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Working Capital

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Working Capital

  • This topic has 3 replies, 3 voices, and was last updated 1 month ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • April 7, 2021 at 7:15 pm #616283
    adarsh1997
    • Topics: 628
    • Replies: 277
    • ☆☆☆☆

    Hello John

    Jeeps Co is concerned about its cash position and has taken to delaying payments to some
    suppliers in order to ease that problem. Each month the purchase ledger department splits
    the total value of invoices for that month into three categories, A, B and C depending on
    their importance.
    Category A invoices, amounting to $2,000,000, are urgent and paid after 30 days
    Category B invoices, amounting to $3,000,000, are less urgent and paid after 60 days; and
    Category C invoices, amounting to $4,000,000, are least urgent and paid after 90 days.
    Several suppliers have reacted to this by offering Jeeps Co a 2% cash discount if the
    accounts are settled within 15 days.

    Jeeps Co’s cost of capital is 12% per annum.
    Assume that there are 30 days in a month and that purchases accrue evenly over the year.
    (a) Jeeps Co is considering the advantage of the early settlement discount from those it
    currently pays after:
    1 60 days
    2 90 days
    From which payables should Jeeps take the 2% cash discount?
    A 1 only
    B Both 1 and 2
    C 2 only
    D Neither 1 nor 2

    1. My sole issue with this question is that I’ve calculate the “old average payables” and the new one and compare those two figures. What’s wrong with my approach?

    2. I believe that my approach is not correct as in the answer, the formula to calculate the cost of discount was used.

    Thanks

    April 8, 2021 at 9:06 am #616328
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 49602
    • ☆☆☆☆☆

    Your approach would be OK and give the correct answer, but would take a long time given that you would have to do the arithmetic for each option separately. It would take far too long for 2 marks and is not needed. Comparing the effective cost of not taking the discount with the cost of capital is much faster and is more sensible.

    May 30, 2022 at 10:55 pm #656916
    mbangwal
    • Topics: 0
    • Replies: 3
    • ☆

    Hi John, as per the question , Assume that there are 30 days in a month and that purchases accrue evenly over the year.

    however the answer has been calculated considering 365 days in a year.

    is it correct?

    my answer considering 30 days a month coming out to be B. Both 1 and 2.

    however as per the exam kit its A. 1 only. please help

    May 31, 2022 at 8:00 am #656931
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 49602
    • ☆☆☆☆☆

    I do not know where you are finding this question and answer, but on the wording as typed in the original post it should have used 360 days a year.

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