串讲提分专场二带上课笔记讲义

ChapterWorkingCapitalFinancingandSection22Section13 MindTypesofPermanentPermanentcurrentCurrentTemporarycurrentNon-current WorkingCapitalFinancingand WorkingCapitalFinancingand

关 资本结

3kindsofworkingcapitalfinancingModerateAbalancebetweenriskandreturnmightbebestachievedbythemoderateapproachFluctuationPermanentFixed,aofmaturitymatchinginwhichlong-termFluctuationPermanentFixed3kindsofworkingcapitalfinancingConservativeAllnon-currentassetsandpermanentcurrentassets,aswellaspartofthefluctuatingcurrentassets,arefinancedbylong-termfunding.FluctuationCAPermanentCAFixed 3kindsofworkingcapitalfinancingAggressiveFluctuationPermanentFixedNotonlyarefluctuatingcurrentassetsallfinancedoutofshort-termsources,butsoFluctuationPermanentFixedTheconservativeworkingcapitalinvestmentmeansrelativelylargeamountsofcash,marketablesecurities,andinventoriesarecarriedandtradecreditsarelittletaken.Ithasahigherlevelofinvestmentincurrentassets.Conversely,withtheaggressiveinvestment ,theholdingsofcash,securities,inventories,andreceivablesareminimisedandtradecreditsarefullyused.Undertheaggressive,alowerleveloffundsareinvestedincurrentassets.ThemoderateinvestmentisbetweenthetwoQuestion4Criticallydiscussthesimilaritiesanddifferencesbetweenworkingcapitalpoliciesinthefollowingareas:WorkingcapitalWorkingcapitalQuestion4Workingcapitalinvestment isconcernedwiththelevelofWorkingcapitalfinancing isconcernedwiththerelativeWhileworkingcapitalinvestment isthereforeassessedonaninvolvesysisoffinancialinformationforonealone.Question4Workingcapitalfinancingusesanysisofcurrentassetsintopermanentcurrentassetsandfluctuatingcurrentassets.Workingcapitalinvestmentdoesnotrequirethisysis.Permanentcurrentassetsrepresentthecorelevelofinvestmentincurrentassetsthatsupportsagivenlevelofbusinessactivity.Fluctuatingcurrentassetsrepresentthechangesinthelevelofcurrentassetsthatarisethrough,forexample,theunpredictabilityofbusinessoperations,suchastheleveloftradereceivablesincreasingduetosomecustomerspayinglateorthelevelofinventoryincreasingduetodemandbeinglessthanpredicted.Question4Workingcapitalfinancing reliesonthematchingprinciple,whichisnotusedbyworkingcapitalinvestment Thematchingprincipleholdsthatlong-termassetsshouldbefinancedfromalong-termsourceoffinance.Non-currentassetsandpermanentcurrentassetsshouldthereforebefinancedfromalong-termsource,suchasequityfinanceorbondfinance,whilefluctuatingcurrentassetsshouldbefinancedfromashort-termsource,suchasanoverdraftorashort-termbankloan.Question4Bothworkingcapitalinvestment usethetermsconservative,moderateandaggressive.Ininvestment ,thetermsareusedtoindicatethecomparativelevelofinvestmentincurrentassetsonanpanybasis.One hasamoreaggressiveapproachcomparedtoanother ifithasalowerlevelofinvestmentincurrentassets,andviceversaforaconservativeapproachtoworkingcapitalinvestment Inworkingcapitalfinancing ,thetermsareusedtoindicatethewayinwhichfluctuatingcurrentassetsandpermanentcurrentassetsarematchedtoshort-termandlong-termfinancesources.Question4Anaggressivefinancing meansthatfluctuatingcurrentassetsandaportionofpermanentcurrentassetsarefinancedfromashort-termfinancesource.Aconservativefinancing meansthatpermanentcurrentassetsandaportionoffluctuatingcurrentassetsarefinancedfromalong-termsource.Anaggressivefinancing willbemoreprofitablethanaconservativefinancingbecauseshort-termfinanceischeaperthanlong-termfinance,asindicatedfordebtfinancebythenormalyieldcurve(termstructureofinterestQuestion4However,anaggressivefinancingwillberiskierthanaconservativefinancingbecauseshort-termfinanceisriskierthanlong-termfinance.Forexample,anoverdraftisrepayableondemand,whileashort-termloanmayberenewedonlessfavorabletermsthananexistingloan.Providedinterestpaymentsaremade,however,long-termdebtwillnotleadtoanypressureonaandequityfinanceispermanentcapital.Overall,therefore,itcanbesaidthatwhileworkingcapitalinvestmentandworkingcapitalfinancingusesimilarterminology,thetwopoliciesareverydifferentintermsoftheirmeaningandapplication.Itisevenpossible,forexample,fora tohaveaconservativeworkingcapitalinvestment whilefollowinganaggressiveworkingcapital Question5Identifytheobjectivesofworkingcapitalmanagementanddiscussthecentralroleofworkingcapitalmanagementinfinancialmanagement.Question5Theobjectivesofworkingcapitalmanagementareusuallytakentobeprofitabilityandliquidity.Profitabilityisalliedtothefinancialobjectiveof isingshareholderwealth,whileliquidityisneededinordertosettleliabilitiesastheyfalldue. musthavesufficientcashtomeetitsliabilities,sinceotherwiseitmayfail.However,thesetwoobjectivesarein ,sinceliquidresourceshavenoreturnorlowlevelsofreturnandhencedecreaseprofitability.Aconservativeapproachtoworkingcapitalmanagementwilldecreasetheriskofrunningoutofcash,favouringliquidityoverprofitabilityanddecreasingrisk.Conversely,anaggressiveapproachtoworkingcapitalmanagementwillemphasiseprofitabilityoverliquidity,increasingtheriskofrunningoutofcashwhileincreasingprofitability.Question5WorkingcapitalmanagementiscentraltofinancialmanagementforseveralFirst,cashisthelife-bloodofa ’sbusinessactivitiesandwithoutenoughcashtomeetshort-termliabilities,a wouldfail.Second,currentassetscanaccountformorethanhalfofa ’sassets,andsomustbecarefullymanaged.Poormanagementofcurrentassetscanleadtolossofprofitabilityanddecreasedreturnstoshareholders.Third,forSMEscurrentliabilitiesareamajorsourceoffinanceandmustbecarefullymanagedinordertoensurecontinuingavailabilityofsuchfinance.Thank感谢您选择高顿ACCAChapterGeneralKnowledgeofWorkingCapitalSection52Section36-10 Mind1.WorkingcapitalGrossGrossworkingNetworkingMeasurementinCashoperaingMeasurementinQuikSales÷networkingMeasurementin1.WorkingcapitalWorkingcapitalisthecapitalavailableforconductingtheday-to-dayoperationofanorganizationasaformofliquidresources.MeasurementinGrossworkingGrossworkingcapitalsimplyreferstocurrentassetsusedinNetworkingNetworkingcapitalisdefinedascurrentassetsminuscurrentliabilities.(Net)Workingcapital=Currentassets-CurrentliabilitiesThesizeofthisnetfigurehasadirecteffectontheliquidityofanMeasurementinWorkingCurrentWorkingCurrentCurrent

