- May 4, 2021 at 10:44 pm #619684Syed Ahsan AliMember
- Topics: 111
- Replies: 69
Sir, I have seen the lecture on this topic but I was confused with few doubts such as:
1) In receivable, we take overdraft because our customers are taking longer to pay & we don’t have much cash to pay for our day-to-day operations which force us to taku up the overdraft from the Bank. [correct?]
2) In payable, the longer we take to pay liabilities the lower the overdraft (therefore we save interest on overdraft) because we have much cash to pay for our day-to-day operations by delaying payments to our suppliers and therefore we only take a lower amount of overdraft as per our need.
(Is it true that the reason behind either taking up the discount from the supplier or taking up overdraft is higher of discount or overdraft?)
3) Is it true that in both cases (receivable & payable) we are taking overdraft because we have a cash shortage which will be met by taking up the overdraft?
4) In receivable: we are taking overdraft because we have a cash shortage & we have two choices either to take up overdraft for liquidity issues or offer the discount to customers to pay early?
5) In payable: we are taking overdraft because we have a cash shortage & we have two choices either to take up overdraft for liquidity issues or take up the discount from the supplier by pay early?
Please correct me if I am wrong anywhere!May 5, 2021 at 8:29 am #619711John MoffatKeymaster
- Topics: 57
- Replies: 51532
1 and 2 are both correct.
3 is correct although even if we did not have an overdraft then instead of the overdraft increasing and therefore paying more interest, then our cash at the bank would reduce and therefore we would lose interest which has the same effect.
4 is correct
5 is the wrong way round. Taking the discount means paying earlier which increases the overdraft. Therefore we will only take the discount if the effective benefit of the discount is more than the interest on the overdraft.
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