Management is analyzing the efficiency of its accounts payable process. Which of the following ratios would be MOST useful to determine if the company is paying its suppliers too quickly compared to industry peers?

Answer options:

Current Ratio

Receivables Turnover

Days Payable Outstanding (DPO)

Times Interest Earned

How to approach this question

Identify the specific activity: paying suppliers. Match to the relevant ratio: Payables Turnover or Days Payable Outstanding.

Full Answer

C.Days Payable Outstanding (DPO)✓ Correct

Days Payable Outstanding (DPO) = (Average Accounts Payable / Cost of Goods Sold) * 365. It measures how long the company holds onto its cash before paying suppliers. Comparing this to peers helps assess payment strategy.

Common mistakes

Selecting liquidity ratios like Current Ratio which are too broad.

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