MeasurementinPayableRawRawFinishedCreditCash

In CreditCreditCashCashOperatingCycle=Inventorydays+Receivabledays-PayableTheinventoryInventoryInventorydaysAverageCostofCovertmaterialsintoCovertmaterialsintofinishedCostCostofsales÷AverageThereceivable ReceivabledaysReceivabledaysAveragereceivableCreditCovertthefirm’sreceivablesintocashCreditCreditsales÷AveragePayableThepayablePayablePayablePayabledaysAveragecostofPayableFromPayableFromthepurchaseofmaterialsintoPaycashforthem÷CostCostofpurchases÷AverageAnswerDiscusswhetheraworkingcapitalcycleshouldbepositiveorIftheworkingcapitalcyclehadbeennegative,a wouldhavebeenreceivingcashfromitscustomersbeforeitneededtopayitstrade Awhichdoesnotgivecredittoitscustomers,suchasasupermarketchain,canhaveanegativeworkingcapitalcycle.Evenifcompaniesmightgenerallyprefertobepaidbycustomersbeforetheyhavetopaytheirrs,thequestionofwhethertheworkingcapitalcycleshouldbepositiveornegativethatcompaniesareabletomakesuchachoice,butthisisnotusuallythecase.Thisisbecausethelengthoftheworkingcapitalcycledependsonitselements,whichareinventorydays,tradereceivablesdaysandtradepayable,andtheseelementsusuallydependonthenatureofthebusinessundertakenbyaandthewaythatbusinessisconductedbyitscompetitors.Thelengthoftheworkingcapitalcycleisusuallythereforesimilarbetweencompaniesinthesamebusinesssector,butcandifferbetweenbusinesssectors.MeasurementinCurrentCurrentratio

