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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

johnmoffat 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.)

eijamalcolm92 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!

johnmoffat says

Yes – you would get full marks.

What you have written is actually more correct, but the examiner allows the other way (even though strictly it is not as correct).

eijamalcolm92 says

Okay, got it! Thanks

absylum007 says

what about payables ?? we do them ourself ??

johnmoffat says

Yes

It’s exactly the same logic as simple discounts for receivables (and, of course, the answer is at the back of the Course Notes)

mujondo 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

johnmoffat says

Thanks a lot for the comments

acca2050 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

johnmoffat says

You could use any number – I use 100 because it makes the number easy

There is no point though in using the sales figure. Just because we might offer a discount we cannot force customers to take it. If it good for us then we will offer it and hope they take it, but we cannot force them to.

acca2050 says

Then why we took the sales figure in ex3 & ex4 ???

johnmoffat says

I don’t think you listened carefully enough to the lecture, because I do explain

The reason is that in those examples we know what proportion of our customers will take the discount.

Also, because there are other costs and benefits involved, we need to calculate the costs and benefits over a year.

acca2050 says

I listened carefully and I still remember that. But that was confusing me.

Thanks

johnmoffat says

No problem – I hope it is clear now

SOUD SAEED 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.

johnmoffat says

There is more than one way of showing the workings. If you do it the same way as in my lecture then you will end up with exactly the same net saving or net cost.

SOUD SAEED says

Thank you so much got it,,

johnmoffat says

Thats great

deniseyang says

Can I ask a bit off-top question although it’s still quite much about working capital, how UNFUNDED DAYS be calculated? Is that come from A/R days + Inventory Days-Payable days?

musenge 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

johnmoffat says

Your approach is fine, and it comes to exactly the same answer as mine!!!!

Check your arithmetic again – what you have written as the expression is correct, but it comes to 1916667 (not 21666667)

musenge says

Thanks sir

And yes, i did a mistake in calculating the answer

Thank you so much sir

johnmoffat says

You are welcome

saulat 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 . ?

johnmoffat says

I am away from home until Thursday and I do not have Kaplan books with me. I will give you a proper reply when I get home on Thursday.

However, in general you get the marks whichever approach you take (but I will need the check the question on Thursday to check that there is nothing special in the question that you might have missed).

johnmoffat says

Please put a post in the Ask the Tutor forum to make sure that I do not forget to give you an answer on Thursday

saulat says

ok sure THANK YOU

saulat 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 …..

johnmoffat 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.

saulat 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 ?

johnmoffat 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)

saulat says

Thanks alot u erased every confusion of mine regarding this