Could u please explain why we cant use the effective rate in Q2 as we did in Q1; In Q2 we calculate straight the discount of 1% on sales. Sorry, but I got confused when we should use effective cost rate and whether not (When it is applicable or not).

Have you watched the next lecture, where I work through example 2? (Because I do explain why we can’t use the same approach).

It is because customer are taking different periods of credit and the proportion of customers taking advantage of the discount is changing.

You can only use the simple approach when offering the same discount to all customers for the same period, and the question asks for the effective cost of the discount as a %.
When the question asks for the net cost or benefit of a change of policy then it has to be the approach in the second example.

In example 4 of payables answer is 44.58%, is it the cost of saving 2% discount ? if this is the case then this should mean not to take discount please correct me.

Firstly 44.58% is the cost of not taking the discount (it is what we save if we do take the discount).

Secondly, it is impossible to say whether or not we should take the discount (and this was not asked for) because we are not told what our overdraft interest is!

(If overdraft interest was 10% then we should take the discount, but if overdraft interest was 50% then we should not take the discount)

It could ask for the new payables figure or it could ask for the effective cost or it could ask whether it was worth taking the discount.

The new payables figure is actually very unlikely to be asked because there is no way that all suppliers (and presumably the company has more than one) will be offering the same discount.

In real life, some companies often use short-term borrowing funds from bank to buy raw material to produce finished goods, and then sell to their customer on credit. They don’t use overdraft, just use loan finance. So, instead of using overdaft interest to compare with effective annual cost to decide whether or not offer the discount, can we use loan interest to compare with effective annual cost to offer the discount to our customer?

Furthermore, can we use deposit interest to compare with effective annual cost to offer the discount because we get money earlier then we deposit them in bank to receive interest.

Short-term borrowing is the same as an overdraft.
Loan finance in the exam always refers to long-term borrowing.

If the business has an overdraft then we use the overdraft interest rate, if on the other hand they have surplus cash then the interest being earned on the cash is the relevant interest rate – it is an opportunity cost.

Mr Moffat, would the examiner want to see our calculation of the effective rate of the cost or can we just say “the cost of giving a discount of e.g. 4% is 4.1667%? If this would be allowed it could save time in the exam if I would prepare a table for the rate of costs for different discount rates and memorize it. When I go through past papers I think I should fairly easily see which discount rates the examiner usually chooses. Obviously if he comes up with one not in my table I would have to calculate it in the exam.

hi John,
I just want to ask that if we do it this way for example 1:-
that for every $96 we get two months earlier, it costs us $4 i.e. 4.17%, while the benefit we get on receiving the payment 2 months earlier, i.e. the interest saved, is $3.2 {(20%/12) x 2} = 3.33%. So 3.33% of 96 is 3.2, thus comparing the cost & benefit, the amount it costs us to offer discount is higher than the interest we are saving by offering it.
Is it right to do it this way?

I am a bit confused about the answer we get in this way i.e. 27.75%, I understand the concept of effective rate and I agree that sales of 12m are not relevant in calculation as we don’t know how many customers are going to take discount, my question is that if we multiply 27.75% with any number of sales, for example if 50% of the customers availed discount i.e 6m, we should get the cost of discount i.e. 0.24m, by multiplying 6 with 27.75% as it is the annual cost of discount?
What i’m not getting is that how can we prove that 27.75% will be the cost of discount we have to bear, given any number of sales (customers) that availed discount?

If anyone were to take up the discount then it would effectively be costing us 27.75% on whatever money we got in sooner. We can then compare this with the interest rate on the overdraft to decide whether or not it was beneficial to us to offer it.

It doesn’t matter whether 1 customer decided to take the discount or all the customers decided to take it – if the cost of giving it in % terms is less that the overdraft interest rate then it is worth offering, it is is more then it is not worth offering.

(Sorry for troubling you again)
Lets say if half of the customers take discount, the money we’ll be getting in sooner is 5.76m (6m x 0.96), thus costing us 0.24m (6m-5.76), but taking 27.75% of 5.76 does not give us 0.24, why is that so?
Thanks alot 🙂

It is costing 0.24 for every 5.76 we get in early, which is 0.24/5.76 = 0.041666 (or 4.1666%) every 2 months.
Therefore the annual cost = 1.04166^ (12/2) – 1 = 0.2775 (or 27.75%).

