3(a) - The requirement here was to advise whether a factor’s offer was financially acceptable to a company. Many candidates gained good marks, although a significant number of answers were poorly organised and difficult to follow.
The recommended approach is to think in terms of costs and benefits. The suggested answer calculates costs and benefits in an incremental way, however a before and after approach is also possible.
Calculating the saving in bad debts as $187,250 per year is an incremental calculation, while noting that bad debts change from $267,500 to $80,250 if the factor’s offer is accepted is part of a before and after approach.
Some candidates ignored the instruction in the question to assume that there were 360 days in each year.
A number of candidates lost marks because of errors relating to trade receivables. For example, the factor offered to reduce average trade receivables days to 35 days, so the revised trade receivables figure was credit sales multiplied by 35/360: a number of answers multiplied current trade receivables by 35/360 instead.
Some answers incorrectly based bad debts on trade receivables instead of credit sales.
The terms of trade required customers to settle within 40 days, but on average they took longer: some answers calculated a trade receivable figure using 40 days and based their analysis on this, rather than on the trade receivables figure provided in the question.
Calculations of interest costs were a regular source of mistakes. From an incremental point of view, there were two elements: a reduction in interest costs arising from the decrease in the average level of trade receivables, and an increase in interest costs arising from the advance of 80% of the new level of trade receivables at 2% more than the 5% interest rate currently paid by the company.
A number of answers mistakenly based interest rate calculations on credit sales rather than trade receivables. Some candidates used 7% as the incremental interest rate, rather than 2%, failing to recognise that the company currently paid 5%.
Some answers treated the interest cost of the advance as a benefit rather than a cost. It is suggested that many candidates would benefit from using a structured approach to questions like this, leading to a structured way of laying out their calculations.
3(b) - Candidates were asked here to briefly discuss how the creditworthiness of potential customers could be assessed. Many answers gained full marks and the suggested answer indicates appropriate points to discuss.
A number of answers, however, lost marks as a result of discussing unnecessary material and thereby failing to address directly the question requirement.
For example, although the question asked about credit analysis, some candidates offered (perhaps memorised) answers discussing credit analysis, credit control and collection of amounts owing, with only a small part of the answer relating to the question requirement.