Auditing and Attestation- Certified Public Accountant (CPA) Practice Exam -

In financial statement analysis, a decline in accounts payable as a percentage of total liabilities could suggest what?

1. Better cash management

2. Possible unrecorded liabilities

3. Increased vendor discounts received

4. Effective credit controls

The correct answer is: Possible unrecorded liabilities

A decline in accounts payable as a percentage of total liabilities may suggest the possibility of unrecorded liabilities. This interpretation arises because when accounts payable decreases relative to total liabilities, it raises the question of whether all liabilities are being accurately reported. If a company is paying off its payables more quickly than it is incurring new ones or if certain liabilities are not being recorded, this decline can indicate that there may be obligations or expenses that are not yet captured in the financial statements. Furthermore, a shrinking accounts payable balance in relation to total liabilities might hint at a change in purchasing patterns. If the company is purchasing less on credit or adjusting payment terms, it could mean that they are not recognizing or recording all liabilities, potentially impacting the overall financial health depicted in the statements. In contrast, while better cash management, increased vendor discounts received, and effective credit controls are all plausible scenarios that could influence accounts payable, they do not directly imply an issue with unrecorded liabilities in the same way. The relationship between accounts payable and total liabilities primarily highlights the need for audit and review of the company's accounting practices to ensure that all obligations are reflected properly on the balance sheet.