- This topic has 3 replies, 2 voices, and was last updated 8 years ago by
.
- Posts
Hello!
I have one question in Kaplan Exam Kit which is not clear for me. Could you please help.
This is the task itself:
The following financial information relates to PNP plc, a UK-based firm, for the year just ended.Sales revenue 5,242,000.00
Variable cost of sales 3,145,000.00
Inventory 603,000.00
Receivables 744,500.00
Payables 574,500.00
Segmental analysis of receivables:
Balance Average payment period Discount Irrecoverable
Class 1 200,000 30 days 1.0% None
Class 2 252,000 60 days Nil 12,600
Class 3 110,000 75 days Nil 11,000
Overseas 182,500 90 days Nil 21,900
Total 744,500 45,500
The receivables balances given are before taking account of irrecoverable debts. All sales are on credit. Production and sales take place evenly throughout the year. Current sales for each class of receivables are in proportion to their relative year-end balances before irrecoverable debts.
It has proposed that the discount for early payment be increased from 1.0% to 1.5% for settlement within 30 days.
It is expected that this will lead to 50% of existing Class 2 receivables becoming Class 1 receivables, as well as attracting new business worth 500,000 in turnover. The new business would be divided equally between Class 1 and Class 2 receivables. Fixed costs would not increase as a result of introducing the discount or by attracting new business. PNP finances receivables from an overdraft at an annual interest rate of 8%.
(a) Calculate the net benefit or cost of increasing the discount for early payment and comment on the acceptability of the proposal.
(b) Calculate the current cash operating cycle and the revised cash operating cycle caused by increasing the discount of early payment.I understood calculations provided by Kaplan in general but I still have 2 questions.
1) They calculate proportion of sales using receivables days. Why it is not correct to use proportion of receivables amount (for example, for Class 1: 200/744.5*5,242)? How can we indicate that receivables days should be used from the text of question?
2) Why total revised receivables are different if they are calculated by different ways? We can calculate it through revised sales and will get the following figures (confirmed by Kaplan solution):
Class 1 283,500.00
Class 2 167,000.00
Class 3 110,000.00 (unchanged)
Class 4 182,500.00 (unchanged)
Total 743,000.00
But if we calculate it by adjusting current receivables for new business turnover we will get another total (confirmed by Kaplan solution):
Increase in Class 1 20,548
Increase in Class 2 41,096
Total revised receivables=744,500+20,548+41,096=806,144
Could you please explain this difference and show me my mistake?Please don’t type out whole questions, because of copyright issues. I only have a BPP Revision Kit, but I do have access to all past exam questions and so all you need to do is give me the name of the question and which exam it was in 🙂
(I am actually very surprised that Kaplan still have it in their Exam Kit – partly because it is so old and not the type of question that currently gets set, but also because it was a very poor question – the wording was poor, and also because the examiner said in his own answer that different assumptions could be made regarding bad debts and regarding the payment periods, which would give different answers (but that they were unlikely to change the recommendation!!!))With regard to your first point. It is easier for my to try and explain with a tiny example than in words 🙂
Suppose sales are 1,000 a month. If receivables pay in 1 month then receivables will be 1,000. However, if they take two months to pay then the receivables will be 2,000. The point I am trying to make is that higher receivables in themselves do not mean higher sales – if they take longer to pay then the receivables will be higher even if sales stay the same.
I know the question says that “current sales are in proportion to their relative year-end balances”, but this is where the way it was worded was dreadful.With regard to your second point, I am puzzled because I don’t know why Kaplan has done the first bit (arriving at a total of 743,000). The examiner certainly did not bother doing this – it is not required. The revised receivables are 806,144.
(I have been puzzling for ages trying to work out how they arrived at 743,000 (as I said – I do not have their exam kit and cannot therefore see their answer), but I have no idea how they got the figures!Overall, I would not spend more time worrying about it. As I wrote at the beginning it was a very poor question for several reasons – the examiner recognised this and is almost certainly why he has not asked anything similar since!!!! (He often asks questions calculating whether or not it is worth offering discounts to receivables for early payment, but they are conventional questions of the type I work through in my free lectures on working capital.)
Sorry, didn’t think about copyright, will take it into account in the future.
Thanks a lot for your reply, it helped a lot!
About p.2: in Kaplan solution they calculate at first revised revenue for Class 1 (2,433.3+250+766.5=3,499.8) then calculate new receivables for Class 1 (3,499.8*30/365=283.5). All other Classes match with calculation using another method.
But if these type of questions are not relevant any more I will focus on actual examples.Thank you one more time!
- You must be logged in to reply to this topic.