great lecture Prof.
in example 3 .However i dont understand one point. Why have u written “interest saved on reduced receivables”
in my understanding- if we don’t consider the factor, then we pay the interest. But if we do consider the factor, he covers 100% of our debt. There is nothing given about the interest charged by the factor. Is it assumed that the interest rate 18% is also charged by the factor?

Nice lecture… However I came across one issue. Where in Example 3 for the average receivable when using the factor i inputted 2.3/12 as a fraction * $10M which gave me an incorrect answer. I realized I must divide out that fraction to get the answer you got.

In example 2, to calculate the average receivables after discount, why didn’t we take into account the discount as well? I mean, instead of $20m*54/365, why is it not $20m*99%*54/365?

In example 1, for calculating the discount (1% X 60% X 20M) = 120K, why did you then not use the 15% overdraft? I am confused as to why the 15% overdraft is only used when calculating benefits and not costs.

Sir,
Can you please explain in example 5, when rate of effective cost is greater than rate of interest on overdraft, why is it beneficial to the company?

Delaying payment would save us overdraft interest, but would lose us the discount.
Losing the discount costs more than the saved interest therefore it is better to pay early.

Or, the other way of looking at it is that paying early gains us the discount, but means paying more overdraft interest. Again, it is better to pay early if we save more than we lose.

Dear John,
I don’t understand the workings provided in the back of the notes to examples 1 and 4. It’s different to how you taught in the lecture. I get the arithmetic but could you please clarify in your earliest convenience as am sitting September session. Still got a lot to do.
Kind regards
Shahz
p.s your lectures are great as always

yes, I watched the first lecture and I understand how you arrived at it. I checked the answer in the back, it is presented different. I understand the arithmetic but I want to know which way is acceptable in the Exam? Thanks
p.s i downloaded the notes once more to double check

I don’t understand. Both the lecture and the answer at the end of the lecture notes end up with an effective annual cost of 27.75%.

The workings are effectively the same (although how you do your workings is not relevant – simple discounts will only be asked as an MCQ and there nobody looks at your workings)

Hi sir John
Just a slight correction. In eg 2 where u made the recommendation to offer the discount, you really should’ve said used the factor because the question ask about factoring of receivables

When looking at factoring, how would you handle bad debts that existed before the factoring? In addition if the factor is only offering 80% on invoice rates at an interest rate?

Irrecoverable debts existing before using factoring would be ignored. We are looking to see if factoring would be worthwhile as a long term policy for the future. Existing bad debts would be the same whether or not we decided to factor.

The situation where the factor charges interest on advances is dealt with in the revision lectures – I go through an example that it in the free revision notes.

There are no videos for those two examples because the technique is identical to that of simple discounts to receivables.
You can test yourself on them (and, of course, the answers are at the back of the Lecture Notes).

Thank you so much sir !!!.for such a quick reply
one more thing that I want to know..the questions given in Kaplan’s complete text book are sufficient for practice .?

You cannot force the customers to take a discount. However, you will offer one if it costs less that the interest we would otherwise paying – and then we would hope that everyone would take advantage of it

Thank you for your grateful lectures.
I have one question.
In the example 2, when interest saved on lower receivables is calculated, new level of receivables is calculated as 20 million * 54 days/365 days.
1% of discount was offered. 60% of customers are taking the discount. So new level of receivables is 20,000,000 – 120,000 after discount.
Why is new level of receivables calculated as above, and not as follows?
(20,000,000 – 120,000discount) *54days/365 days?.

Certainly you can subtract the discount. In some answers the examiner has subtracted the discount and in other answers he has not – he gives full marks for either.

Sir, why do we not minus the $20k of credit control staff? and do we not need to include overdraft under cost of new policy but under benefits instead?

I mean “why do we not minus the $20k of credit control staff? and why do we not need to include overdraft under cost of new policy but under benefits instead?

The fact the we need fewer credit control staff means that we will save 20,000 if we use the factor. The saving of 20,000 is therefore listed as a benefit of using the factor.

Using the factor will mean that average receivables are reduced throughout the year (because we are collecting money faster). Therefore the overdraft will be reduced, and therefore there will be less interest payable. It is the interest saved that is listed as a benefit.

the management of recievables and payables when I tried some of previous paper exams it will become complicated how can I ease them and the lecturer said first list the costs and then the savings but that didn’t work at all exercises can you show other ways to solve them ease my understanding of this management of receivable and payables

Although you can set out your workings in different ways, the approach is always the same – we need to calculate the costs and the savings resulting from the new policy and make the decision on that basis.

