In 20X3, P Co reported a trade payables turnover ratio of 2.49 and C Co reported a turnover ratio of 1.74 for that same year. Which of the following statements is true?
A) C Co pays their vendors in a timelier manner than P Co pays their vendors.
B) On a comparative basis to cost sales, P Co carries more in average payables than does C Co.
C) It is unclear if P Co pays their vendors in a timelier manner than C Co.
D) P Co took approximately 147 days while C Co took about 210 days to pay vendors.

Question

Quizplus · Accepted Answer

The trade payables turnover ratio is calculated as cost of goods sold divided by average trade payables. A lower ratio indicates a company takes longer to pay its vendors. To find the number of days it takes for a company to pay its vendors, you divide the number of days in a year (365) by the turnover ratio. For P Co, it's 365 / 2.49 ≈ 147 days. For C Co, it's 365 / 1.74 ≈ 210 days. Therefore, P Co pays its vendors faster than C Co.

In 20X3, P Co Reported a Trade Payables Turnover Ratio