FM Chapter 5 Questions – Management of working capital (3) – Receivables and Payables
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Sir in Q5 , we consider an invoice of 100 right?
You can use any amount of invoice, but using $100 makes the arithmetic the easiest.
(Have you watched my free lectures on this? 🙂 )
thank you ,yes sir
Please correct Question 2 it mistakenly wrote Admin free instead Admin fee
Sir Please in Question 2, why does the correct answers shows net benefit of $10,000 per year while your working shows net costs of $50,000 per year? which one do we go with and explain further.
I would have thought it is net cost of $10,000 per year since the Overdraft difference saves us $10,000
There is no mention of any overdraft in the question!!!
They save $60,000 a year because there are fewer bad debts. They pay $50,000 a year to the factor. Therefore there is a net saving of $10,000 a year.
I guess you having typo in Question 2 of administration fees, you did wrote as ‘administration “free” which we thought it is saving on administration fees, hope you can amend it, thanks and a have nice day =)
Dear Sir john,
i didnt get the right answer for question 5. my working is like this (1+1%)/(1-1%)^(365/15)-1.
can you clarify it for me??
thankyou in advance.
I do not understand why you want to take (1+1%)/(1-1%).
The cost of the discount over 15 days is 1/99 which is 0.010101 (of 1.0101%).
To turn it into a yearly cost we take ((1 + 0.010101)^(365/15)) – 1
Did you watch the free lectures on this?
Got 100% correct.
This is going to be my first paper in September 2020. If I clear this exam, the whole credit will go to you Sir.
Thank you for your comment 🙂
Hello dear. In question 3 I can’t understand how the expertise of the factor is related to trade receivable management in the firm. As per my understanding going for the factor means giving the management part to him, hence it is not in reality increasing the efficiency. If it is efficient the firm won’t have to go to a factor right? Please correct me if I’m wrong.
If a company itself chases customers to pay their debts then it means employing staff to do the chasing (sending out demand letters, ring up customers who are late etc.) and it costs money to employ people who are good at doing that. For small and medium sized companies it might be cheaper to employ a factor because they specialise in chasing up people to pay and are good at it.
Thank you. Good questions
Helpful questions. Thanks
Hi John
If the Qn has discount allowed and received, the amount to multiply with the discount percentage is the total AR or AP or adjust AR or AP?
Sir for Q1 you did not mention whether it is With recourse or without recourse factoring so i chose option A (2 and 3).
The question asks what may be provided (not what will be provided). They may provide insurance (depending on whether or not we pay for it).
Question 4 does not give the original time it took customers to pay-only says reduced to 60 days- it shouldnt be 365/60-it should be 365 divided by the difference between the receivables period and the period customers would get a discount in?
No – the answer is correct.
The question tells you what the current receivables are. The saving is the interest on the difference between the current receivables and the new average receivables.
Dear Sir
On question 5 I have the following doubts and hope you can enlighten me:
1. Why do we use 1/99? If the discount is 3% then we use 3/97?
2. I get 1 + R = (1 + 0.010101)^(365/15) = 24.579, I have tried many times to make sure I calculate correctly, could you please confirm the answer again?
Thank you very much.
Good Afternoon John,
You and the Opentuition crew are God sent. God bless you.
I need you to clarify question 2, because there is no overdraft interest rate how can I calculate the net cost or benefit for employing the factor?
Thank You
Faith
Since there is no mention of an interest rate, you can ignore any interest benefit.
However, there is the cost of the factor (2% x $2M) + 10,000 = 50,000
and there is the saving in irrecoverable debts (3% x $2M) = 60,000
So a net saving of 10,000.
Thank you.
You are welcome 🙂
Dear sir,
is it misinterpretation that Administration free is saving and then plus $10,000 to earn net benefit of $30,000 per year?
Thank you.
i got 4 out of 5 the last one i just guessed i couldnt understand the meaning, please explan question 5 for me
You need to watch the firstof my free lectures on the management of receivables – then the meaning will become clear.
If you still cannot get the answer then please do post here again and I will show the workings for you.
(and congratulations on getting the other four questions correct 🙂 )
How u get the answer?
To which question?!!
When you submit an answer it tells you whether your answer is right or wrong.
If it is wrong then try again.
If you want the workings for the correct answer, then at the moment the software will not show it (it is something we are working on).
In the meantime, if you want the workings then ask here and I will show them for you.
yes sir, I need to see the working for question 4 and 5. Thank you. 🙂
Question 4:
The new average receivables will be 60/365 x $20M = $3,287,671
Therefore the interest saved will be 12% x (4,000,000 – 3,287,671) = $85,479
Question 5:
The discount is 1/99 = 0.010101 (or 1.010101%) over a period of 15 days (40 – 25).
If the yearly rate is R, then 1 + R = (1 + 0.010101)^(365/15) = 1.2771
R = 0.2771 or 27.71%
(The approach to both Question 4 and Question 5 are dealt with in detail in our free lectures on Receivables Management)