CurrentassetCurrentliabilityCurrentratiomeasureshowmuchoftotalcurrentassetisfinancedbycurrentliability.Thecurrentratioisthestandardtestofliquidity.1.3MeasurementinQuickQuickratioCurrentassetCurrentQuickratio,alsoknownasacidratio,measureshowwellcurrentliabilitiesarecoveredbyliquidassets.Companiesareunabletoconvertalltheircurrentassetsintocashveryquickly.Inbusinesseswhereinventoryturnoverisslow,mostinventoriesarenotveryliquidassets,andthecashcycleislong.1.3MeasurementinSales/Networking

Networking Currentasset-CurrentItshowsthelevelofworkingcapitalsupportingsales.Workingcapitalmustincreaseinlinewithsalestoavoidliquidityproblemsandthisratiocanbeusedtoforecastthelevelofworkingcapitalneededforaprojectedlevelofsales.•Ensurecurrentassetsaresufficienttominimisetheriskof•EnsurecurrentassetsaresufficienttominimisetheriskofThemainobjectiveofworkingcapitalmanagementistogetbalanceofcurrentassetsandcurrentliabilityandbalanceofprofitabilityandliquidity. Investinginlesscurrentassetsinorderto Ifthereareexcessiveinventories,accountsreceivableandcash,andveryfewaccountspayable,therewillbeanoverinvestmentbytheincurrentassets.Workingcapitalwillbeexcessiveandtheinthisrespectwillbeover-capitalised.Sales/networkingLoworLiquidityHighorLonginventoryandaccountsreceivabledaysShortaccountspayabledays3.Over-capitalizationandunder-3.2under-Incontrastwithover-capitalisation,overtradinghappenswhenabusinesstriestodotoomuchtooquicklywithtoolittlelong-termcapital,sothatitistryingtosupporttoolargeavolumeoftradewiththecapitalresourcesatitsdisposal.Evenifanovertradingbusinessoperatesataprofit,itcouldeasilyrunintoserioustroublebecauseitisshortofcash.Suchliquiditytroublesstemfromthefactthatitdoesnothaveenoughcapitaltoprovidethecashtopayitsdebtsastheyfalldue.3.2under-Indicatorsof Sales/networkingShort-termfinance↑,long-termfinance× Accountspayable&overdraft↑Currentassets↑ Accountsreceivable&inventory↑ Currentratio&quickTurnoverperiod↑ Accountsreceivable&inventorydays↑Profitmargin↓3.2under-Solvingover-Therearethreeapproachestosolvetheover-tradingCutbacktradingandrestricttherateofexpansionuntilthebalancebetweenthelevelofbusinessactivityandtheamountoflong-termfinancecouldberestoredandthehasconsolidateditsfinancialposition.(2015/SDSampleRaisenewlong-termcapitalbyequityorlong-termloans.Toomuchnewlong-termliabilityisnotsuggestedasinterestneedstobepaid,whichwillhavenegativeeffectsonnetprofitandcashflowandwillincreasethefinancialgearing.ImproveworkingcapitalmanagementThank感谢您选 ACCA本节结束Chapter ManagementofWorkingSection42Section55-14Chapter5MindTypesofinventoryOrderingOrdering

ShortageCostforacquirinCostforacquiringtheinventoryDelivery

ContributionCostofExtracostof0+Amountperorder1.10+Amountperorder+++HoldingOrdercostsperorder×OrderHoldingcostsperunitperyear×𝐞𝐯Price×𝐀𝐧Ordertimes×Amountper1.1TypesofinventoryAverageinventorylevel=Re-orderamount÷Averageinventorylevel=(Openinginventory+Endinginventory)÷ XAveragety Economic ty–D=usageinunitsforoneperiod(thedemand)Co=costof cingoneorderCh=holdingcostperunitofinventoryforoneperiodrelevantcostsonlyQ=re-order AnnualTheorder ty,EOQ,whichwillminimisethesetotalcostsis:

Total

TotalTotalannualinventorycost DC0Qh2EOQ2C0

OrderingtyperQuestionFirmXfacesregulardemandof150unitspermonth,itordersfromitsratapurchasecostperunitof£25.Eachordercosts£32,andholdingcostis18%p.a.ofthepurchaseprice.Calculatetheeconomicorderty,andtheaverageinventoryCalculatetotalinventoryrelatedcostatthiseconomicorderQuestion1EOQ

