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When calculating the fall in average receivables, should we remove the bad debts from the credit sales first or not?
It depends on what the topic of the question is (cash flow budgets, considering the offering of a discount, the factoring of debts, etc.) and the precise wording of the question.
In that case bad debts will normally be removed, but again it depends on the precise wording of the question.
If you are puzzling over an answer to a specific past exam question or a question in the BPP Revision Kit, then say which one and I will explain.
Q: L Co is considering whether to factor its sales invoices. A factor has offered L Co a non-recourse package at
a cost of 1.5% of sales and an admin fee of $6,000 per annum. Bad debts are currently 2% of sales per
annum and sales are $1.5m per annum.
What is the cost of the package of L Co?
—–In this case would we remove the bad debts if the factor offered with recourse services to calculate the cost of the package?
When the factoring is non-recourse, the company will save the 2% if they employ the factor.
If the factoring was to be with recourse, then the company would not save the 2%.
Sir I understand that but in the case of with recourse factoring when calculating the cost of the package, do we remove the 2 percent first from the sales and then calculate the fee of the factor?
It depends on what the agreement with the factor is – whether it is a % of the sales or whether it is a % of the cash collected.
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