Days Payable Outstanding is a type of Turnover Ratio

$$Days\quad Payable\quad Outstanding=\quad $$$$\frac { Accounts\quad Payable\quad ×\quad Number\quad of\quad Days }{ Cost\quad of\quad Goods\quad Sold } $$

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$$Days\quad Payable\quad Outstanding=\quad $$$$\frac { Accounts\quad Payable\quad ×\quad Number\quad of\quad Days }{ Cost\quad of\quad Goods\quad Sold } $$

**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 Invoices****Where****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

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**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)

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**Solution: **

**Accounts Payable =**Rs. 1200000**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**Hence, Days Payable Outstanding = 21.9 Days**