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The question:
Option 2: Oscar would be required to accept an advance of 80% of credit sales when invoices are raised at interest rarte of 9% per year.
Overdraft interest rate = 7% per yearOther info:
revenue = $28m, all sales on 30 days credit => credit sales = $28m => Is that correct?revised receivables = $28m * 30/365 = 2,301,369.
My answer is:
Option 2: Additional finance cost = $28m * 80% * (9-7)%But the anwer in the kit is: Additional finance cost = 2,301,369 * 80% * (9-7)%
Why do we use the revised receivables (2,301,369) but not $28m which is the credit sales?
Thanks,
The amount of the receivables is on average 2,301,369 through the year, and on 80% of this they are paying extra interest of 2% a year.
Calculating interest on the entire credit sales would be assuming that all of the sales cost interest for the whole year which is not the case – they only attract interest for the period of credit.
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