I didn’t understand the logic of the calculations we made to obtain the effective annual cost. In fact, i don’t even think I got the idea of effective cost. Could you please clarify Mr.Moffat?

I am sorry but I really do not know what else to say other than what I say in the lecture (and I can’t type out the whole lecture here).
Please watch the lecture again and say which bit of it you are getting lost on.

I just need to understand the logic of the calculations, like in the example , we did (1.41667)^12/2. I do understand that 2 corresponds to 2 months and 12 to 1 year. But why did we put it as a power instead of for example, multiplying it or something. I’m sorry I am very bad at expressing myself. I just don’t understand the logic behind calculations. For example, to find EOQ i know the step by step logic of how to get that formula ( differentiation etc) but here it’s not clear. I hope you understand what’s worrying me

Both of the problems you mention are in fact revision from paper F2 and so it will help you to watch the relevant F2 lectures.

Deriving the EOQ formula cannot be asked (as I say in the lecture), which is why the formula is given on the formula sheet.

With regard to the interest, to add on 2% interest we multiply by 1.02. ($100 with 2% interest grows to $102).
Since the interest is added on every 2 months, it will be added on 6 times over the year. So we multiply by 1.02 six times (which is multiplying by 1.02^6)

Thanks a lot Mr. Moffat. I like to learn the logic behind every calculation so that i don’t need to learn anything by heart. As for the EOQ formula, I already understood it even if I know that it won’t be needed. Thanks for your clarifications it was very helpful !!!!

In order to determine whether or not to give the discount why are we comparing the effective annual cost with the bank overhead rate? I mean why is the bank overhead rate important in this case.

For calculating discount, is it acceptable to go say, (1/99) * (365/20)

Assuming a 1% discount and a reduction of 50 to 30 days (20 days less). I get 18.4% using this. I note that in the lecture you are getting around 20%. Will either method be accepted.

Thank you so much for the excellent videos too. It cannot be put into words how thankful I am.

In the past the examiner did used to accept the way you have done it.
However, because of MCQ’s, you should now do it the ‘correct’ way ( 1/99^(365/20) )

No. Factoring is more of a long-term policy applying to all receivables. Invoice discounting is a one-off exercise on one invoice as a way of getting short-term money when there is a cash flow problem.

In our BPP revision kit under investment appraisal we have a question (Q 49) involving advance annuity (starting at T0) and their corporation tax consequences. could you please explain how to deal with such a question.

Please ask this question in the Ask the Tutor Forum for Paper F9, and not as a comment on a lecture about something completely different!

Have you watched the lectures on investment appraisal, because dealing with annuities starting at a time different from time 1 and dealing with tax are all dealt with (and lease and buy is a particular example of an annuity starting at time 0).

Good day sir,
Thank you for the lectures,based on the example in the lecture notes,can i use the 12m sales figure to solve the question which gives me approx. 21%.as the discount to be offered?

The $12M is not relevant. The reason is that although we might offer a discount, we can not force customers to pay early and take advantage of it. We might hope we will (and therefore we might offer the discount) but again, we have no idea how many of the customers will take it.

Do you explain any short cut method of solving the formula:
annual cost of discount = (1+discount / amount left to pay)^no. of periods – 1
by calculator ?

The problem is at your end – if you go to the technical support page then you should find a solution (the link is below the lecture, headed “Technical problems”)

First of all thanks for the lectures, they are very useful and valuable material.
Could you please clarify which method to use in order to calculate the annual cost of discount taking example 1?
-your method of 4% / 96% * 6=25% or
-(1+4%/96%)^6-1=27.8% as written in Kaplan F9 Essential Text published in 2012

Strictly the second method is more correct.
However it is only ever been asked twice in the whole history of the exam – both times it was just two marks, and both times the examiner said he would accept either method.

hello,
Please explain me the meaning of the following line
Finding a total level of credit which can be offered is a matter of finding the least costly balance between enticing customers, whose use of credit entails considerable costs, and refusing opportunities for profitable sales
Thnx in a anticipation

If you allow customers to take credit then you have the cost of chasing those who don’t pay, you lose interest while you are waiting for the money, and there is more risk of people not paying. The more credit you allow the more these costs will be.

