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How to calculate receivable days in this question
The following information is available for Pind Co, a manufacturing company. You are
provided with an extract from the Income Statement:
$
Operating profit 42,000
Interest charges (16,000)
––––––
PBT 26,000
Taxation (5,460)
––––––
20,540
Pind Co has an operating profit margin of 15%. You are provided with an extract from its
Statement of Financial Position:
$
Equity and reserves
Total equity and reserves 420,000
Non current liabilities
Loan 150,000
5% Preference shares 40,000
Current liabilities
Payable 50,000
If Pind Co has a receivables to cash ratio of 2 : 2.5, what are the receivable days (to
the nearest whole day)? _________ days
This is from Kaplan exam kit question number 220I do not have the Kaplan Kit (only the BPP Kit) and so I cannot see the printed question. However, but assuming that you have copied it all correctly it does seem that they have left out part of the question, because there are no details of current assets and/or receivables.
Do they not provide an answer (with workings)? Because that might give us a clue as to the missing information 🙂
THIS IS THE ANSWER WITH WORKINGS GIVEN
26 days
Quick ratio = 0.9.
We know payables is $50,000 and therefore, receivables + cash = $45,000.
As receivables : cash is 2 : 2.5, so receivables = $20,000 and hence receivable days
are: (20,000/(40,000/0.15)) × 365 = 26 daysNowhere in the question as you typed it are you given the quick ratio as being 0.9, and there is no way that it can be calculated from the information as you typed it.
I can only assume that Kaplan omitted it from the question by mistake (or that you did not copy it out in your post).
If we were given the quick ratio to be 0.9, then it would indeed mean that current assets (excluding inventory) would be 0.9 x 50,000 = 45,000.
Since this must be the value of cash plus receivables, then receivables must be equal to
(2/(2 + 2.5)) x 45,000 = 20,000.I guess you are happy with the rest of the answer (arriving at the 26 days) but if not then do ask again 🙂
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