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Dear Professor,
2018 : payable days = 257/2600*365 =36 days………………………2017 payable days = 28 days
what i understand here is the company would take an advantage of improved cash flow due to the extra money that they postpone to pay to vendors.
I guess X/2600*365=8 days then X is 57 million dollars, so the company has extra 57 million dollars available for 8 days.
However, in Answer sheet,
Average payable days have increased and are now beyond the 30 days normal for this business. this will create a cash drain for the business removing the opportunity to find some internal investment from internally generated funds.
I do not understand why it is written cash drain? in fact, cash flow is improved due to delayed payments.
moreover opportunity to find some internal investment? what kind of internal investment are they talking about?
it is hard to get big picture…
please kindly help me to digest =) using simple concept.
Best regard
Your studentHello Sir,
I am talking about ONE ENERGY PLC question
the question requires me to show the clear sign that the company was in difficulty and do further investigation using financial information.
ONE ENERGY PLC Purchased the software from RiteSoftware co, but the company became bankrupt so no longer to get the further service from the company.
so above calculation is one of the investigation that we could have done before purchasing the software from Rite co.
the below is the report for Rite co.
2018
cos 2600
payable 2572017
cos 2300
payable 178so through the payable days investigation,
i can’t see any “cash drain for the biz removing the opportunity to fund some internal investment from internally generated funds”
more payable means more cash flow, but why answer sheet states that “cash drain”?
that’s my question sir.
thank you
First the question does NOT ask you to show a clear sign that the company is in difficulty. It asks you to assess the validity of W&P’s conclusion – which might be completely incorrect.
The ACCA answer sheet mentions nothing about a cash drain, so I assume you are looking at a different answer – perhaps incorrect. Slowing payment to suppliers is not a cash drain though there might be other problems as set out below.
You are correct in saying that delaying payment to suppliers will keep cash in the business for longer, but this can only go on for so long and can be expensive if slow payment means a loss of discount. Additionally, suppliers might begin to get nervous and to stop selling to the company. Therefore, large increases in supplier payment days generally imply a problem with cash flow as the company is using suppliers as a permanent source of capital.
A Google search on ‘One Energy plc ACCA’ will locate sites where the original ACCA answer can be found.
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