May you please help me understand the logic behind calculations of the effective annual cost of discount. For instance, in the first example, why do we have to say 4/96 and also, why do we have to introduce 1+R in the calculations or that is just how the fomulae is like.

Sir I understand the logic and the calculations, but I just cannot seem to get these to work on my calculator? Can you help at all please! This is really frustrating, I’m sure once I have cracked it, it’ll get there but I just cant come up with the answer no matter which way I bloody do it!

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?!

Hi, John…Really find your lectures extremely helpful and easy to understand. Though sometimes I feel that the questions in past papers are of a higher level of difficulty or are more complicated or require a deeper/more detailed level of understanding than is covered in the lectures… Just a feeling, maybe I am wrong…I mean no complaints 🙂 I just want to be sure if these lectures with the notes are enough to pass the F9 exam (of course with exam questions practice) or would I also need to refer to a text book like BPP or Kaplan? Plus any guess for June 2013 F9 paper topics to give special attention to? 🙂 Would appreciate your comments. Thank you for your time.

Although exam questions require more reading, the arithmetic is not more complicated and nor do they require a deeper level of understanding. The purpose of the lectures is to explain the topic and the approach – it is then important to practice as many past exam questions as possible. If you do have a text book, then the more reading the better, but our notes and lectures are enough on their own to pass the exam – provided you really do understand them and provided you practice lots of questions.

That is why we have also started uploading recordings answering past exam questions – you can find the link to them on the main F9 page.

Our guesses for the June exam were uploaded onto the main F9 page last week.

hi, i have a problem understanding how part of question 2c of the december 2008 exam has been answered. the question on calculating the interst of the factor’s advance to the company: part of the question is:
A factor has offered to take over the administration of trade receivables on a non-recourse basis for an annual fee of
3% of credit sales. The factor will maintain a trade receivables collection period of 30 days and Gorwa Co will save
$100,000 per year in administration costs and $350,000 per year in bad debts. A condition of the factoring
agreement is that the factor would advance 80% of the face value of receivables at an annual interest rate of 7%.
part of the solution is
the receivables under factor = 37,400,000 x 30/365 = $3,074,000
Extra interest cost on advance = 3,074,000 x 80% x (7% – 5%)
the part i havent understood is how the interest is calculated. why (7% – 5%)
can someone explained this to me pls

It is because if they did not use the factor then they would be paying overdraft interest at 5%. Using the factor, they are paying interest at 7%, which is 2% more.
I prefer the approach in my lectures – it will give the same final result and get the full marks.

Hi Sir,when i used the formula for percentage cost of discount i got 28% and the quick way gives 25%,is it ok to use the quick method or will it effect the answer?

If you have time and you can remember the formula, then do it that way. Otherwise the quick way will probably still get you full marks (even though the answer might be slightly different).

Thanks for free lectures. They are very good and easy to understand but for some reason I am stuck on cost of discount example 1 chap5.
Could somebody help me why cost of discount is 4/96*100 and for year calculation times by 12/2.

I just got a question watching the above video.
When doing the Example 1 (chapter 5), shouldnt he apply the Annual cost of dicount formula: -1 +(1+ dto / amount recieved)^n

As per the example: -1 + (1+ 4 /96)^6 = 27,75%
He gets 25% as per his calculations

@juanalonso, Strictly, what you say is correct. However on the (only two occasions) there has been a simple discount in the exam, the examiner has accepted the ‘quick’ way, even though it is not strictly accurate.

i have to go to a remote place for about a month where there is no access to the internet. Can anyone tell me if i can download these videos on a cd so that i can access it whenever i want even with the internet service? Thank you.

i am currently having a problem the player it saying “Server not found: rtmpt://r.acca.opentuitioncom.netdna-cdn.com:80/play”
please tell me if this is on my end or Open Tuition website. need to know so i can get it fixed asap.
thank you

just a feedback regarding the player:
unexpectedly I closed the browser then I had to wait till the video is completely downloaded. Because the player wont allow me to jump to a point in video until the streaming is finished.

everyone likes quick reply.. but if you spent time reading the comments on the site, you would know the answer.

what is not recorded can’t be uploaded! and If I am right, lecturer actually says in one of the lectures, that some chapters you are supposed to study at home by yourself

KeepWalking says

Dear Sir,

Could u please explain why we cant use the effective rate in Q2 as we did in Q1; In Q2 we calculate straight the discount of 1% on sales. Sorry, but I got confused when we should use effective cost rate and whether not (When it is applicable or not).

