The management of payables - ACCA Financial Management (FM)
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31 Comments
S
Sohaibb·
Hi, sir I have a confusion related to this topic. The way we calculate the cost/benefit of respective decision, will the opposite party not calculate it the same way? considering a real life scenario. If Yes then only can have benefit and one wont, as the effective cost of accepting the discount and offering are kind of same just from different perspective. and overdraft rates would normally be almost same considering a real life scenario. It would be really nice of you if you could just help me out with these thoughts. I will be waiting for your reply. Thanks.
J
John MoffatTutor·
A benefit to one party is a cost to the other party (and vice versa).
S
Sonal·
Sir, in example 5 we stopped at calculating the percent profit we will have from taking discount. If we calculate the amount. How much that would be. and how to calculate it. please explain
J
John MoffatTutor·
Why would we want to calculate it? The problem we are solving is as to whether or not it is worth taking the discount.
F
Fedde·
So Sir, why is it when we're managing receivables we're calculating the effective interest annual cost of offering the discount but with payables, it is the effective cost of not taking the discount in the workings?
J
John MoffatTutor·
Because with receivables it is worth giving a discount if it costs less than the interest on our overdraft (because getting the money sooner means we can reduce our overdraft).
With payables, if we take the discount then it means paying earlier which increases our overdraft. So we need to compare the cost of not taking the discount and so delaying payment with the cost of the overdraft which would be higher if we did pay earlier.
M
MMA·
Is it necessary to read the articles on ACCA's website?
J
John MoffatTutor·
It is certainly a good idea to read them.
M
MMA·
Do they have extra information relevant to the exam?
J
John MoffatTutor·
It is not that they have extra information, but it is always good to read the same information written in a different way so as to check that you really do understand it :-)
P
PratibhaSupporter·
Hi Sir,
I am little bit confused when to use the effective cost method and when to use the other method of cost and saving. In the example 5- I calculated it using the cost & save method( by taking saving as - 1.5%*100,000 and cost by calculating interest on both 40 days and 15 days, then took the difference between both of them).
Although, I got the same answer that we will accept the offer but now I am doubting my approach.
Thank you for all your help and such great lectures!
J
John MoffatTutor·
In the exam it depends on what the question asks for.
The question may specifically ask for the effective cost, or it may ask for the saving in $'s. However the question will make it clear.
M
mohitgupta·
Hi sir , in the example 4 , are we accepting the discount or not?
i cant clearly understand in the lecture
J
John MoffatTutor·
Example 4 does not ask whether or not we would accept the discount.
It only asks what the effective cost of refusing the discount is.
We would compare this with the overdraft interest to decide whether or not to take the discount, but the question does not state the overdraft interest rate which is why we are not asked for the decision.
S
sohaibmussadiq·
Sir in example 5 alternatively you have not discounted the 100000 as you have not considered the discount rate of 1.5%. Although it is not a significant difference but it doesn't make sense as we would not have to 100000 and the total payable would be 98500.
J
John MoffatTutor·
There is no discounting necessary. We are comparing the cost of not taking the discount with the overdraft interest in order to decide which is better.
P
Pan·
Hi Sir, I am confusing about calculate the payable and receivable.
In what situation we use the method of effective % cost ?
(Such as example 1,4 & 5)
In what situation we use the method to calculate the cost and saving ? (Such as example 2 & 3)
Please explain???
J
John MoffatTutor·
The method you use depends on what information is given in the question.
P
Pan·
Hi Sir, I don't understand, why in example 4, you take the effective cost % is 43.86% you do not take the discount?
But why in example 5, you take the effective cost % is 24.69%, you take the discount?
Please explain???
A
Ali·
I have small question regarding example 5:
can you interpret the % of over draft in order to under stand more clearly the reason behind favoring the discount offer.
what did you mean by "the longer we delay we are saving overdraft interest" and "paying early will increase our overdraft" I just want you to explain to me how its work
J
John MoffatTutor·
When payment is made, the overdraft will increase.
