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Dear Sir,
Could you please look into following query for me?
In the course notes example, when calculate the new receivable, it use the (annual sales * average receivable periods/365).
However, in the practice question 4 Ruby plc, it use the annual turnover subtract the discount cost to calculate the new average receivable.
I do not understand why come up two different calculations when they are exactly same situation?There is an argument for doing either. In some answers the examiner subtracts the discount and in some answers he does not! You will get the marks either way (even though the answer comes out to a different figure, the difference is always going to be small).
I didn’t understand completely, but I think you wanted to know this.
Calculation of financing costs ( interest costs) if discount was given ?
I did this, but my answer was wrong, I did what BPP does:
Which is take (annual sales x new receivables days/365), the outcome of this into your Interest %, and subtract the outcome of this with what your finance cost was before the discount policy was introduced..
But according to Sir John you should do [Annual Sales – Discount x new receivables days/365].
Now even I’m confused. But when I do other sums with a discount policy in it, I still get the right answerSir my answer was 25000 benefit, and your answer is 33000 of benefit, i’ve rounded my caclulations to the 000’s so is this difference acceptable ?
And Sir I compare the cost of the two policies. For example.
When there is no discount:
Fin. Cost on Avg. Receivables
+ Admin Costs
+ bad Debts
= xxxx $
After discount:
Fin. Cost on Avg. Receivables
+Cost of Discount
+new bad debts
= xxxx2 $
Now the benefit will be xxxx2 – xxxx.
I hope I don’t need to do the incremental method ( self study has made me comfortable with only this method, it produces the same results on most occassions – Lets say 90% with small rounding off differences)
And Sir at what point do we start rounding our figures off ? I mean under what circumstances.
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