2×150×12×32=25×Averageinventorylevel=160=2Totalinventorycosts=1800×25+25×0.18×80+32×1800=EOQwithbulkThesolutionobtainedfromusingthesimpleEOQformulamayneedtobemodifiedifbulkdiscounts(alsocalled tydiscounts)areavailable.Todecidemathematicallywhetheritwouldbeworthwhiletakingadiscountandordering ties,itisnecessarytominimise:Totalpurchasingcosts+Orderingcosts+InventoryholdingThetotalcostwillbeAtthepre-discountEOQlevel,sothatadiscountisnotworthwhile;AttheminimumordersizenecessarytoearntheQuestionUsingthesameinformationgiveninquestionFirmXfacesregulardemandof150unitspermonth,itordersfromitsratapurchasecostperunitof£25.Eachordercosts£32,andholdingcostis18%p.a.ofthepurchaseprice.Calculatetheminimumtotalcostassumingthefollowingdiscountapplies:Discountof1%givenonordersof150andoverDiscountof2%givenonordersof300andoverDiscountof4%givenonordersof800and2×150×12×2×150×12×25×0.99×EOQ=1800×25×800×25×0.18×232×PurchasingPurchasingHolding161×25×0.18×21800×25×300×25×0.18×32×32×1800×25×2EOQwithbuffer01.2.3EOQwithbuffer1.2.3EOQwithbufferFortheexistenceofuncertaintyindemandandleadtimefromcinganordertoreceivingthematerials,theorderneedstobecedwhenthere-orderlevelisreachedandbuffersafetylevelneedstobeestablishedtowarnthemanagementthatinventoryisapproachingadangerouslevel.Buffersafetylevel=Re-orderlevel-Averageusage×AverageleadRe-orderlevelAverageinventorylevel=usage×umleadtime.safetylevel+Re-orderamount/2Re-orderlevelAverageinventorylevel=Useofare-orderlevelbuildsinameasureofsafetyinventoryandminimisestheriskoftheorganisationrunningoutofinventory.Thisisparticularlyimportantwhenthevolumeofdemandorthesupplyleadtimeareuncertain. EOQwithbufferTheholdingcostwillbeasHoldingcost=Holdcostperunit×(Buffersafetylevel+Re-orderTheincrementalholdingcost,comparingtohavingnobuffersafetylevel,Holdcostperunit×BuffersafetyThisisalsoaninvariantHence,thebestorder tyisalsoEOQor,possibly,acertainbulkdiscountpurchase1.3Just-In-Thetraditionalinventorymanagement&&1.3Just-In-Somemanufacturingcompaniestrytomaketheinventorylevelsofrawmaterialsandcomponentsaslowaspossible.ThisleadstoJITsystem. 1.3Just-In-2)Just-In-TimeJITmightbringthefollowingpotentialØReductionininventoryholdingcostsØReducedmanufacturingleadtimesØImprovedlabourproductivityØReducedscrap/rework/warrantyJIThasØNotsuitableforbusinessoperatingundervolatileØSuccesslargelydependonthereliability ØØNotbeappropriateinsomecases,suchasinQuestionQuestion8(2010/12Brieflydescribethebenefitsofajust-in-time(JIT).Question8Holdingcostscanbereducedbyreducingthelevelofinventoryheldbya.Holdingcostscanbereducedtoaminimumifaorderssonlywhenitneedsthem,avoidingtheneedtohaveanyinventoryatallofinputstotheproductionprocess.Thisapproachtoinventorymanagementiscalledjust-in-time(JIT)procurement.ThebenefitsofaJITprocurementincludealowerlevelofinvestmentinworkingcapital,sinceinventorylevelshavebeenminimised:areductionininventoryholdingareductioninmaterialshandlingcosts,duetoimprovedmaterialsflowthroughtheproductionanimprovedrelationshipwithrs,sincerandcustomerneedtoworkcloselytogetherinordertomakeJITprocurementasuccess;improvedoperatingefficiency,duetotheneedtostreamlineproductionmethodsinordertoeliminateinventorybetweendifferentstagesoftheproductionprocess;lowerreworkingcostsduetotheincreasedemphasisonthequalityofs,sincehold-upsinproductionmustbeavoidedwheninventorybetweenproductionstageshasbeeneliminated.Receivable••Collectingsalesreceiptsasquicklyaspossibletoreducethecostof•ExtendingthecreditperiodtocustmertoencourageCreditCreditisasetofstandardsinmanagingcreditsandaccountSystematically,inaccordingtoprocedure,itcoversthreemajorCreditCredit shouldaccessthecreditworthinessofallnewcustomersimmediayandexistingcustomersperiodically.Informationforaccessingmaycomefrom:ØbankØtradeØreportsfromcreditreferenceØpublicinformationlikeannualreportoftheØcreditØrecordsofprevioustransactionswithpotentialØCreditCreditUsingtheinformation,theneedstodocreditevaluationandscoring.Amightsetupitsowncreditscoringsysteminordertoassessthecreditworthinessofpotentialcustomers.Afterthecreditysis,creditlimitofcertaincustomermustbesetupincludingØAmountofcreditØLengthoftimeallowedbeforepaymentisCreditCreditTokeeptrackofpaymentsbycustomers,mostfirmswillmonitoroutstandingØAverageCollectionPeriodisabasictooltomonitortheaccountØAgedtradereceivablesysis(agingreport),identifyingaccountsandamountsinarrears,andtheextenttowhichamountsareoverdue.