Days Payable Outstanding is a type of Turnover Ratio that determines the average time taken by a company (in days) to pay its outstanding bills and invoices. In other words, this ratio tells how fast a company pays off its dues.
$$Days\quad Payable\quad Outstanding=\quad $$$$\frac { Accounts\quad Payable\quad ×\quad Number\quad of\quad Days }{ Cost\quad of\quad Goods\quad Sold } $$
Accounts Payable is the amount a company owes in form of Outstanding Bills and InvoicesWhere
Number of Days = 1 FY = 365 Days
Cost of Goods Sold = Inventory at the Beginning of Period + Purchases – Inventory at the End of Period
⇨3000000 + 4000000 – 5000000
⇨Rs. 2000000.
$$Days\quad Payable\quad Outstanding=\quad $$$$\frac { Accounts\quad Payable\quad ×\quad Number\quad of\quad Days }{ Cost\quad of\quad Goods\quad Sold } $$
⇨(120000 * 365)/2000000
$$Days\quad Payable\quad Outstanding=\quad $$$$\frac { Accounts\quad Payable\quad ×\quad Number\quad of\quad Days }{ Cost\quad of\quad Goods\quad Sold } $$
Accounts Payable is the amount a company owes in form of Outstanding Bills and InvoicesWhere
- Cost of Goods Sold = Inventory at the Beginning of Period + Purchases – Inventory at the End of Period
Significance and Interpretation
- High Days Payable Outstanding indicates that the company is holding or delaying its payments against accounts payable, this may be due to a shortage of cash or utilizing cash in other areas.
- Low Days Payable Outstanding indicates that the company is efficiently clearing its payments against accounts payable, this may be due to regular or high cash flow expected by the company.
Examples
Example 1:
Use the following data of ABC Ltd, to calculate its Days Payable Outstanding.- Total Accounts Payable during FY = Rs. 120000.00
- Total Purchase During FY = Rs. 400000.00
- Inventory at the Beginning of FY = Rs 300000.00 (adjusted for Depreciation)
- Inventory at the End of FY = Rs 500000.00 (Adjusted for Depreciation)
Solution:
Accounts Payable = Rs. 1200000Number of Days = 1 FY = 365 Days
Cost of Goods Sold = Inventory at the Beginning of Period + Purchases – Inventory at the End of Period
⇨3000000 + 4000000 – 5000000
⇨Rs. 2000000.
$$Days\quad Payable\quad Outstanding=\quad $$$$\frac { Accounts\quad Payable\quad ×\quad Number\quad of\quad Days }{ Cost\quad of\quad Goods\quad Sold } $$
Hence, Days Payable Outstanding = 21.9 Days
