ACCA FM Syllabus C. Working Capital Management - Managing Receivables in Practice - Past Papers ^{1 / 5}

It is the middle of December 20X6 and Pangli Co is looking at working capital management for January 20X7.

Forecast financial information at the start of January 20X7 is as follows:

Pangli Co has a gross profit margin of 40%. Although Pangli Co offers 30 days credit, only 60% of customers pay in the month following purchase, while the remaining customers take an additional month of credit.

Inventory is expected to increase by $52,250 during January 20X7.

Pangli Co plans to pay 70% of trade payables in January 20X7 and defer paying the remaining 30% until the end of February 20X7. All suppliers of the company require payment within 30 days. Credit purchases from suppliers during  January 20X7 are expected to be $250,000.

Interest of $70,000 is due to be paid in January 20X7 on fixed rate bank debt. Operating cash outflows are expected to be $146,500 in January 20X7. Pangli Co has no cash and relies on its overdraft to finance daily operations. Thecompany has no plans to raise long-term finance during January 20X7.

Assume that each year has 360 days.

Required:
(b) Discuss FIVE techniques that Pangli Co could use in managing trade receivables. (10 marks)

Nesud Co has credit sales of $45 million per year and on average settles accounts with trade payables after 60 days.

One of its suppliers has offered the company an early settlement discount of 0·5% for payment within 30 days.

Administration costs will be increased by $500 per year if the early settlement discount is taken. Nesud Co buys components worth $1·5 million per year from this supplier.

From a different supplier, Nesud Co purchases $2·4 million per year of Component K at a price of $5 per component.

Consumption of Component K can be assumed to be at a constant rate throughout the year. The company orders components at the start of each month in order to meet demand and the cost of placing each order is $248·44. The holding cost for Component K is $1·06 per unit per year.

The finance director of Nesud Co is concerned that approximately 1% of credit sales turn into irrecoverable debts. In addition, she has been advised that customers of the company take an average of 65 days to settle their accounts, even though Nesud Co requires settlement within 40 days.

Nesud Co finances working capital from an overdraft costing 4% per year. Assume there are 360 days in a year.

Required:
(c) Critically discuss how Nesud Co could improve the management of its trade receivables. (10 marks)

The management of XYZ Co has annual credit sales of $20 million and accounts receivable of $4 million. 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 to 60 days?

A. $85,479
B. $394,521
C. $78,904
D. $68,384

TGA Co, a multinational company, has annual credit sales of $5·4 million and related cost 
of sales are $2·16 million. Approximately half of all credit sales are exports to a European country, which are invoiced in euros. Financial information relating to TGA Co is as follows:

TGA Co plans to change working capital policy in order to improve its profitability. This 
policy change will not affect the current levels of credit sales, cost of sales or net working capital. As a result of the policy change, the following working capital ratio values are expected:

Required:

Discuss the key elements of a trade receivables management policy.

(7 marks)

Calculate the dollar income from a forward market hedge and a money market hedge, and indicate which hedge would be financially preferred by TGA Co.

(4 marks)

Discuss the factors to be considered in formulating a trade receivables management policy.