Kirk Development buys on terms of 2/15, net 60 days. It does not take discounts,

Question

Kirk Development buys on terms of 2/15, net 60 days.  It does not take discounts, and it typically pays on time, 60 days after the invoice date.  Net purchases amount to $550,000 per year.  On average, what is the dollar amount of total trade credit (costly + free) the firm receives during the year, i.e., what are its average accounts payable? (Assume a 365-day year, and note that purchases are net of discounts.)

Kirk Development buys on terms of 2/15, net 60 days. It does not take discounts, and it typically pays on time, 60 days after the invoice date. Net purchases amount to $550,000 per year. On average, what is the dollar amount of total trade credit (costly + free) the firm receives during the year, i.e., what are its average accounts payable? (Assume a 365-day year, and note that purchases are net of discounts.)

Explanation / Answer

Hi,

Please find the answer as follows:

Accounts Payable Turnover Ratio = 365/Average Payment Period = 365/60

Average Accounts Payable = Net Purchases/Accounts Payable Turnover Ratio = 550000/(365/60) = 90410.96 or 90411

Answer is 90411

Thanks.

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