Let's say a company has $80m in COGS and an average balance of $16m in accounts payable. If the days payable outstanding (DPO) is straight-lined across the forecast - what is the projected A/P balance if COGS is anticipated to be $100mm? Assume the DPO formula uses the average between the beginning and ending balance of A/P, and 365 for the number of days in a period.

• A. $16.0mm
• B. $20.0mm
• C. $24.0mm
• D. $28.0mm

Answer: (B)

DPO tells you how long payables are outstanding relative to COGS, and it uses the average accounts payable in the period: DPO = (Average AP × 365) / COGS. If DPO stays the same while COGS increases, the average AP must rise proportionally to keep that ratio. Start with the given data: average AP is 16 and COGS is 80, so the current DPO is 16 × 365 / 80 = 73 days.

In the forecast, COGS rises to 100. To keep DPO at 73 days, solve for the required average AP: 73 = (Average AP × 365) / 100, so Average AP = 73 × 100 / 365 = 20. Therefore the projected average A/P balance entering the DPO calculation is 20.

If you were asked for the ending A/P balance that would yield that average given a starting balance of 16, ending would be 2×20 − 16 = 24. The option 20 reflects the average balance used in the DPO formula, which is why it’s the correct choice. The other values would imply a different DPO, breaking the requirement that DPO remains straight-lined.