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Hi sir
1. In a past paper, (Dec 2015,m ZXC Co.), we were asked what the annual cost of the early settlement discount would be – there were additional admin costs and so I included this in my answer, but it was incorrect!
How do we know when we’re meant to include auxiliary costs stemming from the Early Settlement Discount or just include the raw cost of the discount offered itself?
If a speculator thought they could use fundamental analysis to earn an abnormal return, then would they believe that the mark was weak form efficient only?
Thank you.
1. The examiner certainly does take the additional admin costs into account in his answer. They are listed under ‘costs’ in the answer.
2. Correct.
Thank you sir.
That’s what I thought, but the solution includes the cost of the discount itself only, but does not include the admin cost increase, which is stated in the scenario.
‘What would be the annual cost of the early settlement discount if offered by ZXC Co?’
Would you suggest that we include the annual cost in an objective test question then, even though in this one they did not?
Sorry, sir, another question. In another past question, from my question bank – the business is offered a bulk buying discount, which will triple its order size and the business accepts. The solution says that the cash operating cycle would be unchanged as the increase in inventory value, would increase inventory days, but this is then offset by an equal and opposite increase in payables and paybables days.
Would this therefore also mean that the current ratio would be unchanged because net current assets would be unaltered because of the proportionate increase in the current assets and current liabilities?
Thank you.
But the answer does include the additional admin costs!!!!
Are you looking at the examiners answer?
Under the heading ‘Costs’ it has the following:
Increase in administration costs 35,000
Cost of discount 108,000
Total costs 143,000We always include any additional admin costs.
With regard to your second question, yes – the current ratio will be unchanged.
Hi Sir
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