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  1. Avatar of charlottecallaghanclarke says

    Hello John

    Just a quick question…

    I have just done example 5 on this chapter and checked my answer. Now then, I got the correct answer as I used the first method. However, I notice that there is an alternative method and the answer is different i.e. the first method recommends you do not take advantage of the discount whereas the second method says that you should take advantage. Why do the answers differ? Is there a right and a wrong way? Which way should be used for the exam or should we do both to gain full marks??

    Your input would be much appreciated.

    Thank you
    Charlotte

    • Avatar of John Moffat says

      I think that you have misread the answer!!

      Both methods come to the same conclusion – i.e. they should take the discount.
      (Maybe you got the correct number (22%) using the first method but made the wrong decision. Here taking the discount and paying early will cost 13% (paying earlier means bigger overdraft) whereas not taking the discount and paying later will ‘lose’ us 22%. So better to take the discount)

      Either way would get full marks in the exam, but the first way is more sensible because it is quicker. (Although to be asked for any calculations regarding payables management is actually rather unlikely.)

  2. avatar says

    Hello Sir,i have a question regarding example 4. By using annual effective cost calculation, the answer will be 44.6% —> 100/98 ^ (365/(30-10) – 1

    And in the answer section shows a different calculation with a different answer.

    If I use annual effective cost calculation, can I still gain marks? Thanks!

  3. avatar says

    Dear Mr Moffat,

    I would like to express my sincerest gratitude for your lectures – i have attended BPP courses and they do not compare to your lectures. All my passes in the exams are due to open tuition courses….i am now sitting F9 in june.

    Thank you so much for all your help!
    Muji

  4. avatar says

    Dear John,
    In example 2…why you didn’t take the sales figure to work on rather we supposed $100 invoice. Why???
    I have learnt the logic though and also tried other amount assumption like $2000 etc…but that was my question???

    At the start it seemed to be too much confusing but ultimately with your clear directions, the ex3 and 4 are cleared like crystal.

    Many Thanks

  5. avatar says

    Hi Mr Moffat, forgive me asking question out if this lecture,, in december 2008 qstn no 2,, regarding factoring, when calculating the interest for the advanced payment of the face value of receivable,, the model answer was { 80%× revised recivable× (annual interest – overdraft interest rate) } ,, I was wondering why exactly they subtracted the the interest charged minus the overdraft,, they shoud rather just take the interest payment. I would really appreciate for your timely response.

  6. avatar says

    hi sir

    In these examples you found the average receivables as Months x %age (e.g in 2nd example it was 1 x 20% ; 2 x 30% ; 3 x 50% so you got 2.3 months answer as average which you multiply by 10m and divide by 12) to come at 1916667$

    I used a slightly different approach as i found the averrage receivables as

    [ (1/12 x 20%) + (2/12 x 30%) + (3/12 x 50%) ] x 10mil

    BUT my answer is different than yours (21666667) is my approach incorrect or this is also fine? will i get marks using the method mentioned??

    Please reply sir

    Thanks

  7. avatar says

    regarding FACTORING , in comparison of COSTS and SAVINGS , under savings we calculate reduction in receivables (current receivables – receivables under factor) and then we multiply it with the overdraft interest cost right? like we did it ANJO and in GORWA ,current minus recivables under factor. for current we pick receivables from balance sheet , and for facotrs receivables, we normally calculate it by factors days . but in kaplan in question and aswers at the end , there is a question named MARTON, there he just didn’t make any comparison of current and new receivables, he just calculated sales * factor days /365 . and multiply it by interest cost . how ever the CURRENT RECEIVABLES are given in balance sheet …. and the receivables scenario was just same as ANJO and GORWA. well i m confuzed which one is correct ? if i do it in exam straight away receivables under factor and multiply it with o/d cost will he cut my marks ? Thank you …… kindly help me by telling , which approach should be adopted ? i m pretty much wanting to adopt the approach like in ANJO and GORWA . ?

  8. avatar says

    hey there, as in example 2 of this video lecture, there is (if its the correct word) a class of receivables who pays like 20% in 30 days, 50% in 60 days and 30% in 90 days, so u multiply the days with percentage and then collectively get number of days , and accumulatedly put in the formula of average receivables , SALES *days/365 i.e 20m *63days/365days. right ? and then make a comparison with new n old receivables , and then multiply it by an od interest rate ? right? .. i m pretty much clear with it . but i have put the same approach in december 2012 question .2 part a KXP Company. current receivables are given 2466m . for revised receivables days i did 30days *0.5 plus 45days * 0.3 plus 60days * 0.2 which gives 41days . then to calculate avg revised receivables i did 15m sales multiplied by 41days/365days. which gives me $1684932 receivables. but in the solution he seperatedly multiplied sales by evey revised days which gives an answer of $1664384 receivables. my question is what is this difference for? what is the correct approach ? as i have just followed the solution of ur example 2 of this video lecture. where am i lacking ? kindly rectify my confusion . another question that the formula of annual cost of discount according to kaplan [ 1 + discount/ amount left to pay] ^ no of periods – 1 is applicable when and where ? why we can not apply that formula in this question? and where isit there to be applied? THANK YOU …..

    • Avatar of John Moffat says

      Both approaches give exactly the same answer.

      The approach you took comes to 40.5 days, not 41 days! If you use the correct 40.5 days you will get the same answer as the examiner.

      The reason that you cannot use the other approach is because this only works if there is a fixed payment period – not where some pay in 30 days, some pay in 45 days and some pay in 60 days.

      • avatar says

        Thank you ,,,,,,,,,,, , was just mistaking again in rounding off ………. !! I m clear now :). and the fixed payment period (the formula) is called the Annual cost of a discount ?. and the approach where some pay in 30 days , some in 50 days and some in 60days is called the Early settlement discount, right ? and Early Settlement Discount always requires for calculating the net cost or benefit ? right ?

      • Avatar of John Moffat says

        You are correct about calling it the annual cost of a discount.

        However they are all called early settlement discount (it is a discount for paying quickly – whether everyone pays quickly or just some pay quickly)

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