Western Governors University (WGU) ACCT2020 D196 Principles of Financial and Managerial Accounting Practice Test

The formula for calculating cash payments to suppliers is important for understanding how much cash a business is actually disbursing to settle its debts with suppliers for goods and services received. The correct answer involves both current payments and cash that has been paid on previous purchases.

The rationale behind this calculation is that cash payments to suppliers are not just determined by the current period's expenses or the rate at which payments are made; they also have to account for any payments that may have been due from previous periods. By taking the current period payments and adjusting for the payment rate, you effectively capture only part of the cash movement. Adding in the cash paid on previous purchases ensures that all cash outflows related to supplier obligations are accounted for, giving a complete picture of cash payments.

This option accurately reflects the comprehensive nature of cash management in accounting and allows businesses to ensure they are meeting their obligations to suppliers without unintentionally misstating cash flow. It incorporates both current obligations and history, which is crucial for precise cash flow management.