventory relates more to inventory management than to the efficiency of payables. Lastly, higher levels of credit sales are not directly tied to the Payable Turnover ratio, which focuses on the company's obligations toward suppliers rather than its sales activity.