Management of Working Capital – Introduction – ACCA Financial Management (FM)
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In the notes, it is said working capital does not earn profit directly, it is the non-current asset that do. what about the case pf the retailer, who buys an inventory, let says a bottle of water and sells it. Wont he/she be making profit on a non-current asset, an Inventory? or are they considered purchases and not non-current assets?
Why did you use “Purchases of raw materials” for the payables days calculation and not Cost of goods sold?. Isn’t this the assumed total cost for all inventory finished or not not just raw materials?
Payables days is the number of days they to pay suppliers for goods bought from them, regardless of whether or not the items they produce have been sold.
Why do we refer to it as average receivables in the formula for calculating receivable day?
According to Efficiency ratios:
Receivables’ turnover = Credit sales p.a./Average receivables which shows how quickly outstanding receivables are collected.
However, in Example 1: Receivables Days = Average receivables / Credit sales – WHY?? Please, can someone or the dear tutor shed some light on this confusion for me?
Thanks,
Receivables days is measuring how many days credit customers are taking (i.e. how many days it is before they pay).
Hi, Receivable turnover and Receivable Days are two different measures that is why the way on how to compute them are also different. hope this helps thanks
About the “Average”, should we caculate Average receivable = (0+Receivable)/2 ?
because the annual account usually mean the number in year end, and the problem didn’t give us the number of receivable in the beginning year… so i assume that there was 0 receivable in beginning.
The assumption of the opening balance being Zero is assumed only when the business is a new business.
Normally if no information is given regarding when the business has started and no opening balance is specified, the closing balance is taken as average balance.
Thank you.
Concept of Working capital cycle well explained and illustrated , thank you
The equation for calculating receivables days from the question is Receivables days = Ave receivables / credit sales X 365.
To note the question assuming 365 days and there’s no clear mention of credit sales hence we assume that sales in the question is credit sales since there is no additional information regarding credit sales. Hope that clarifies your question.
The equation for calculating receivables days=Credit sales p. a. /Average inventory as per the note but it is not calculated as per the equation, why is receivables are divided by sales?( in example 1)