Question
The table below shows an efficiency ratio calculated for Javid Ltd for the past two years: Ratio & 2022 & 2021 }(l) Average settlement period for trade payables & 56 days & 48 days Which of the following statements is CORRECT about this ratio: Javid Ltd should aim to have a very long average settlement period for trade payables, even if it could result in a loss of goodwill of suppliers. The increase in the average settlement period in 2022 could be beneficial for the Javid Ltd as a form of free finance provided by suppliers. Credit suppliers prefer to supply goods and services to customers with a longer average settlement period. In 2022, Javid Itd was quicker to pay the amounts it owed to its suppliers, compared to 2021.
Answer
4.5
(210 Votes)
Erin
Expert · Tutor for 3 years
Answer
"The increase in the average settlement period in 2022 could be beneficial for Javid Ltd as a form of free finance provided by suppliers." is the correct statement. In 2022, Javid Ltd took more time (longer than it did in 2021) to pay its trade credit payables. This could be seen as beneficial for the company as it is a way of financing their obligations without interest being charged, but in best standards they have to be strategic about prolonging payment time so they don't risk, supplier relations, as well.
Explanation
## Step1:The average settlement period for trade payables is a measure of the average number of days that a company spends paying off its deficits to its suppliers. If a company has a shorter settlement period, it means that it pays its suppliers faster.## Step 2: From the published data, we are informed that the average settlement period of Javid, Ltd in 2022 was 56 days which increased from 48 days in 2021.## Step 3: An increase in the settlement period means that Javid, Ltd took longer to pay its suppliers in 2022 compared to 2021, which conclusively denies the statement that it was quicker to pay in 2022.## Step 4:Companies generally aim to maintain a suitable balance of shorter settlement period to keep supplier relations smooth and risk-free, and longer periods to maximize the financial advantages and maintain good liquidity. Therefore, the statements proposing that Javid Ltd. should aim to have a very long settlement period and that credit suppliers reliably incline towards those firms with longer average payment times, are both incorrect.