CFA Practice Question

There are 90 practice questions for this study session.

CFA Practice Question

How does an increasing accounts payable turnover ratio affect operating and financing cash flows?

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?
You need to log in first to add your comment.