Using analytical procedures based on inventory purchases, trade payables were 10 per cent higher than expected. Which of the following explanations from management would help explain this difference from expectations?
A) "This year we have been able to sell inventory for a higher price."
B) "The cost of inventory has significantly increased this year."
C) "We have changed our cash management strategy, instead of paying invoices as soon as they are received, we take full advantage of the 30-day payment terms."
D) "We have had to return a higher than expected amount of inventory to suppliers this year and therefore purchases are actually understated compared to trade payables."

Question

Quizplus · Accepted Answer

Management's explanation that they have changed their cash management strategy and are taking full advantage of the 30-day payment terms would help explain why trade payables are 10 per cent higher than expected. This is because the company is holding onto the cash for longer and not paying the invoices as soon as they are received.

Using Analytical Procedures Based on Inventory Purchases, Trade Payables Were