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Management of Receivables and Payables Example 2 and 3
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For example 5 in the course notes i applied the discount when calculating the new payables figure but i noticed that you did not until the end why is this? and would i be marked down in the exam for this difference. i worked it like this:
current payables: 40/365 x 100 000= 10959
New payables : 15/365 x 98.5% x 100000 = 4048
Fall in payables : 6911
Interest on new payables: 6911 x 13% = 898
value of discount 1500-898=602
Take discount due to a savings of $602 for paying early.
would i be way off mark if i worked it like this?
why does these videos get stuck in the middle,like if the video takes 30 minutes it stops at 18min and some don’t play at all .am i the only one facing this problem please help me before its too late.thanks.
why does these videos get stuck in the middle,like if the video takes 30 minutes it stops at 18min .am i the only one facing this problem please help me before its too late.thanks
I am struggling to understand example 4
“A supplier offers a 2% discount if invoices are paid within 10 days of receipt. Currently we take 30 days to pay invoices and therefore do not receive the discount. Calculate the annual % effective cost of refusing the discount.
The solution at the end of the lecture notes given is as follow
Effective cost = 2/98 x 100% over 20 days (30-10) = 2/98 x 365/20 x 100p.a. = 37%p.a.
Where do we get 98 from? is this 100% – 2%=98????
please anyone any comments on this?
Hello sir there is this question in kaplan text on managing receivables. the way it is solved in the ext is not clear to me:
here is the question
Paisley Co has sales of 20m for the previous year and receivables at the year end of 4 million and the cost of financing receivables is covered by an overdraft at the interest rate of 12 percent per anum. it is now considering offering a cash discount of 2 percent for payments of debts within 10 days. should it be introduced if 40 percent of customers will take up the discount
here is how i solved it
receivables days = 4000000/2000000 x 365 = 73 days
if 40 percent take discount
receivables = 0.4 x10/365 x 20000000 + 0.6 x 73/365 x 20000000
= 219178 + 2400000
= 2619178
Interest on receivables = 0.12 x 2619178 = 314301
Discount allowed = 0.02 x 0.4 x 20000000 = 160000
The solution in the text says it is cheaper not to offer the discount and finance the receivables using overdraft but my answer is showing that the interest on over draft is greater than the discount allowed
Here is how I approach this example:
We assume that our receivables throughout the year is 4,000,000
So 4,000,000/20,000,000=73 days is our current receivables
New receivables
40% of the customers will take the discount and will pay us within 10 days – 10×40%=4days
60% of the customers will pay as usual at the end of 73 days – 73×60%=43.8 days
Total new recievables is 47.8 days
20,000,000 x 47.8/365 = 2,619,178 this is our new average receivables after new discount system is introduced
4,000,000 – 2,619,178 = 1,380,822 fall in av. receivables
1,380,822 x 12% = 165,699 savings p.a. after new discount introduced
P.S. scroll down the page there are few comments about the same example
Hi, I would like to know what do we make of the 37% derived from example 4? Is the question incomplete, or do I have to make an assumption?
If my understanding is not wrong, 37% is cost that will face by suppliers to get the cash now (for working capital) by giving out discounts as oppose to borrowing from the bank and having to pay the bank’s interest rate. From a payable/client’s point of view, I will accept this discount if a banks % for overdraft is <37% so that I can borrow and pay off while benefiting from the discount of 2%…..
Please comment.
sir in my understanding example 3 is about factoring not whether to give discount so why you have written we should give discount
I have computed the savings as follows: actually we have managed to reduce our receivables only for 40% of the receipts (20% were already paying within 30 days); this means that we will obtain 40% of the sales of 20 mio 30 days earlier than normal, hence savings would be: 40% x 20 mio x 15% x 30/365 = 98k (difference to the result in the book is round 20k). Could you please advise as to where I am wrong? Thanks!
Good Work Opentution,,, Just Great ! but what about payables i don’t have any grip on that ..
Very nice ….. i have learn a lot from this lecture …
Can there be a question whether to factor or to offer discount , as far as i have done only question deciding whether to offer or not the discount or whether to factor or not …? Thank you
Dear sir, u dnt talk about payables and i found questions about it and also there is something called APR it is a formula and i have different examples and after listening to the lect still i cant solve it so please reply what i can do.
Thanks.
There is a formula in my book
It is percentage of cost of the discount = 1-[100/100-2] x 365/20
Is it just another method of finding out if settlement discount should be taken? or is it something else ?
@amal123, It is the same as what I have done in my lecture!
(Although obviously it is based on days and not months, and it is only correct if the discount is for paying 20 days earlier than otherwise)
cool
dear sir,
after listening to the tuition i tried answering the following question but im not getting the correct answer. can you please help me out.
paisley co has sales of $20 million for the previous year, receivables at the end of $4 million and the cost of financing receivables is covered by an overdraft at the interest rate of 12% p.a. it is now considering a cash discount of 2% for payment of debts within 10 days. should it be introduced if 40% of customers will take up the discount??
my answer was cost of discount $160 000 and savings p.a $261699
4m/20m x 365= 73 days
73 days x 60%= 43.8 days
20m x 43.8/365= $2.4 m
new receivables
10 x 40%= 4
4/365 x 20m= $219178
2400000-219178=2180822
2180822x 12%= 261699
cost of discount 20m x 2% x 40%= $160 000
savings p.a= $261699
the answer in the book is savings of $165699
can you please tell me where is my mistake.
thanks in advance
@chicababes1991, Currently receivables are 4M (we assume that they are at this level throughout the year)
The new receivables will be :
not taking discount: 60% x 73/365 x 20M = 2.4M
plus
taking discount: 40% x 10/365 x 20M = 219,178
So new recbles in total = 2400000 + 219178 = 2619178
So interest saving is 12% x (4M – 2619178) = 165699
(current recbles are 4M throughout the year. In future they will be 2619178 throughout the year. So the interest saving is 12% of the difference,)
Hope that helps.
@johnmoffat, thank you so much sir
perfect, thank you
Example 2,60% customers take advantage of the discount, precisely it makes more sense if it is 60% of sales instead of customers.
@wendy2001, What you say is true, but the examiner usually words it in the same way as me
I am facing a challenge of not managing to download the video.
@undisputed, Videos are for watching on line, not downloading
rely nice…he hs drilled it in our brain:)
The lecturer has worked examples 4 and 5 or you can check the answers in the back of notes.
@tameablebunchy, hi can you please tell me where the lecturer has worked out examples 4 and 5.
thanks
@winwithascent, Please look at the answer to examples in the back of the lecture notes. you will see the worked example there.
Has anyone worked out examples 4 and 5? Just want to check if my calculations are correct
@vbalande, Check the answer section in the back of the lecture notes.
very nice, I understand the concept now..
Calculation of the new receivables after ofering the discount in example 2 should use 99 % of the $20m (as opposed to $20m) multiplied by 54/365 as that is the new sale p.a.. Any thoughts? Thank you
@zsolt8007,
If I understood it correctly you are trying to ascertain whether its worth giving the discount and you have to consider the full receivables, I believe the only time you use a percentage is if the question had said receivables is 20m and we have already collected 1m. Commentst anyone.
Thanks
this session was very productive
this is the only time i have really enjoyed my F9 through the lectures by John Moffat because i understand the concept behind and its now easier for me to tackle most questions
Thank you May God bless you
the decision is to employ factor not to offer discount.Really enjoying these.wil conquer F9 this time around
help, video stops at 7.38, is there a problem?