Sir, where are the videos for Example 4 and 5. They are missing. Please work on that too… I’ve understood receivables but due to lack of lectures of payables, i.e example 4 and 5 I no nothing about Payables. Please check it and work on it. Please!

Sir, there is always a difference between the answers of the two approaches i.e the one you set out and the formula given in KAPLAN [ 1 + discount/ amount left to pay] ^ no of periods – 1…….the cost is almost 1% different every time and it can have an impact on the overall decision….

Yes – there is always a difference, and the formula you quote is more accurate.
However it has only been relevant in the exam two times ever (usually it is the more complicated discount problem which needs a different approach) and both times the examiner said he would accept the approximate method. (And both times it was only a couple of marks and did not affect the decision)

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.

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.

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

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%…..

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!

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)

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

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

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.

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

s1234 says

Sir, where are the videos for Example 4 and 5. They are missing. Please work on that too… I’ve understood receivables but due to lack of lectures of payables, i.e example 4 and 5 I no nothing about Payables. Please check it and work on it. Please!

John Moffat says

If you understand receivables, then you should have no problem with payables – it is exactly the same logic as receivables with simple discount.

There are answers to the examples at the back of the course notes, but there will not be an extra lecture recorded.

mahoysam says

That seems similar to the “relevant cost” questions in F5, yet I think much easier! Good stuff! 🙂

Zohaib says

Sir, there is always a difference between the answers of the two approaches i.e the one you set out and the formula given in KAPLAN [ 1 + discount/ amount left to pay] ^ no of periods – 1…….the cost is almost 1% different every time and it can have an impact on the overall decision….

John Moffat says

Yes – there is always a difference, and the formula you quote is more accurate.

However it has only been relevant in the exam two times ever (usually it is the more complicated discount problem which needs a different approach) and both times the examiner said he would accept the approximate method. (And both times it was only a couple of marks and did not affect the decision)

latoyah says

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?

mariasuzanah2 says

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.

mariasuzanah2 says

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

skarotaegle says

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?

chiclarence says

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

skarotaegle says

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 😉

limkimli says

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.

omerchamp says

sir in my understanding example 3 is about factoring not whether to give discount so why you have written we should give discount

annchen says

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!

cris1993 says

Good Work Opentution,,, Just Great ! but what about payables i don’t have any grip on that ..

Talal says

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

aelsewy says

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.

amal123 says

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 ?

John Moffat says

@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)

omoworare says

cool

chicababes1991 says

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

John Moffat says

@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.

chicababes1991 says

@johnmoffat, thank you so much sir

serina1800 says

perfect, thank you 🙂

wendy2001 says

Example 2,60% customers take advantage of the discount, precisely it makes more sense if it is 60% of sales instead of customers.

John Moffat says

@wendy2001, What you say is true, but the examiner usually words it in the same way as me 🙂

undisputed says

I am facing a challenge of not managing to download the video.

admin says

@undisputed, Videos are for watching on line, not downloading

aboobucker says

rely nice…he hs drilled it in our brain:)

tameablebunchy says

The lecturer has worked examples 4 and 5 or you can check the answers in the back of notes.

winwithascent says

@tameablebunchy, hi can you please tell me where the lecturer has worked out examples 4 and 5.

thanks

tameablebunchy says

@winwithascent, Please look at the answer to examples in the back of the lecture notes. you will see the worked example there.

vbalande says

Has anyone worked out examples 4 and 5? Just want to check if my calculations are correct 🙂

tameablebunchy says

@vbalande, Check the answer section in the back of the lecture notes.

suresh320 says

very nice, I understand the concept now..

zsolt8007 says

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

tameablebunchy says

@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.

praveenkaur says

Thanks

annick says

this session was very productive

nyambira says

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

charongwa says

the decision is to employ factor not to offer discount.Really enjoying these.wil conquer F9 this time around

mosingh says

help, video stops at 7.38, is there a problem?