FM-Ch-9 (Accounts receivable and payable)

A supplier offers a 3% discount for payment within 10 days or full payment within 45 days.

Assuming a 360-day year what is the simple annualised cost of not taking the discount?

• 37.1%

• 1. 36.0%

• 1. 31.8%

• 1. 24.7%

A company has daily sales of $150,000. A debt factor has guaranteed to reduce the company’s receivables collection time by four days for a monthly fee of $2,500. Cash surpluses can be invested in money market deposits yielding 4% per year.

What is the additional annual income/(loss) from using the cash management service?

• 1. $12,000

• 1. $6,000

• 1. $(6,000)

• 1. $(12,000)

Amicable Wireless Co offers customers credit terms of 2% discount for payment within 10 days or full payment within 25 days. 60% of Amicable’s customers take the 2% discount and pay on day 10. The remainder of Amicable’s customers pay on day 30.

What is Amicable’s receivables collection period?

• 1. 12 days

• 1. 16 days

• 1. 18 days

• 1. 20 days

The CFO of a company is concerned about the company’s accounts receivable turnover ratio. The company currently offers customers terms of 3% discount for settlement within 10 days or full payment within 30 days.

Which of the following strategies is most likely to improve the company’s accounts receivable turnover ratio?

• Using invoice discounting

• 1. Changing customer terms to a 1% discount for settlement within 10 days

• 1. Entering into a factoring agreement with a finance company

• 1. Changing customer terms to a 3% discount for settlement within 20 days

Scrimpy Co buys materials from Frugal Enterprises. Frugal offers discount terms of 2% discount for payment within 10 days or full payment within 30 days.

Assuming a 360-day year, what is the annual percentage cost associated with Scrimpy’s failure to take advantage of the discount offered by Frugal?

• 2.0%

• 1. 33.3%

• 1. 36.0%

• 1. 36.7%

Identify, by clicking on the relevant box in the table below, whether each of the following statements about debt factoring and invoice discounting is true or false.
(1) Factoring is with recourse whereas discounting is without recourse
(2) Invoice discounting is usually performed on the entire receivables ledger
(3) Both are relatively cheap sources of finance
(4) Only factoring involves outsourcing the administration of the receivables ledger

• (1) False
  (2) False
  (3) False
  (4) True

• (1) True
  (2) False
  (3) False
  (4) True

• (1) False
  (2)True
  (3) False
  (4) True

• (1) False
  (2) False
  (3) False
  (4) False

The management of XYZ Co has annual credit sales of $20m and accounts receivable of $4m. Working capital is financed by an overdraft at 12% interest per year. Assume 365 days in a year.

What is the annual finance cost saving if the management reduces the collection period by 60 days?

• $394,521

• $395,521

• $384,521

• $395,531

Ling Co has annual credit sales of $4,500,000 and on average customers take 60 days to pay, assuming a 360-day year. As a result, Ling has a trade receivables balance of $750,000. Ling relies on an overdraft to finance this at an annual interest rate of 8%.

Ling is considering offering an early settlement discount to its customers of 0.5% for payment in 30 days. It expects that 25% of its customers (representing 35% of the annual credit sales figure) will pay on 30 days in order to obtain the discount.

If Ling introduces the proposed discount, what will be the NET saving?

• $2625

• $2626

• $2624

• $2627

What role would the money market have in a letter of credit arrangement?

• 1. Initial arrangement of the letter of credit

• 1. Acceptance of the letter of credit

• 1. Issuing of a banker's acceptance

• 1. Discounting the banker's acceptance

The following information has been extracted from a company’s financial records:
What is the company’s receivables turnover?

• 1. 6.0 times

• 1. 7.1 times

• 1. 7.5 times

• 1. 8.0 times