Thanking you in advance.

John Moffat says

Have you watched the next lecture, where I work through example 2? (Because I do explain why we can’t use the same approach).

It is because customer are taking different periods of credit and the proportion of customers taking advantage of the discount is changing.

You can only use the simple approach when offering the same discount to all customers for the same period, and the question asks for the effective cost of the discount as a %.

When the question asks for the net cost or benefit of a change of policy then it has to be the approach in the second example.

KeepWalking says

Dear Sir,

Many thanks for your prompt and clear response.

I will follow.

John Moffat says

You are welcome 🙂

Aline Edwige says

thanks sir with your explanation i understood the concept

John Moffat says

You are welcome 🙂

bhamanihussain says

Hi Sir,

In example 4 of payables answer is 44.58%, is it the cost of saving 2% discount ? if this is the case then this should mean not to take discount please correct me.

Thanks

John Moffat says

Two things:

Firstly 44.58% is the cost of not taking the discount (it is what we save if we do take the discount).

Secondly, it is impossible to say whether or not we should take the discount (and this was not asked for) because we are not told what our overdraft interest is!

(If overdraft interest was 10% then we should take the discount, but if overdraft interest was 50% then we should not take the discount)

bhamanihussain says

Thank you sir

John Moffat says

You are welcome 🙂

Hemraj says

Sir, In this question, wont the new payables figure be 15/365*100000*98.5%?

John Moffat says

Yes, but that is not required by the question.

Hemraj says

So, will the question in exam ask us to look at new payables figure after the discount?

John Moffat says

It could ask for the new payables figure or it could ask for the effective cost or it could ask whether it was worth taking the discount.

The new payables figure is actually very unlikely to be asked because there is no way that all suppliers (and presumably the company has more than one) will be offering the same discount.

khanhhoangvu says

Dear Teacher

In real life, some companies often use short-term borrowing funds from bank to buy raw material to produce finished goods, and then sell to their customer on credit. They don’t use overdraft, just use loan finance. So, instead of using overdaft interest to compare with effective annual cost to decide whether or not offer the discount, can we use loan interest to compare with effective annual cost to offer the discount to our customer?

Furthermore, can we use deposit interest to compare with effective annual cost to offer the discount because we get money earlier then we deposit them in bank to receive interest.

Could you please help me to explain more clearly.

Thank you very for your lecture and your help.

John Moffat says

Short-term borrowing is the same as an overdraft.

Loan finance in the exam always refers to long-term borrowing.

If the business has an overdraft then we use the overdraft interest rate, if on the other hand they have surplus cash then the interest being earned on the cash is the relevant interest rate – it is an opportunity cost.

Lebogang says

Hi Sir

how can one download this videos…

Auret says

Mr Moffat, would the examiner want to see our calculation of the effective rate of the cost or can we just say “the cost of giving a discount of e.g. 4% is 4.1667%? If this would be allowed it could save time in the exam if I would prepare a table for the rate of costs for different discount rates and memorize it. When I go through past papers I think I should fairly easily see which discount rates the examiner usually chooses. Obviously if he comes up with one not in my table I would have to calculate it in the exam.

John Moffat says

In Section B, you must show your workings – it is the workings that are marked, not the final answer.

In Section A (the MCQ’s) nobody will look at your workings so it does not matter how you arrived at the answer.

Auret says

Thank you sir.

John Moffat says

You are welcome 🙂

Mahrukh says

hi John,

I just want to ask that if we do it this way for example 1:-

that for every $96 we get two months earlier, it costs us $4 i.e. 4.17%, while the benefit we get on receiving the payment 2 months earlier, i.e. the interest saved, is $3.2 {(20%/12) x 2} = 3.33%. So 3.33% of 96 is 3.2, thus comparing the cost & benefit, the amount it costs us to offer discount is higher than the interest we are saving by offering it.

Is it right to do it this way?

