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Plot Co

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Plot Co

  • This topic has 4 replies, 2 voices, and was last updated 1 year ago by learnsignal123.
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  • February 25, 2024 at 11:33 am #701083
    learnsignal123
    Participant
    • Topics: 16
    • Replies: 26
    • ☆

    Product Q

    The annual demand for Product Q is 456,000 units and Plot Co purchases this product at $1 per unit on 60 days credit. The supplier has offered an early settlement discount of 1% for settlement of invoices within 20 days.

    Other information

    Plot Co holds no cash and finances working capital with short-term finance costing 5% per year. Assume that there are 365 days in each year.

    Which TWO of the following are potential advantages for Plot Co of accepting the early payment discount for Product Q?

    a. A shortening in the operating cycle
    b. An increase in profit margins
    c. Improved business reputation
    d. An increase in the current ratio

    The correct answer is B and C

    Can you please tell me why Option D is incorrect ?

    I chose option D because as you get a early payment discount , you would pay earlier than before hence reducing current liabilities leading to current assets bigger than current liabilities which would mean an increase in the current ratio.

    Using random values Current Assets Ratio :
    Before discount – current assets of 100/ current liabilities of 150 = 0.67
    After discount – current assets of 100/ current liabilities of 50 = 2

    February 25, 2024 at 3:39 pm #701094
    LMR1006
    Keymaster
    • Topics: 4
    • Replies: 1509
    • ☆☆☆☆☆

    Option D is incorrect because accepting the early payment discount for Product Q would not directly result in an increase in the current ratio.

    Accepting the early payment discount would affect the cash position of Plot Co, but it would not directly impact the current assets or liabilities. Therefore, it would not lead to an increase in the current ratio.

    February 25, 2024 at 6:28 pm #701102
    learnsignal123
    Participant
    • Topics: 16
    • Replies: 26
    • ☆

    Thank you !

    February 25, 2024 at 6:37 pm #701103
    LMR1006
    Keymaster
    • Topics: 4
    • Replies: 1509
    • ☆☆☆☆☆

    Your welcome
    You ask good questions :0-)

    February 25, 2024 at 9:34 pm #701121
    learnsignal123
    Participant
    • Topics: 16
    • Replies: 26
    • ☆

    <333

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