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Hi Mr. MikeLittle
can you explain me this point in this question?
271 The finance director of Sandbag knows that the acid test ratio is below 1. He is planning two changes:
Proposal 1: Offering a 2% early settlement discount to credit customers
Proposal 2: Delaying payment to all trade payables by one extra month
What effect would each of these proposals have on the acid test ratio?
A Proposal 1 – increase ratio / Proposal 2 – decrease ratio
B Proposal 1 – increase ratio / Proposal 2 – increase ratio
C Proposal 1 – decrease ratio / Proposal 2 – decrease ratio
D Proposal 1 – decrease ratio / Proposal 2 – increase ratioProposal 1 is clear.
Proposal 2 is also clear in one aspect but on the other hand, if we delay our payments it is certainly true that our cash will be increased furthermore if we delay our payment interests also increases due to late payment and it will increase our current liability if it wasn’t longer than 1 period.There may very well be no ‘interest’ implications – it’s not a common feature in UK commerce to have interest charges on commercial debt
Proposal 1 will worsen the ratio
Proposal 2 will improve the ratio
So my answer is D
(Even if there were interest charges on commercial debts, the interest is not likely to be 100% of the amount payable. So the delay by one month of, say, $100 will possibly increase the interest charge figure by $1 – so that’s still a huge improvement to the ratio)
OK?
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