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  1. This answer was edited.

    Meaning of Days Payable Outstanding Days Payable Outstanding (DPO) refers to the average number of days taken by an organization (or) company to pay to its outstanding suppliers/vendors. It is calculated on the credit purchases made by an organization. It is computed on a monthly, quarterly (or) annRead more

    Meaning of Days Payable Outstanding

    Days Payable Outstanding (DPO) refers to the average number of days taken by an organization (or) company to pay to its outstanding suppliers/vendors. It is calculated on the credit purchases made by an organization. It is computed on a monthly, quarterly (or) annual basis. This portraits how well can a company manage its cash outflows.

    If the company takes less time to make payment to its outstanding suppliers then it states that an organization has a strong financial position. but if the company takes a more (or) longer time to pay its outstanding supplier then it could either be an action plan or else the company’s financial position is weak.

    Formula

    The following formula is used for calculating Days Payable Outstanding (DPO) of an organization.

    Formula of Days Payable Outstanding

    Where Cost of Goods Sold (COGS) = Opening Inventory + Purchases – Closing Inventory.

    Example

    ABC Ltd has furnished you with the following information. Compute Days Payable Outstanding.

    S.No.ParticularsAmount
    1.Average Accounts Payable45,000
    2.Cost of Goods Sold2,25,000
    3.Number of Days30

    Calculation Part-

    Days Payable Outstanding = Average Accounts Payable * No. of days/Cost of Goods Sold

    = 45,000 * 30/2,25,000

    = 6 Days

    In my perspective, 6 days is a low average period for an organization for making the payments to all the outstanding suppliers. Therefore it represents a fairly good DPO. Although it depends on the organization about their understandability on high or low DPO.

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  1. This answer was edited.

    Sure, John, firstly I would like to explain the meaning of net credit sales before moving onto the formula of net credit sales. To make the concept easy and transparent, I would like to add a practical example for better understanding.  Net Credit Sales Credit sales refer to the total value of salesRead more

    Sure, John, firstly I would like to explain the meaning of net credit sales before moving onto the formula of net credit sales. To make the concept easy and transparent, I would like to add a practical example for better understanding. 

    Net Credit Sales

    Credit sales refer to the total value of sales which an organization (or) company makes on credit. If the company offers any discount to its customers on the credit sale of goods (or) if sales returns occur, then such amounts must be deducted from the total value of credit sales to arrive at Net credit sales figure.

    In simple terms, net credit sales refer to the total revenue generated by the company when it sells goods and services to its customers on credit, reducing the amount of sales allowance and sales return from the total credit sales.

    Net Credit Sales Formula

    Net Credit Sales = Total Credit Sales – Sales Returns – Discount on Sales

    Example-

    Apple Inc furnishes you the following sales information. Calculate the value of Net credit sales.

    ParticularsAmount
    Total Sales4,50,000
    Cash Sales1,50,000
    Credit Sales3,00,000
    Goods Returned by Customers1,00,000
    Sales Allowance/Discount60,000

    Net Credit Sales = Credit Sales – Sales Returns – Discount allowed on Sales

    = 3,00,000 – 1,00,000 – 60,000

    = 1,40,000

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  1. This answer was edited.

    Meaning of Net Current Assets In simple terms, Net Current Assets refers to the total amount of current assets excluding the total amount of current liabilities in a business. It can also be referred to as Net Working Capital. The Net Current Assets can have a positive or a negative value, wherein tRead more

    Meaning of Net Current Assets

    In simple terms, Net Current Assets refers to the total amount of current assets excluding the total amount of current liabilities in a business. It can also be referred to as Net Working Capital.

    The Net Current Assets can have a positive or a negative value, wherein the two are an indicator of the well-being of a business. In case the current assets are greater than the current liabilities, the company possesses sufficient assets to pay off its indebtedness and is operating efficiently. However, a company is said to be facing financial difficulty and is not in a position to pay off its debts, when the value of net current assets is negative.

    The formula is as follows:

    Formula

    Difference between Net Current Assets and Current Assets

    Net Current Assets refers to the difference between the total amount of current assets and the total amount of current liabilities whereas Current Assets are a subpart of Net Current Assets and refer to those assets that are expected to be utilized, depreciated or traded through the operations of a business within the same financial year.

    For example, cash and cash equivalents, inventory, accounts receivable, etc are Current Assets whereas the summation of the same minus the total of current liabilities is termed as Net Current Assets which is further explained through an example given below.

    Numerical Example

    Calculate the Net Current Assets of ABC Ltd.

    (Extract of Balance Sheet)

    PARTICULARSAMOUNT
    CURRENT ASSETS
    Cash and Cash Equivalents2,00,000
    Accounts Receivables40,000
    Stock Inventory15,000
    Marketable Securities35,000
    Prepaid Expenses6,000
    TOTAL CURRENT ASSETS2,96,000
    CURRENT LIABILITIES
    Accounts Payable15,000
    Accrued Expense2,000
    Unearned Revenue20,000
    Taxes Payable40,000
    Short-term Debt10,000
    Interest Payable6,000
    TOTAL CURRENT LIABILITIES93,000

    Solution:

    Total current assets = 2,96,000

    Total current liabilities= 93,000

    Net Current Assets = Total Current Assets – Total Current Liabilities

    = 2,96,000- 93,000  = 2,03,000

    Key Takeaways

    • Net Current Assets are also known as Net Working Capital.
    • Net Current Assets is the difference between the total current assets and total current liabilities.
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  1. This answer was edited.

    Working capital = Current Assets - Current Liabilities I believe if you want to understand how the above formula works you will need to understand each part of this formula i.e you will first need to have a clear understanding about the concept of current assets and current liabilities. Current asseRead more

    Working capital = Current Assets – Current Liabilities

    I believe if you want to understand how the above formula works you will need to understand each part of this formula i.e you will first need to have a clear understanding about the concept of current assets and current liabilities.

    Current assets

    It refers to all the assets including cash and cash equivalents which are expected to be converted within a year or within the operating cycle of an entity if such entity has an operating cycle longer than a year.

    Current liabilities

    It refers to all the payables or debts which an entity expects to discharge within a year or the operating cycle of such entity provided such an entity has an operating cycle longer than a year.

    I understand that even though you got a rough idea of this concept you may not be confident while applying this concept hence, to relate to this concept a numerical example would be of great help.

    So, I believe once you have a look at the below-mentioned example you will be in a better position to comfortably apply this formula:

    Working Capital Position in Balance sheet

    Here, Working Capital = Current Assets – Current Liabilities

    = Cash in Hand + Cash at Bank + Trade Receivables + Prepaid Rent –Trade Payables  –                  Outstanding Salaries

    = 5,000 + 56,000 + 64,000 + 3,000 – 20,000 – 20,000

    = 128,000 – 40,000

    = 88,000.

    It will add more value to your understanding if you also interpret the concept of Gross Working Capital and Net Working Capital.

    Gross Working Capital

    Gross working capital is a sum total of current assets of an entity. It includes

    • Cash and Cash Equivalents
    • Trade Receivables
    • Inventory
    • Short term Investments
    • Other Marketable Securities.

     

    Net Working Capital

    Now, the net working capital of an entity is nothing but the working capital of an entity. In simple terms, it is a difference between current assets and current liabilities of an entity.


    Aastha Mehta

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