3 collection of the receivable reduces accounts

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3. Collection of the receivable reduces accounts receivable and increases cash. It is solely a ance sheet transaction and does not impact the income statement. 4. Cash payment of accounts payable is solely a balance sheet transaction and does not im income statement accounts (expense relating to inventories is recognized when the invent _ is sold or used up, not when the liability is paid). Accounts Payable Turnover (APT) Inventories are financed, in large part, by accounts payable (also called trade credit or tr. payables). Such payables usually represent interest-free financing and are, therefore, less ex sive than using available cash or borrowed money to finance purchases or inventory producti Accordingly, companies use trade credit whenever possible. This is called leaningonthetrade
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Module 7 I Liability Recognition and Nonowner Financing 7-6 The accounts payable turnover reflects management's success in using trade credit to ce purchases of goods and services. It is computed as: Accounts Payable Thrnover (APT) = Cost of Goods Sold/Average Accounts Payable _abIes reflect the cost of inventory, not its retail value. Thus, to be consistent with the denomi- r, the ratio uses cost of goods sold (and not sales) in the numerator. Management desires to trade credit to the greatest extent possible for financing. This means that a lower accounts _able turnover ispreferable. Verizon's accounts payable turnover rate for 2010 is 10.7 times year, computed as ($44,149 million/[($3,936 million + $4,337 million)/2]); this compares 8.5 times three years earlier. This increase in accounts payable turnover indicates that Veri- i paying its obligations more quickly than it has in the past. A metric analogous to accounts payable turnover is the accounts payable days outstanding, - h is defined as follows: unts Payable Days Outstanding (APDO) = Accounts Payable/Average Daily Cost of Goods Sold use accounts payable are a source of low-cost financing, management desires to extend the lintspayable days outstanding aslongaspossible, provided thatthisaction does notharm sup- channel relations. Verizon's accounts payable remain unpaid for 32.5 days in 2010, computed -3,936/[$44,149/365 days]), down from 43.7 days three years earlier. Verizon is paying its sup- more quickly than it has in the past.' ccounts payable reflect a source of interest-free financing. Increased payables reduce the nt of net operating working capital as pay ables (along with other current operating liabili- are deducted from current operating assets in the computation of net operating working ital. Also, increased payables mean increased cash flow (as increased liabilities increase net - from operating activities) and increased profitability (as the level of interest-bearing debt i required to finance operating assets declines). RNOA increases when companies make use this low-cost financing source.' Yet, companies must be careful to avoid excessive "leaning on trade" as short-term income gains can yield long-term costs such as damaged supply channels.
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