Chartered Financial Analyst (CFA) Level 1 Practice Exam

What is the formula for calculating Payable Turnover?

1. Average payables / total purchases

2. Purchases / average payables

3. Revenue / average payables

4. Total purchases / cash disbursements

The correct answer is: Purchases / average payables

The formula for calculating Payable Turnover is identified correctly as the ratio of Purchases to Average Payables. This measure is used to assess how effectively a company manages its accounts payable. The Payable Turnover ratio indicates how often a company pays off its suppliers within a specific time period, usually over a year. When you divide Purchases by Average Payables, you are essentially measuring the speed at which a firm settles its short-term obligations. A higher ratio suggests that a company is paying its suppliers quickly, which could imply good liquidity or favorable credit terms. Conversely, a lower ratio may indicate that a company is extending its payable period, possibly due to cash flow issues or negotiating longer payment terms with suppliers. The other options provide incorrect interpretations or formulations of the concept. For example, the average payables divided by total purchases would yield an inverse measure rather than the turnover itself, and using revenue instead of purchases misrepresents the focus on supplier payments. Similarly, total purchases divided by cash disbursements mixes different financial metrics without offering a clear insight into payable turnover.