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INTERPRETATION OF FINANCIAL STATEMENTS

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FA – FIA FFA › INTERPRETATION OF FINANCIAL STATEMENTS

  • This topic has 3 replies, 3 voices, and was last updated 3 months ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • May 16, 2022 at 3:17 am #655782
    AbrahamChinYuan
    Participant
    • Topics: 20
    • Replies: 19
    • ☆

    Hi Sir,

    Below is the question from Kaplan exam kit.

    436) In an attempt to increase sales revenue during the year, C Co offered extended credit terms to its major customers. Whilst many major customers took advantage of the extended credit period, C Co did not increase its volume of sales.

    What impact did this have upon the current ratio?

    A There was no change to the current ratio

    B It is not possible to determine the impact on the current ratio as there is insufficient
    information available.

    C The current ratio increased

    D The current ratio decreased

    The answer given is C and the explanation given is

    “If credit customers take advantage of extended credit periods, this will increase trade
    receivables. If all other factors remain unchanged, there will be an increase in current assets
    and, consequently, in the current ratio.

    But i think the answer is A since question mentioned “did not increase its volume of sales”, hence the trade receivables should remain the same and hence the current asset remains

    May 16, 2022 at 6:16 am #655789
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51545
    • ☆☆☆☆☆

    Suppose sales are $1,000 per month.

    If they give 1 months credit then receivables will be $1,000.

    However if they give 2 months credit then they will always be being owed for 2 months sales and therefore the receivables will be $2,000.

    October 6, 2022 at 7:52 pm #668059
    MelodyC
    Participant
    • Topics: 6
    • Replies: 9
    • ☆

    I also think the answer is A. Because if the volume of sales remains with the major customers take advantage of the extended credit terms, then receivables will increase but at the same time cash will decrease since the amount of cash which the company could have received earlier before offering extended credit terms is now confined in receivables. So current ratio should not be affected when the total of numerator(Receivables and cash and inventory) remains same(upward receivables counteracts downward cash)?

    Please tell me what I am misunderstanding here.

    October 7, 2022 at 10:27 am #668081
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51545
    • ☆☆☆☆☆

    The decrease in cash received is only a short term change. Once the credit period has changed then the cash received each month will remain the same (it is just being received later).

  • Author
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