However, if you don’t allow customer to take credit then you risk them going to another supplier who does give them credit and therefore you risk losing sales.

Hi Mr Moffat,, Sir I was going through a question in the pilot paper Ulnad Co,, and I noticed one thing,,we are told that the sales figure is $6M and it increased by 5% and also they offered a discount of 1.5% in which 30% of customers took the discount offered,, in calculating new receivable days 46.5 days I got it, however the new sales figure I got stuck,, the answer module calculated $6M × 1.05= $6.3M,, my question is why they didnt subtract the discount which will be 6.3 – ( 30% × 1.5% × 6.3M) =6271650 so that the sales figure is less the discount offered,, so that the new receivable will be 46.5/365 × 6271650 rather than 46.5/365 × 6.3M,,,

Thank you very much Mr moffat,,, I really really appreciate to the awesome videos and to your timely response for the ealier questions,, today is f9 examination hop it will be good ,, once again I express my gratitude for everything. Have a blessed day

Great lecture!
and, I do think this method is far more easier to understand the method given in Kaplan; annual cost of discount = (1+discount / amount left to pay)^no. of periods – 1. But, will the examiner give marks for this method?

Exam questions are tougher than the questions we practice here, but it;s the theory we need to understand. When I sat for F5 last June, I went through only Opentuition lecture Videos and one past paper, but the understanding I got by going through the lectures got me enough marks to pass the exam comfortably. So thanks alot sir!

Could somebody help me why cost of discount is 4/96*100 and for year calculation times by 12/2.
I am just slightly confused as to why the 12/2 is used , I hear John saying in the lecture , that perhaps the receivable is paid in 2 months and I see the 12/2 , but in the actual wording of the question , it says they are considering a 4% discount if paid in one month, would this then mean a 4/96*100*12 giving a cost of discount of 50% ? … may look silly but I need to get it right in my head thanking you ..

At the moment receivables take 3 months, but offering the discount means they pay in 1 month – so they are getting the money 2 months earlier. This is were the 2 months comes from (for 12/2)

Thankyou John, makes perfect sense to me now but I just couldn’t see that when I looked at it , So it is the saving in time , 3 months they were paying and now paying in 1 month … Thank you

Dear John, I ‘d like to ask about the difference between your approach and Kaplan’s text book on annual cost of discount. Kaplan gives a formula which annual cost of discount = (1+discount / amount left to pay)^no. of periods – 1. The results are slightly different though. Is there any problem in the exams if we use your logic ???

Strictly, what Kaplan writes is correct. However on the (only two) occasions that there has been a simple discount in the exam (as a tiny part of a question), the examiner has accepted the ‘quick’ way, even though it is not strictly accurate.

I find it funny that you keep promising the students that the numbers will be arriving soon! Are they like kids in a sweet shop, but their craving is numbers?!

shaafia says

I didn’t understand the logic of the calculations we made to obtain the effective annual cost. In fact, i don’t even think I got the idea of effective cost. Could you please clarify Mr.Moffat?

John Moffat says

I am sorry but I really do not know what else to say other than what I say in the lecture (and I can’t type out the whole lecture here).

Please watch the lecture again and say which bit of it you are getting lost on.

shaafia says

I just need to understand the logic of the calculations, like in the example , we did (1.41667)^12/2. I do understand that 2 corresponds to 2 months and 12 to 1 year. But why did we put it as a power instead of for example, multiplying it or something. I’m sorry I am very bad at expressing myself. I just don’t understand the logic behind calculations. For example, to find EOQ i know the step by step logic of how to get that formula ( differentiation etc) but here it’s not clear. I hope you understand what’s worrying me

John Moffat says

Both of the problems you mention are in fact revision from paper F2 and so it will help you to watch the relevant F2 lectures.

Deriving the EOQ formula cannot be asked (as I say in the lecture), which is why the formula is given on the formula sheet.

With regard to the interest, to add on 2% interest we multiply by 1.02. ($100 with 2% interest grows to $102).

