receivables & payables management

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This topic contains 10 replies, has 2 voices, and was last updated by Avatar of johnmoffat John Moffat 1 year, 5 months ago. This post has been viewed 37 times

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  • Avatar of Miss A..
    Miss A..
    Participant
    • Topics: 27
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    Sir, how come we know there is net benefit in case of payables & receivables?

    and what’s the formula of net benefit?


    Avatar of johnmoffat
    John Moffat
    Keymaster
    • Topics: 3
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    There is no formula.

    You have to list the costs and the benefits (over a year) and then decide if there is a net benefit or a net cost.

    Have you watched my lecture on this?


    Avatar of Miss A..
    Miss A..
    Participant
    • Topics: 27
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    yes, i have watched.
    Sir, I couldn’t understand how do we have net benefit in example 5 of chapter 5???

    I have understood the calculation but i am unable to understand the conclusion.
    ”Effective cost of discount is 22% > 13% overdraft interest , so we take the discount”. Why????


    Avatar of Miss A..
    Miss A..
    Participant
    • Topics: 27
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    Isn’t it like this that if we are payables we could take discount if it costs higher than overdraft interest and vice versa.
    And if we are are receivables , we wont give discount if it costs higher than overdraft interest and vice versa.

    Am i right???


    Avatar of johnmoffat
    John Moffat
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    • Topics: 3
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    In example 5, it is costing us 22% if we do not take the discount.
    But if we do not take the discount then we pay later and save only 13% in overdraft interest.
    It is better therefore to take the discount and pay early – we will gain 22% from the discount and only lose 13% from the extra overdraft interest.

    Your second message is correct and agree with what I have just typed above :-)
    (because example 5 is payables)


    Avatar of Miss A..
    Miss A..
    Participant
    • Topics: 27
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    ok


    Avatar of Miss A..
    Miss A..
    Participant
    • Topics: 27
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    anyways , what is overdraft interest?


    Avatar of Miss A..
    Miss A..
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    • Topics: 27
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    and when we pay extra overdraft interest?


    Avatar of johnmoffat
    John Moffat
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    An overdraft is a negative bank balance. You have to pay interest on a negative bank balance. If you pay payables early then you will have a bigger overdraft and therefore pay more interest.


    Avatar of Miss A..
    Miss A..
    Participant
    • Topics: 27
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    how come is that If we pay payables early then we will have a bigger overdraft??


    Avatar of johnmoffat
    John Moffat
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    • Topics: 3
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    Because paying payables means that you are paying out cash!

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