Chapter 16 - Working capital management (AP and AR) Flashcards

1
Q

What are the 2 factors that needs to be balanced to find the optimum level of trade credit?

A
  • Profit improvement from sales obtained by allowing credit
  • Cost of credit allowed
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2
Q

What details must be present on payment terms?

A
  • Price
  • Delivery date
  • Payment date(s)
  • Discounts
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3
Q

For AR, what will the entity’s credit policy be influenced by?

A
  • Demand
  • Competitor’s terms
  • Risk of irrecoverable debts
  • Financing costs
  • Cost of credit control
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4
Q

What are the 4 key aspects of receivables management?

A
  • Assessing creditworthiness of customers
  • Setting credit limits
  • Invoicing promptly and collecting overdue debts
  • Monitoring the credit system
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5
Q

What 2 limits need to be set when setting credit limits?

A
  • Amount of credit available
  • Length of time before payment due
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6
Q

What should the risk associated with a customer’s credit status be based on?

A
  • Customer’s payment record
  • New info obtained
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7
Q

What is the system used to follow up late payments?

A
  • Reminder letter
  • Phone calls
  • Withholding supplies
  • Debt collectors
  • Legal action
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8
Q

What is a collection target?

A

Target for the amount of payments to collect for trade receivables within a given time period

Designed to motivate credit control staff

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9
Q

What are the methods used to review the receivables position?

A
  • age analysis
  • ratios
  • stats
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10
Q

What is the formula for finance cost?

A

Finance cost = receivables balance x interest rate

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11
Q

What is the formula for receivables balance?

A

Receivables balance = sales x (receivables days/365)

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12
Q

What is the formula for the annual cost of discount?

A

Annual cost of discount = (1 + discount/amount left to pay) ^ no. of periods - 1

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13
Q

What is the formula for no. of periods?

A

No. of periods = days weeks or months in a year/no. of days weeks months earlier money is received

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14
Q

What is the annual rate of interest formula?

A

(100/100 - discount%) ^ no. of periods - 1

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15
Q

How is the trade receivables balance worked out when there’s less than 1 year of credit sales?

A

(Sales/365) x Credit sales days

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