Since the interest is added on every 2 months, it will be added on 6 times over the year. So we multiply by 1.02 six times (which is multiplying by 1.02^6)

shaafia says

Thanks a lot Mr. Moffat. I like to learn the logic behind every calculation so that i don’t need to learn anything by heart. As for the EOQ formula, I already understood it even if I know that it won’t be needed. Thanks for your clarifications it was very helpful !!!!

John Moffat says

You are welcome

Arun says

Hello John,

In order to determine whether or not to give the discount why are we comparing the effective annual cost with the bank overhead rate? I mean why is the bank overhead rate important in this case.

Thanks,

Arun.

John Moffat says

It is the bank overdraft rate (not the bank overhead rate), which is the interest charged by the bank on negative balances (i.e. on borrowings).

If receivables pay us sooner then the level of bank borrowings needed (the overdraft) will be lower, and therefore we will save bank interest.

aanaa says

sir,how do we calculate effective annual cost in$????

John Moffat says

Effective annual cost is not calculated in $’s – it is a %.

aanaa says

Thank you sir!

Gary says

For calculating discount, is it acceptable to go say, (1/99) * (365/20)

Assuming a 1% discount and a reduction of 50 to 30 days (20 days less). I get 18.4% using this. I note that in the lecture you are getting around 20%. Will either method be accepted.

Thank you so much for the excellent videos too. It cannot be put into words how thankful I am.

John Moffat says

In the past the examiner did used to accept the way you have done it.

However, because of MCQ’s, you should now do it the ‘correct’ way ( 1/99^(365/20) )

Alick says

Dear John,

Is invoice discounting a kind of factoring method?

Thanks!

John Moffat says

No. Factoring is more of a long-term policy applying to all receivables. Invoice discounting is a one-off exercise on one invoice as a way of getting short-term money when there is a cash flow problem.

Alick says

Thank you John!

Have a nice day!

alifahumee says

Dear John Sir,

In our BPP revision kit under investment appraisal we have a question (Q 49) involving advance annuity (starting at T0) and their corporation tax consequences. could you please explain how to deal with such a question.

Thank you

John Moffat says

Please ask this question in the Ask the Tutor Forum for Paper F9, and not as a comment on a lecture about something completely different!

Have you watched the lectures on investment appraisal, because dealing with annuities starting at a time different from time 1 and dealing with tax are all dealt with (and lease and buy is a particular example of an annuity starting at time 0).

mehreen245 says

hi Mr Moffat

at 18:24 you said difference of 500 is cost for us for getting it now.. did you mean 100{5000-4900}?

John Moffat says

Ooops – yes

The cost is 100, not 500. Sorry

aliimranacca007 says

1 + R = 1.04166 how 1.041667 come

John Moffat says

R = 4/96 = 4.1667% or 0.041667

1+R = 1 + 0.041667 = 1.041667

Samoar says

The new upgrade for the video lectures looks great and is more helpful than the last format.

Abel says

Thanks this is helpful

yetunde says

Good day sir,

Thank you for the lectures,based on the example in the lecture notes,can i use the 12m sales figure to solve the question which gives me approx. 21%.as the discount to be offered?

John Moffat says

The $12M is not relevant. The reason is that although we might offer a discount, we can not force customers to pay early and take advantage of it. We might hope we will (and therefore we might offer the discount) but again, we have no idea how many of the customers will take it.

Raghav says

Hello Sir,

Do you explain any short cut method of solving the formula:

annual cost of discount = (1+discount / amount left to pay)^no. of periods – 1

by calculator ?

John Moffat says

No really – you need to have a scientific calculator for this exam anyway, in which case there should be no problem taking n’th powers.

020891meme says

each time im trying to play chapter 5 lectures an F3 chapter 1 lecture plays, please advise

John Moffat says

The problem is at your end – if you go to the technical support page then you should find a solution (the link is below the lecture, headed “Technical problems”)

zsolah says

First of all thanks for the lectures, they are very useful and valuable material.

Could you please clarify which method to use in order to calculate the annual cost of discount taking example 1?

-your method of 4% / 96% * 6=25% or

-(1+4%/96%)^6-1=27.8% as written in Kaplan F9 Essential Text published in 2012

Thanks,

John Moffat says

Strictly the second method is more correct.

