- CFA Exams
- CFA Level I Exam
- Topic 4. Financial Statement Analysis
- Learning Module 10. Financial Reporting Quality
- Subject 4. Detection of Financial Reporting Quality Issues
CFA Practice Question
How does an increasing accounts payable turnover ratio affect operating and financing cash flows?
B. No impact | Increase
C. Decrease | No impact
Operating | Financing
A. Increase | No impact
B. No impact | Increase
C. Decrease | No impact
Correct Answer: C
If the ratio is increased, the result is a smaller DSP. This will reduce operating cash flow.
User Contributed Comments 8
| User | Comment |
|---|---|
| creativemny | I'm super confused. If the payables turnover is increased the result is a larger DSP. Using Basic Question 1: DSP = AP/COGS*365, 20/100*365 or 73 days. If the AP turnover ratio is increased from .2 (20/100) to .5 then the DSP will be 182.5 days which is clearly larger than 73 not smaller. |
| jmcarr02 | You have an error in your formula: payables turnover is COGS/AP = 100/20 = 5. |
| Beret | If the days payable decreases it means the company speeds up paying its vendor, resulting in a larger (operating)cash outflow and thus a lower operating cash flow. |
| johntan1979 | This question is not talking about DSP or days payable. Payable turnover increase means an increase in the numerator i.e. COGS, which reduces NI, and decrease in the denominator i.e. Payable. Both reduces CFO. No effect on CFF. |
| robbiecow | John is right. According to the Direct Method for CFO, a decrease in AP means outflow of cash. |
| degosan9 | Isn't Payables turnover purchases/payables instead of COGS? |
| jimmyvo | pay your bills sooner = decreased operating cash flow. |
| Freddie33 | But Johntan, the answer mentions DSP? |