Chapter 3: 11BP_b (page 250)

McGriff Dog Food Company normally takes 27 days to pay for average daily credit purchases of $9,530. Its average daily sales are $10,680, and it collects accounts in 32 days.
b. If the firm extends its average payment period from 27 days to 37 days (and all else remains the same), what is the firm’s new net credit position? Has it improved its cash flow?

Short Answer

Expert verified

The net credit position is -$10,850 and it has increased the cash flow of the firm.

Step by step solution

Information provided in the question

Average credit purchases = $9,530

Average payment period = 37 days

Average daily sales = $10,680

Average collection period = 32 days

Calculation of accounts receivables

The accounts receivables is $341,760.

$\begin{array}{rcl} Accounts receivables & = & Average daily credit sales \times Average collection period \\ = & $ 10, 680 \times 32 days \\ = & $ 341, 760 \end{array}$

Calculation of accounts payable

The accounts payable is $257,310.

$\begin{array}{rcl} Accounts payable & = & Average daily credit purchases \times Average payment period \\ = & $ 9, 530 \times 37 days \\ = & $ 352, 610 \end{array}$

Calculation of net credit position

The net credit position is $10,850. The firm has improved its cash flow as now it is extending less credit than it is achieving.

$\begin{array}{rcl} Net credit position & = & Accounts receivables - Accounts payable \\ = & $ 341, 760 - $ 352, 610 \\ = & - $ 10, 850 \end{array}$

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January	\(28,000
February	\)19,000
March	\(12,000
April	\)14,000
May	\(8,000
June	\)6,000
July	\(22,000
August	\)26,000
September	\(29,000
October	\)34,000
November	\(42,000
December	\)24,000
Total annual sales	\(264,000

Short Answer

Step by step solution

Information provided in the question

Calculation of accounts receivables

Calculation of accounts payable

Calculation of net credit position

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