Measuring Customer's Average Payment Period

Steps:

• Identify the query: time to pay for credit purchases, which reflects the customer's payables period from their financial statements.
• Recall relevant ratios: trade payables turnover measures how often payables are settled annually.
• Calculate payment period: use formula (365 / trade payables turnover) to get average days to pay suppliers.
• Eliminate mismatches: other options assess liquidity or receivables, not payables.

Why C is correct:

• Trade payables turnover = cost of sales / average trade payables; reciprocal × 365 yields average payment days, directly indicating credit payment time.

Why the others are wrong:

• A: Current ratio = current assets / current liabilities; assesses overall short-term solvency, not payment speed.
• B: Liquid (acid) test ratio = (current assets - inventory) / current liabilities; evaluates immediate liquidity, ignoring payment periods.
• D: Trade receivables turnover = credit sales / average receivables; shows collection time from the customer's debtors, not their payment to suppliers.

Final answer: C