John Moffat says

No – what is in the lecture is the correct way 🙂

Mahrukh says

I am a bit confused about the answer we get in this way i.e. 27.75%, I understand the concept of effective rate and I agree that sales of 12m are not relevant in calculation as we don’t know how many customers are going to take discount, my question is that if we multiply 27.75% with any number of sales, for example if 50% of the customers availed discount i.e 6m, we should get the cost of discount i.e. 0.24m, by multiplying 6 with 27.75% as it is the annual cost of discount?

What i’m not getting is that how can we prove that 27.75% will be the cost of discount we have to bear, given any number of sales (customers) that availed discount?

John Moffat says

If anyone were to take up the discount then it would effectively be costing us 27.75% on whatever money we got in sooner. We can then compare this with the interest rate on the overdraft to decide whether or not it was beneficial to us to offer it.

It doesn’t matter whether 1 customer decided to take the discount or all the customers decided to take it – if the cost of giving it in % terms is less that the overdraft interest rate then it is worth offering, it is is more then it is not worth offering.

Mahrukh says

(Sorry for troubling you again)

Lets say if half of the customers take discount, the money we’ll be getting in sooner is 5.76m (6m x 0.96), thus costing us 0.24m (6m-5.76), but taking 27.75% of 5.76 does not give us 0.24, why is that so?

Thanks alot 🙂

John Moffat says

Of course not!

It is costing 0.24 for every 5.76 we get in early, which is 0.24/5.76 = 0.041666 (or 4.1666%) every 2 months.

Therefore the annual cost = 1.04166^ (12/2) – 1 = 0.2775 (or 27.75%).

Mahrukh says

Thankyou 🙂

John Moffat says

You are welcome 🙂

Joyce says

Hi John

May you please help me understand the logic behind calculations of the effective annual cost of discount. For instance, in the first example, why do we have to say 4/96 and also, why do we have to introduce 1+R in the calculations or that is just how the fomulae is like.

John Moffat says

This is all explained in the lectures. For every 100 invoiced, then a discount of 4% will mean only 96 is received.

Therefore the cost of getting 96 early is 4, or effectively 4/96%

Chris says

Sir I understand the logic and the calculations, but I just cannot seem to get these to work on my calculator? Can you help at all please! This is really frustrating, I’m sure once I have cracked it, it’ll get there but I just cant come up with the answer no matter which way I bloody do it!

Thanks, Chris.

Martynas says

Hi John,

Just a quick question in regards to effective rate: could you advice why do we take 99 as a denominator instead of 100?

As I see it if we have a product which costs 4 and we offer a discount of 2, the effective rate is 4/2=50%, I dont get how it can be 2/2=100%

thanks a lot, marty

John Moffat says

The discount is 1% (not $1!). So for every 100 invoiced, the discount is 1 and the amount payable is 99.

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?!

Asim says

Hi, John…Really find your lectures extremely helpful and easy to understand. Though sometimes I feel that the questions in past papers are of a higher level of difficulty or are more complicated or require a deeper/more detailed level of understanding than is covered in the lectures… Just a feeling, maybe I am wrong…I mean no complaints 🙂 I just want to be sure if these lectures with the notes are enough to pass the F9 exam (of course with exam questions practice) or would I also need to refer to a text book like BPP or Kaplan? Plus any guess for June 2013 F9 paper topics to give special attention to? 🙂 Would appreciate your comments. Thank you for your time.

John Moffat says

Although exam questions require more reading, the arithmetic is not more complicated and nor do they require a deeper level of understanding. The purpose of the lectures is to explain the topic and the approach – it is then important to practice as many past exam questions as possible. If you do have a text book, then the more reading the better, but our notes and lectures are enough on their own to pass the exam – provided you really do understand them and provided you practice lots of questions.

That is why we have also started uploading recordings answering past exam questions – you can find the link to them on the main F9 page.

Our guesses for the June exam were uploaded onto the main F9 page last week.

chiclarence says

hi, i have a problem understanding how part of question 2c of the december 2008 exam has been answered. the question on calculating the interst of the factor’s advance to the company: part of the question is:

A factor has offered to take over the administration of trade receivables on a non-recourse basis for an annual fee of

3% of credit sales. The factor will maintain a trade receivables collection period of 30 days and Gorwa Co will save

$100,000 per year in administration costs and $350,000 per year in bad debts. A condition of the factoring

agreement is that the factor would advance 80% of the face value of receivables at an annual interest rate of 7%.

part of the solution is

the receivables under factor = 37,400,000 x 30/365 = $3,074,000

Extra interest cost on advance = 3,074,000 x 80% x (7% – 5%)

the part i havent understood is how the interest is calculated. why (7% – 5%)

can someone explained this to me pls

John Moffat says

It is because if they did not use the factor then they would be paying overdraft interest at 5%. Using the factor, they are paying interest at 7%, which is 2% more.

