Certified Management Accountant Practice Exam

The formula used to find purchases in accounts payable is derived from the relationship between accounts payable turnover and the average accounts payable balance. In financial management, understanding how quickly a company pays off its suppliers relative to its purchases is crucial.

When we say "Purchases," we are referring to the total cost of goods purchased during a specific period, which ultimately affects accounts payable. The accounts payable turnover ratio indicates how many times a company pays off its accounts payable within a period.

To find purchases using accounts payable data, the formula incorporates the concept of the average accounts payable balance and the accounts payable turnover ratio. Specifically, the accounts payable turnover is calculated by dividing total purchases by the average accounts payable. Rearranging this formula allows one to express total purchases as:

Purchases = Average Accounts Payable × Accounts Payable Turnover

Furthermore, the days in a year divided by the accounts payable turnover offers an insightful view into how many days, on average, it takes a company to pay its suppliers. This can assist in estimating total purchases over a given period by providing a comprehensive look at cash flow related to accounts payable.

Therefore, this option aligns well with financial analysis practices that consider the critical role of turnover ratios in revealing operational efficiency, which is vital