Every question is worded differently and when there is a problem it is in interpreting the question.

If you have problems with any specific past exam question then do ask in the F9 Ask the Tutor forum and I will try and help.

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??

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.)

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).

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.

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.

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.

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.

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.

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.

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?

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??

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 . ?

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).

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 …..

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.

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 ?

Warhorse says

great lecture Prof.

in example 3 .However i dont understand one point. Why have u written “interest saved on reduced receivables”

in my understanding- if we don’t consider the factor, then we pay the interest. But if we do consider the factor, he covers 100% of our debt. There is nothing given about the interest charged by the factor. Is it assumed that the interest rate 18% is also charged by the factor?

Slightly confused. PL Help

Thanks in advance

Damian says

Nice lecture… However I came across one issue. Where in Example 3 for the average receivable when using the factor i inputted 2.3/12 as a fraction * $10M which gave me an incorrect answer. I realized I must divide out that fraction to get the answer you got.

shaafia says

In example 2, to calculate the average receivables after discount, why didn’t we take into account the discount as well? I mean, instead of $20m*54/365, why is it not $20m*99%*54/365?

shaafia says

I’m sorry I meant to say why is it not ($20m-$120k)*54/365?

John Moffat says

You can (and I do say this in the lecture).

Sometimes the examiner ignores the discount in his answers, and sometimes he subtracts it – there are arguments both ways.

However he has always said that he accepts either for full marks (and the difference is always small in the exam).

shaafia says

thank you

John Moffat says

You are welcome

$@M says

Hi Sir,

Thank you for the great videos.

I have a doubt for Ex.4, the ans behind is 44.58%, but as per your calculation for ex.1,

I get 14.45%.

Kindly clarify.

Thanks.

John Moffat says

I don’t know how you got your answer.

The interest is 2/98 (0.020408) over 20 days.

The yearly interest rate = (1.020408)^(365/20) ) -1 = 0.4458 or 44.58%

$@M says

Thank you sir, it was my arithmetical mistake.

Lilit says

Once again thank you !!!!!!!!! You make complicated stuff so easy to understand !!!

John Moffat says

Thanks for the comment – I am pleased it is helping you

ahlaamzk says

Hi Mr. Moffat,

In example 1, for calculating the discount (1% X 60% X 20M) = 120K, why did you then not use the 15% overdraft? I am confused as to why the 15% overdraft is only used when calculating benefits and not costs.

Thanks

ahlaamzk says

Sorry I mean example 2

ahlaamzk says

I figured it out

priyanka says

Sir,

Can you please explain in example 5, when rate of effective cost is greater than rate of interest on overdraft, why is it beneficial to the company?

John Moffat says

Delaying payment would save us overdraft interest, but would lose us the discount.

Losing the discount costs more than the saved interest therefore it is better to pay early.

Or, the other way of looking at it is that paying early gains us the discount, but means paying more overdraft interest. Again, it is better to pay early if we save more than we lose.

priyanka says

Thank you, I understood it.

shahz20 says

Dear John,

I don’t understand the workings provided in the back of the notes to examples 1 and 4. It’s different to how you taught in the lecture. I get the arithmetic but could you please clarify in your earliest convenience as am sitting September session. Still got a lot to do.

Kind regards

Shahz

p.s your lectures are great as always

John Moffat says

Have you watched the first lecture on the management of receivables (this is the second one).

In that lecture I go through example 1 (which is ‘simple’ discounts)and the answer is the same as in the current edition of the free lecture notes.

shahz20 says

yes, I watched the first lecture and I understand how you arrived at it. I checked the answer in the back, it is presented different. I understand the arithmetic but I want to know which way is acceptable in the Exam? Thanks

p.s i downloaded the notes once more to double check

John Moffat says

I don’t understand. Both the lecture and the answer at the end of the lecture notes end up with an effective annual cost of 27.75%.

The workings are effectively the same (although how you do your workings is not relevant – simple discounts will only be asked as an MCQ and there nobody looks at your workings)

Adrian says

Hi sir John

Just a slight correction. In eg 2 where u made the recommendation to offer the discount, you really should’ve said used the factor because the question ask about factoring of receivables

John Moffat says

But example 2 is about discounts, it is example 3 that is about factoring.

