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In questions I’ve been practising with regards to early settlement discounts and their cost / benefit, I’m unsure whether to apply the discount to the value of credit sales before calculating the receivables level?
From the BPP 2016-17 Study text questions (No. 5 in Section C, “Velm Co”):
The question asked about offering a 1% discount that 2/3rds of customers take up, and it’s affect on profitability.
In this question the Credit sales were 4m and receivables were 550,000 and the average receivables would be reduced to 26 days.
To calculate the new receivables level, the answer in the back of the book suggests we reduce credit sales by 2/3 of 1% to 4m x (1-(2/3 x 1%) = 3,973,333
3,973,333 x 26/365 = 283032 = new receivables level
In the BPP 2016-17 Revision Kit, there are 2 more questions that deal with discounts. One specifically mentions that “credit sales are not expected to change as a result of changes in receivables management” which explains maybe why that question does not reduce the credit sales by the value of the discount, before calculating the new receivables level.
However, the other question does not mention anything like the above at all. It is question 81, KXP Co (which is from the Dec ’12 paper apparently) which again is a company offering a discount and it changing their receivables level. In the answer to this question though, the discount is not applied to the credit sales before calculating the new receivables level.
So what do I do? Do I, unless stated, apply the discount to the sales prior to calculating the receivables level or not?
Thanks in advance, and for answering my previous question.
I rewatched the lecture on Management of Receivables and Payables Examples 2/3 here: https://opentuition.com/acca/f9/management-of-working-capital-management-of-receivables-and-payables-example-2-3/
and noticed you did a similar question based on a 1% discount. In this, you did not reduce the credit sales by the amount of the discount before calculating the new receivables so I will assume that is what I should do in the exam. I still don’t quite understand why I should / shouldn’t apply the discount to the credit sales, although I’m sure I’m just missing something simple.
I do make it clear in my lectures that the examiner is not consistent on this – sometimes he subtracts the discount and sometimes he does not.
The difference resulting is always going to be small anyway, and the examiner has always said that he accepts either (even though the final result will be slightly different).Ah perfect, I must’ve missed where you mentioned that, in my haste.
I appreciate you taking the time and effort to respond. Thank you, this place is a great help to me especially as a self study student!
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