Certified Financial Management Specialist Practice Exam

What does accounts payable refer to?

1. Money a company has invested

2. Money owed to a company by clients

3. Money a company owes to suppliers

4. Cash available for operational expenses

The correct answer is: Money a company owes to suppliers

Accounts payable refers to the money that a company owes to its suppliers for goods or services that have been purchased on credit. This liability is an essential part of a company's short-term financing and reflects the obligations that the business needs to settle in the near term. When a company makes purchases but does not pay cash immediately, it creates an accounts payable entry on its balance sheet, indicating an obligation to pay the supplier. This could include anything from raw materials to finished products, as well as services rendered by external providers. Proper management of accounts payable is crucial for maintaining healthy supplier relationships and ensuring smooth operations within the business, as it impacts cash flow and credit terms with vendors. The other options address different financial concepts. Investments refer to money a company puts into assets rather than liabilities. Money owed to a company by clients pertains to accounts receivable, which reflects earnings already generated but not yet collected. Cash available for operational expenses describes liquid assets that a company can utilize for its day-to-day functioning, but it does not represent a liability like accounts payable does. Thus, the accurate definition of accounts payable is encapsulated in the choice regarding money owed to suppliers.