However it is only ever been asked twice in the whole history of the exam – both times it was just two marks, and both times the examiner said he would accept either method.

zsolah says

Thanks for the clarification!

sufyan says

how to download this video?

John Moffat says

You do not download!

The videos are not downloadable – it is the only way that we can keep this website free of charge.

aishaasad says

hello,

Please explain me the meaning of the following line

Finding a total level of credit which can be offered is a matter of finding the least costly balance between enticing customers, whose use of credit entails considerable costs, and refusing opportunities for profitable sales

Thnx in a anticipation

John Moffat says

What they are trying to say is the following:

If you allow customers to take credit then you have the cost of chasing those who don’t pay, you lose interest while you are waiting for the money, and there is more risk of people not paying. The more credit you allow the more these costs will be.

However, if you don’t allow customer to take credit then you risk them going to another supplier who does give them credit and therefore you risk losing sales.

Hope that makes sense

SOUD SAEED says

Hi Mr Moffat,, Sir I was going through a question in the pilot paper Ulnad Co,, and I noticed one thing,,we are told that the sales figure is $6M and it increased by 5% and also they offered a discount of 1.5% in which 30% of customers took the discount offered,, in calculating new receivable days 46.5 days I got it, however the new sales figure I got stuck,, the answer module calculated $6M × 1.05= $6.3M,, my question is why they didnt subtract the discount which will be 6.3 – ( 30% × 1.5% × 6.3M) =6271650 so that the sales figure is less the discount offered,, so that the new receivable will be 46.5/365 × 6271650 rather than 46.5/365 × 6.3M,,,

John Moffat says

You can do that. Sometimes the examiner subtracts the discount and sometimes he does not. You would get full marks either way.

SOUD SAEED says

Thank you very much Mr moffat,,, I really really appreciate to the awesome videos and to your timely response for the ealier questions,, today is f9 examination hop it will be good ,, once again I express my gratitude for everything. Have a blessed day

sdmaalex says

Great lecture!

and, I do think this method is far more easier to understand the method given in Kaplan; annual cost of discount = (1+discount / amount left to pay)^no. of periods – 1. But, will the examiner give marks for this method?

Exam questions are tougher than the questions we practice here, but it;s the theory we need to understand. When I sat for F5 last June, I went through only Opentuition lecture Videos and one past paper, but the understanding I got by going through the lectures got me enough marks to pass the exam comfortably. So thanks alot sir!

John Moffat says

Yes. He has only ever asked ‘simple’ discounts twice, and it was just 2 marks (as a tiny part of a question). He said either way would get the marks.

mother1 says

Could somebody help me why cost of discount is 4/96*100 and for year calculation times by 12/2.

I am just slightly confused as to why the 12/2 is used , I hear John saying in the lecture , that perhaps the receivable is paid in 2 months and I see the 12/2 , but in the actual wording of the question , it says they are considering a 4% discount if paid in one month, would this then mean a 4/96*100*12 giving a cost of discount of 50% ? … may look silly but I need to get it right in my head thanking you ..

John Moffat says

At the moment receivables take 3 months, but offering the discount means they pay in 1 month – so they are getting the money 2 months earlier. This is were the 2 months comes from (for 12/2)

mother1 says

Thankyou John, makes perfect sense to me now but I just couldn’t see that when I looked at it , So it is the saving in time , 3 months they were paying and now paying in 1 month … Thank you

Akis says

Dear John, I ‘d like to ask about the difference between your approach and Kaplan’s text book on annual cost of discount. Kaplan gives a formula which annual cost of discount = (1+discount / amount left to pay)^no. of periods – 1. The results are slightly different though. Is there any problem in the exams if we use your logic ???

John Moffat says

Strictly, what Kaplan writes is correct. However on the (only two) occasions that there has been a simple discount in the exam (as a tiny part of a question), the examiner has accepted the ‘quick’ way, even though it is not strictly accurate.

neilsolaris says

I find it funny that you keep promising the students that the numbers will be arriving soon! Are they like kids in a sweet shop, but their craving is numbers?!