NASAA Series 65, Uniform Investment Adviser Law ExaminationEconomic Factors and Business InformationMedium
A portfolio manager is analyzing a company's financial statements. Upon reviewing the balance sheet, the manager notes a significant increase in 'Accounts Payable' from the previous year. Assuming all else remains constant, what does this change primarily indicate about the company's financial position?
- ABetter asset utilization
- BIncreased short-term liabilities
- CImproved liquidity
- DHigher profitability
Show answer & explanationAnswer & explanation
Correct answer: B. Increased short-term liabilities
Accounts Payable represents money owed by a company to its suppliers for goods or services purchased on credit. An increase in Accounts Payable signifies an increase in the company's short-term liabilities.
Why the other options are wrong
- A. Accounts Payable does not directly relate to asset utilization efficiency.
- C. Increased Accounts Payable typically suggests a decrease in liquidity, as more cash will be needed to pay obligations.
- D. Accounts Payable is a balance sheet item, not directly reflecting profitability, which is shown on the income statement.
Accounts Payable
Accounts Payable (AP) are amounts owed by a business to its suppliers for goods or services received but not yet paid for.
- Represent short-term liabilities.
- Found on the balance sheet.
- An increase can indicate delayed payments or increased purchasing on credit.
Memory trick: The Balance Sheet 'Balances' Assets, Liabilities, and Equity.