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- This topic has 1 reply, 2 voices, and was last updated 3 years ago by John Moffat.
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- April 19, 2021 at 7:23 pm #618246
Sir can u please correct me here. It is related to chapter 5 (management of receivables):
1) In Receivables, why do we take overdraft from the bank & then pay yearly interest on it? Is it true that we take overdraft because our receivables are getting larger & we need cash to finance our working capital (i.e. Cash) for daily operations?
2) In Payables, we are taking overdraft to pay our suppliers early. And to get the overdraft we need to have large amount of payables otherwise we are going to be refused for the overdraft facility by the BANK. If this is correct why falling in payables which lead to falling in interest on overdraft is not a benefit (but was taken as a COST)?
April 20, 2021 at 6:25 am #618261If receivables are taking longer to pay then if we currently have an overdraft (as is usually the case in the exam) then the overdraft will increase as a result and therefore there will be more interest payable. If we do not have an overdraft then higher receivables will mean a lower cash balance and therefore we will earn less interest. Either way, higher receivables mean more interest payable or lost.
With payables, it. is the other way round. The longer we take to pay liabilities the the lower the average overdraft (or higher the average bank balance and therefore we save interest.
Banks do not give overdrafts on the basis of the amount of the payables, and interest on overdrafts is calculated on a daily basis.
I hope that you are not using the lecture notes without watching the free lectures that go with them, because that would be a waste of time. They are lectures notes, not a Study Text, and it is in the lectures that I work through the examples and explain and expand on the notes. If you are not watching the lectures for any reason then you need to buy a Study Text from one of the ACCA Approved Publishers and study from there.
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