They have to pay interest on the amount of the overdraft, so the longer they delay paying then the longer it is before the overdraft increases and therefore the less interest they have to pay.
Y
yukyo·
Hello, can I ask for example 4 why do you calculate the effective cost of refusing discount with 2/98 instead of 2/100?
J
John MoffatTutor·
But I explain this in the lecture!!!
For every $100 of the invoice, the discount is $2 and therefore they are paying $98 early. By delaying payment of the $98 (and therefore having to pay $100) it is costing them $2.
D
Danford·
Hi Yukyo
Further to John's explanation above you need to remember the formula to annualise the discount. 1-(.02/.98).... 2% being the discount factor, 98% being what you will eventually pay
D
Danford·
Hi Yukyo
Further to John's explanation above you need to remember the formula to annualise the discount. 1+(.02/.98).... 2% being the discount factor, 98% being what you will eventually pay raised to the power(365/n/52/n/12/n) n being the period saved
U
Usman·
I didnt undersdant the finance cost when we took discount
J
John MoffatTutor·
You will have to say which bit you did not understand.
T
tabusheev·
Why you don't calculate average payables current and new? In new variant you will have less cash, so overdraft would be used only for this part of cash. Don't you think that we should calcukate it?
T
tabusheev·
Oh sorry, I think I found an answer myself))
A
Ali·
Hey sir! I have a little query regarding the calculation of period while calculating the annual effective rate of discount.
How is a period of 14.6 practically possible ( if the days are 25 and it is suposed the number of days in a year is 365) .Cant we make the period as 15 instead of 14.6?
Thank you
J
John MoffatTutor·
We are looking at averages and for an average 14.6 is the figure to use even though sometimes it might be 14 days and sometimes 15 days.
With payables, if we take the discount then it means paying earlier which increases our overdraft. So we need to compare the cost of not taking the discount and so delaying payment with the cost of the overdraft which would be higher if we did pay earlier.
I am little bit confused when to use the effective cost method and when to use the other method of cost and saving. In the example 5- I calculated it using the cost & save method( by taking saving as - 1.5%*100,000 and cost by calculating interest on both 40 days and 15 days, then took the difference between both of them).
Although, I got the same answer that we will accept the offer but now I am doubting my approach.
Thank you for all your help and such great lectures!
The question may specifically ask for the effective cost, or it may ask for the saving in $'s. However the question will make it clear.
i cant clearly understand in the lecture
It only asks what the effective cost of refusing the discount is.
We would compare this with the overdraft interest to decide whether or not to take the discount, but the question does not state the overdraft interest rate which is why we are not asked for the decision.
In what situation we use the method of effective % cost ?
(Such as example 1,4 & 5)
In what situation we use the method to calculate the cost and saving ? (Such as example 2 & 3)
Please explain???
But why in example 5, you take the effective cost % is 24.69%, you take the discount?
Please explain???
can you interpret the % of over draft in order to under stand more clearly the reason behind favoring the discount offer.
what did you mean by "the longer we delay we are saving overdraft interest" and "paying early will increase our overdraft" I just want you to explain to me how its work
They have to pay interest on the amount of the overdraft, so the longer they delay paying then the longer it is before the overdraft increases and therefore the less interest they have to pay.
For every $100 of the invoice, the discount is $2 and therefore they are paying $98 early. By delaying payment of the $98 (and therefore having to pay $100) it is costing them $2.
Further to John's explanation above you need to remember the formula to annualise the discount. 1-(.02/.98).... 2% being the discount factor, 98% being what you will eventually pay
Further to John's explanation above you need to remember the formula to annualise the discount. 1+(.02/.98).... 2% being the discount factor, 98% being what you will eventually pay raised to the power(365/n/52/n/12/n) n being the period saved
How is a period of 14.6 practically possible ( if the days are 25 and it is suposed the number of days in a year is 365) .Cant we make the period as 15 instead of 14.6?
Thank you