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I have come across a question that has worried me somewhat? Please could you try and explain a good way of working through these sort of questions methodically.
Question
The statement of financial position at 31 March states
Receivables = $550,000
Payables = $590,000info
Receivables pay after an average of 1 and a half months
Trade payables are paid after 2 months
Sales and purchases are made at a constant rate each month and from month to month.Required
Determine the net cashflow attributable to receivables and payables at 31st March to be budgeted in May.
Ok, so the answer is (111,667). That is receivables positive cashflow $183,333 less payables $295,000.
How is this worked out?
Thanks so much for all your help!
I am wondering where you found this question, because it is a very very badly worded question.
Receivables pay after one and a half months, so this means that the average sales are 550,000 / 1.5 = 366,667 per month.
Also it means that every time they invoice, half pay after 1 month and half pay after 2 months (so the average is 1.5 months).
So…..at the end of March, half of the 366,667 will be received in 1 month (April) and half in 2 months (May). So the amount received in May will be 183,333.With payables, the average purchases per month are 590,000 / 2 = 295,000.
So the amount owing at the end of March will be 295,000 from February, and 295,000 from March. The amount owing from February will be paid in April and the amount owing from March will be paid in May.(
What makes it a terribly poor question is that it says the net cash flow “attributable to receivables and payables at 31 March”, and OK the answer is correct (and is as I have typed).
However, the total inflows and outflows in May will not simply be those from 31 March – they will be affected by also by sales and purchases in April. Because it says that sales and purchases are at a constant rate, the total cash received from sales will be 366,667 and the total cash paid to suppliers will be 295,000. They will continue the same each month, and that is what would be much more useful for budgeting!)Thanks John
I must be honest and say i’m slightly relieved that you are unimpressed by the question and really hope this is not the tone of multi choice questions for the future exam. This is an approved ACCA providers question I have purchased on a CD.
Thank you for your explanation, I can see the reasoning now, but i’m not sure I would get there on my own; and In 2 minutes, NO WAY!! I’ve spent a few hours trying to reason what is happening!!
Oh well, I’ll just keep practicing.
I know you are all very busy at OT but will you be putting any resources together on Multi choice questions?
Thanx
River
Ahh, but now you have seen what to do it will not take so long next time you see a question like that 🙂
We will be uploading tests that are like Section A of the exam, to practice on.
However, you must have a Revision/Exam Kit from one of the approved publishers because they are full of exam standard questions (for both Section A and Section B) and practice is more important than anything else.
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