Hi Sir, May I know what’s the “Average Receivable” means? Just feel confused in example 2, Annual sales is 20,000,000 p.a. And the Current Average Receivables (I assume it’s per year) is only 3,452,055. How come the annual sales figure is higher then the Average Receivable p.a.?

Receivables are the amount owing by customers at a point in time. They may sell 20M a year, but you would hardly expect all 20M to still be owing at the end of the year!!!

Receivables reduce because the company is getting the money from them sooner. If they get the money sooner they have more to invest and earn interest, or can reduce their bank overdraft and save interest.

It is part of the calculation of the average number of days. To calculate the average we multiply the days by their probability and add up – in exactly the same way as we calculate expected values in earlier ACCA exams.

In my opinion when calculating question 2 calculation for new receivable you used the sales figure of 20M, you discount for the reduction of the 1% for 60% of 20m as the turnover will fall

Can you please clarify why couldn’t we calculate the savings in interest for lower Average Receivables by calculating the new “effective interest rate” based on the discount given/ fee paid to factors and compounding it to an annual rate, just like how you did it in the previous example of simple settlement discount?

Thank you for your time. This is the first paper that I am trying to learn through online courses and I really enjoyed your lessons.

We could if that was all that was involved. However when there are other savings or costs then it is easier to calculate the overall net cost or saving over the year (and that is what the examiner would actually ask for in this type of question).

The overdraft rate in question 3 was 18%(not 15%) which creates a saving on interest of $195000 and overall the savings is greater than cost of EMPLOY factor

Sun says

Hi Sir,

May I know what’s the “Average Receivable” means? Just feel confused in example 2, Annual sales is 20,000,000 p.a. And the Current Average Receivables (I assume it’s per year) is only 3,452,055. How come the annual sales figure is higher then the Average Receivable p.a.?

John Moffat says

Receivables are the amount owing by customers at a point in time.

They may sell 20M a year, but you would hardly expect all 20M to still be owing at the end of the year!!!

Sun says

Thank you, Sir. I got it!

John Moffat says

You are welcome 馃檪

John Moffat says

Receivables reduce because the company is getting the money from them sooner. If they get the money sooner they have more to invest and earn interest, or can reduce their bank overdraft and save interest.

kelleur says

Hi,

In example 3 I am not sure how the 833333 value with the factoring is better. what does this represents exactly?

John Moffat says

The 83,333 is the new average receivables throughout the year.

bballhawk says

Whoa !!!! No groovy intro music in F9 lectures ?

John Moffat says

馃檪

malikjitin says

Hi John,

In example 2, I do not understand why are taking a percentage of of days. Like 20% of 30.

If 20% of customer pays in 30 days then why do we need to take 20% of 30.

Thanks

John Moffat says

It is part of the calculation of the average number of days. To calculate the average we multiply the days by their probability and add up – in exactly the same way as we calculate expected values in earlier ACCA exams.

malikjitin says

Ah right.

Got it.

Thanks

John Moffat says

You are welcome 馃檪

ramosquagmire says

In my opinion when calculating question 2 calculation for new receivable you used the sales figure of 20M, you discount for the reduction of the 1% for 60% of 20m as the turnover will fall

John Moffat says

I actually mention this in the lecture!! There are arguments both ways and the examiner has always allowed either.

mjibola says

I’m not clear as to why we are multiplying the shortfall in receivables by 15% to calculate interest savings.

The company’s bank overdraft rate is 18% p.a.. Where is the 15% coming from? Or am I using an old F9 note?

John Moffat says

Sorry – it is a mistake and I am going to re-record the lecture. However the answer printed in the lecture notes is correct.

yushengng says

Hello John,

Can you please clarify why couldn’t we calculate the savings in interest for lower Average Receivables by calculating the new “effective interest rate” based on the discount given/ fee paid to factors and compounding it to an annual rate, just like how you did it in the previous example of simple settlement discount?

Thank you for your time. This is the first paper that I am trying to learn through online courses and I really enjoyed your lessons.

Regards,

YuSheng

John Moffat says

We could if that was all that was involved. However when there are other savings or costs then it is easier to calculate the overall net cost or saving over the year (and that is what the examiner would actually ask for in this type of question).

jamalarkoub says

That’s right and the new policy is beneficial as saving will be 215000 which is higher than cost of 200,000.

hope this help not to rerecord lecture.

John Moffat says

Thanks 馃檪

usamaamjad17 says

John, Example 3, Isn’t the overdraft rate 18%? making a net saving of $15000 resulting in employing the factor?

Thanks

John Moffat says

Ooops. Thanks for pointing that out – I must re-record the lecture.

(The answer in the free lecture notes does use 18% and is correct)

ramosquagmire says

The overdraft rate in question 3 was 18%(not 15%) which creates a saving on interest of $195000 and overall the savings is greater than cost of EMPLOY factor