G Co and A Co are both in the biotechnology industry.In 2012,G Co reported a trade payables turnover of 7.71 and A Co reported a ratio of 3.06.Which of the following is an incorrect reason for the difference in ratios?
A)A Co has a higher average trade payables in comparison to their cost of goods sold.
B)A Co has a lower average trade payables in comparison to their cost of goods sold.
C)A Co is taking longer to pay vendors
D)G Co has a better payment record in terms of timely payment to vendors.

Question

Quizplus · Accepted Answer

The trade payables turnover ratio is calculated by dividing the cost of goods sold by the average accounts payable balance. Therefore, a lower ratio can be caused by either higher accounts payable or lower cost of goods sold. Option A incorrectly states that A Co has a higher average trade payables, while option B correctly states that A Co has a lower average trade payables. Option C is a possible reason for a lower turnover ratio, as it means A Co is taking longer to pay vendors, which may result in higher accounts payable. Option D is also a possible reason as it suggests that G Co has a better payment record, which could result in better terms from vendors and result in a lower accounts payable balance. However, since D is not an incorrect reason, B is the best choice.

G Co and a Co Are Both in the Biotechnology