Noreen says

When looking at factoring, how would you handle bad debts that existed before the factoring? In addition if the factor is only offering 80% on invoice rates at an interest rate?

John Moffat says

Irrecoverable debts existing before using factoring would be ignored. We are looking to see if factoring would be worthwhile as a long term policy for the future. Existing bad debts would be the same whether or not we decided to factor.

The situation where the factor charges interest on advances is dealt with in the revision lectures – I go through an example that it in the free revision notes.

Raghav says

Hello Sir,

Where are video lectures of Example 4 & 5 (Working Capital Management- Payables Part)?

John Moffat says

There are no videos for those two examples because the technique is identical to that of simple discounts to receivables.

You can test yourself on them (and, of course, the answers are at the back of the Lecture Notes).

Raghav says

Thank you so much sir !!!.for such a quick reply

one more thing that I want to know..the questions given in Kaplan’s complete text book are sufficient for practice .?

John Moffat says

You should really get an Exam Kit because they contain lots of exam standard questions (including past real exam questions), and practice is vital.

DreamerSK says

Hello,

What if 60% of the customers only account for 1% of sales. In practice, would this be accounted for?

John Moffat says

It doesn’t make any difference.

You cannot force the customers to take a discount. However, you will offer one if it costs less that the interest we would otherwise paying – and then we would hope that everyone would take advantage of it

DreamerSK says

I’m still unclear as the calculations are based on the percentage of customers and not the dollar amount they represent.

DreamerSK says

Hello,

What if 60% of the customers only account for 1% of sales. In practice, would this be accounted for?

Thanks in advance.

Irma says

Dear Sir Moffat,

Thank you for your grateful lectures.

I have one question.

In the example 2, when interest saved on lower receivables is calculated, new level of receivables is calculated as 20 million * 54 days/365 days.

1% of discount was offered. 60% of customers are taking the discount. So new level of receivables is 20,000,000 – 120,000 after discount.

Why is new level of receivables calculated as above, and not as follows?

(20,000,000 – 120,000discount) *54days/365 days?.

Best regards

John Moffat says

Certainly you can subtract the discount. In some answers the examiner has subtracted the discount and in other answers he has not – he gives full marks for either.

Irma says

Thank you Mr Moffat

Best regards

Erica says

Sir, why do we not minus the $20k of credit control staff? and do we not need to include overdraft under cost of new policy but under benefits instead?

Erica says

I mean “why do we not minus the $20k of credit control staff? and why do we not need to include overdraft under cost of new policy but under benefits instead?

John Moffat says

The fact the we need fewer credit control staff means that we will save 20,000 if we use the factor. The saving of 20,000 is therefore listed as a benefit of using the factor.

Using the factor will mean that average receivables are reduced throughout the year (because we are collecting money faster). Therefore the overdraft will be reduced, and therefore there will be less interest payable. It is the interest saved that is listed as a benefit.

bona007 says

Is the net cost $46,027 ($120000-$73973) in question 2?

John Moffat says

Yes it is. (There are answers to all of the examples at the back of the course notes – it is listed on the contents page.)

Abdullahi says

the management of recievables and payables when I tried some of previous paper exams it will become complicated how can I ease them and the lecturer said first list the costs and then the savings but that didn’t work at all exercises can you show other ways to solve them ease my understanding of this management of receivable and payables

John Moffat says

Although you can set out your workings in different ways, the approach is always the same – we need to calculate the costs and the savings resulting from the new policy and make the decision on that basis.

Every question is worded differently and when there is a problem it is in interpreting the question.

If you have problems with any specific past exam question then do ask in the F9 Ask the Tutor forum and I will try and help.

Abdullahi says

Working Capital part at the side of recievables and payables when I tried some of previous Paper it will become complicated how can I ease them

Abdullahi says

I want to print out the F9 lecture notes, how can

John Moffat says

If you download them first, you should be able to print them out as normal.

Queenie 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

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.)

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!

John Moffat 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 ??

John Moffat 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

John Moffat 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

John Moffat 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 ???

John Moffat 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

John Moffat 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.

John Moffat 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,,

John Moffat 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

John Moffat 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

John Moffat 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 . ?

John Moffat 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).

John Moffat 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 …..

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.

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 ?

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)

saulat says

Thanks alot u erased every confusion of mine regarding this