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Anood · Nov 27, 2009, 09:47 AM

Hot to calculate creditor/purchases ratio

morgaine300 · Nov 27, 2009, 04:31 PM

Never heard of that one, and couldn't even find an equation by googling it, so I take it to be unusual. I did find a definition. Based on that definition, I would assume it's calculated in the same manner that days sales in receivables would be, which would make it:

$\text{\frac{average \ payables}{annual \ purchases\ \div\ 365}}$

The definitions I found all said the number of days to pay off credit purchases, which should make the above equation work. However, I do find it a bit odd that it would be called a "ratio" if that's the equation. Doing it from an actual "ratio" point of view, I would think it would more likely be:

$\text{\frac{annual\ purchases}{average\ payables}}$

In the long run, many of these equations have slight variations anyway, depending on where they are gotten from. When something is for school, I always suggest you use the one from your textbook or instructor, and then if you don't understand how to work the equation, provide it to us and we can guide on its usage.

Anood · Nov 28, 2009, 05:09 AM

Appreciated

I have an assignment and I have to submitted on 6th, Dec, 2009. It is included a balance sheet and income statement of one company and they asked us to find the creditor purchases ratio. I found that purchases means the cost of goods sold but my problem is how to find the creditors from the balance sheet or from the income statement.

I really appreciate your efforts Mr. Morgain

Best regards,

morgaine300 · Nov 28, 2009, 09:07 PM

Actually, purchases means purchases. They may want the cost of goods sold in the equation, but purchases and cost of goods sold are two different things. It does not make any sense to me to use cost of goods sold. The number of days to pay someone off means the number of days (on average) it's taking to pay off purchases. Whether those purchases got sold or not (cost of goods sold), wouldn't be relevant.

Sometimes statements don't have the actual numbers that you need and you have to use the best thing you can. If your instructions specifically say to use COGS, then use it. If not, you can get purchases by taking the ending merchandise inventory, adding on COGS and then subtracting the beginning inventory (which is the same as ending from the prior year).

As for creditors, that's accounts payable, or just payables.