I prefer the approach in my lectures – it will give the same final result and get the full marks.

hasanali95 says

Hi Sir,when i used the formula for percentage cost of discount i got 28% and the quick way gives 25%,is it ok to use the quick method or will it effect the answer?

John Moffat says

If you have time and you can remember the formula, then do it that way. Otherwise the quick way will probably still get you full marks (even though the answer might be slightly different).

John Moffat says

It is OK to use the quick method even though the answer will be slightly different.

shahbazalikhan says

How can i download lectures Admin Plz guide me.as i cant see any download option on my pc, except on intro lecture..

admin says

Lectures are online ONLY – that;s the only way this site can be FREE

you can only download Introduction lecture,

raylene says

Good..but different with NTU..So…need to consider more…5.5.5…

John Moffat says

@raylene, NTU ???

snaik20071 says

Thanks for free lectures. They are very good and easy to understand but for some reason I am stuck on cost of discount example 1 chap5.

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

aelsewy says

i love his way he is amazing tutor thanks alot OT team.:)

juanalonso says

I just got a question watching the above video.

When doing the Example 1 (chapter 5), shouldnt he apply the Annual cost of dicount formula: -1 +(1+ dto / amount recieved)^n

As per the example: -1 + (1+ 4 /96)^6 = 27,75%

He gets 25% as per his calculations

Can anyone give a hand??

Grand lectures btw!

Juan A.

John Moffat says

@juanalonso, Strictly, what you say is correct. However on the (only two occasions) there has been a simple discount in the exam, the examiner has accepted the ‘quick’ way, even though it is not strictly accurate.

meerarijal says

i have to go to a remote place for about a month where there is no access to the internet. Can anyone tell me if i can download these videos on a cd so that i can access it whenever i want even with the internet service? Thank you.

admin says

No, sorry, lectures (like the whole website) is for online only use

o_kaghembe says

this is great. i wish i knew about it early.!!!!!!!

dawnjacque says

great lecturer!

mmariba2000 says

Great notes Tutor on Receivables very easy to follow through I liked the effective interest rate example

aboobucker says

nice 1

chris grant says

i am currently having a problem the player it saying “Server not found: rtmpt://r.acca.opentuitioncom.netdna-cdn.com:80/play”

please tell me if this is on my end or Open Tuition website. need to know so i can get it fixed asap.

thank you

admin says

@chris grant, it seem to be something at your end. reload the page?

video works fine

asadraza says

just a feedback regarding the player:

unexpectedly I closed the browser then I had to wait till the video is completely downloaded. Because the player wont allow me to jump to a point in video until the streaming is finished.

accapakistan says

Please tell me why chapter4 is not included in these lectures. Waiting for a quick reply. I LOVE JOHN MOFFAT

admin says

everyone likes quick reply.. but if you spent time reading the comments on the site, you would know the answer.

what is not recorded can’t be uploaded! and If I am right, lecturer actually says in one of the lectures, that some chapters you are supposed to study at home by yourself

sheratan says

Chapter 4 is not included here but oddly I found it on the F2 video page:

http://opentuition.com/acca/f2/inventory-control-part-a-example-1-2/

http://opentuition.com/acca/f2/inventory-control-part-b-the-eoq-formula-example-2/

http://opentuition.com/acca/f2/inventory-control-part-c-quantity-discounts-example-3/

admin says

Nothing odd about it 🙂

Tutor did say in one of the F9 lectures, inventory won’t be covered, because it is like a revision of F2

lisagu says

@admin,

I hv checked F2 video but it looks like the inventory section has not been updated so I can not view it. Is there any chance u can help me? X

merissa says

this certainly answered some questions……thanks

praveenkaur says

Thanks a mil.

ntgiang says

this video have problem, it have been stopped in the middle of lesson.

Please help me to solve it

kera says

Open tuition brings clarity to the subject area and gives me confidence in this paper.