ØAcreditutilisationreportcanassistmanagementinunderstandingtheextenttowhichcreditisbeingused,identifyingcustomerswhomaybenefitfromincreasedcredit,andassessingtheextentandnatureofa’sexposuretotradeReceivable shouldensurethatitstradereceivablesarekeptinformedabouttheiraccounts,amountsoutstandingandamountsingdue,andthetermsoftradetheyhaveaccepted.Afirmusuallygoesthroughthefollowingsequenceofproceduresforcustomerswhosepaymentsareoverdue:ØItsendsoutadelinquentletterinformingthecustomerofthepast-duestatusoftheaccount.ØItmakesaephonecallor alvisittothecustomer.ØItemploysacollectionagency.ØIttakeslegalactionagainsttheQuestionBrieflydiscusshowthecreditworthinessofpotentialcustomerscanbeQuestion9Thecreditworthinessofpotentialcustomerscanbeassessedfromarangeofdifferentsourcesofinformation.Referencesareusefulinthisrespect,andpotentialcustomersshouldsupplyabankreferenceandatradeorotherreferencewhenseekingcreditonpurchases.Anothersourceofinformationisthecreditratingofthepotentialcustomer,whichcanbecheckedbyacreditratingagencyorcreditreferenceagency.Forlargerpotentialcustomers,afilecanbeopenedwhereadditionalinformationcanbelocated,evaluatedandstored,suchastheannualreportandaccountsofthepotentialcustomer,pressreleasesandsoon.Question10(2013/06Discussthekeyelementsofatradereceivables Question10Thekeyelementsofatradereceivables arecredit ysis,creditcontrolandreceivables ysishelpsa tominimizethepossibilityofbaddebtsbyofferingcreditonlytocustomerswhoarelikelytopaythemoneytheyowe.Credit ysisalsohelpsa minimisethelikelihoodofcustomerspayinglate,causingthe toincuradditionalcostsonthemoneyowed,byindicatingwhichcustomersarelikelytosettletheiraccountsastheyfalldue.Credit ysis,ortheassessmentofcreditworthiness,isundertakenby ysingandevaluatinginformationrelatingtoacustomer’sfinancialhistory.Thisinformationmaybeprovidedbytradereferences,bankreferences,theannualaccountsofa orcreditreportsprovidedbyacreditreferenceagency.Thedepthofthecredit ysiswilldependonthepotentialvalueofsalestothe ,intermsofbothordersizeandexpectedfuturetrading.Asaresultofcredit ysis,a willdecideonwhethertoextendcredittoacustomer.Question10CreditHavinggrantedcredittocustomers,aneedstoensurethattheagreedtermsarebeingfollowed.Thetradereceivablesmanagementwillstipulatethecontentoftheinitialsalesthatisraised.Itwillalsoadviseonthefrequencywithwhichstatementsaresenttoremindcustomersofoutstandingamountsandwhentheyareduetobepaid.Itwillbeusefultoprepareanagedreceivablesysisatregularintervals(e.g.monthly),inordertofocusmanagementattentiononareaswhereactionneedstobetakentoencouragepaymentbys.ReceivablesIdeally,allcustomerswillsettletheiroutstandingaccountsasandwhentheyfalldue.Anypaymentsnotreceivedelectronicallyshouldbebankedquicklyinordertodecreasecostsandincreaseprofitability.Ifaccountseoverdue,stepsshouldbetakentorecovertheoutstandingamountbysendingreminders,makingcustomervisitsandsoon.Legalactioncouldbetakenifnecessary,althoughonlyasalastresort.WaystospeedupaccountreceivableEarlysettlementEarlysettlementdiscountsmaybeemployedtoshortenaveragecreditperiodsandtoreducetheinvestmentinaccountsreceivableandthereforeinterestcostsofthefinanceinvestedintradereceivables.CostCostVSThediscountsTheinterestcostThebenefitininterestcostsavedshouldexceedthecostofthediscountsEarlysettlementEarlysettlementdiscount,asatooltopromptpayment,hasadvantagesandReducingtheaccountsreceivablebalanceandhencetheinterestchargeDifficultytodecideonsuitablediscountPotentialtoreducetheamountofbadMakethemanagementmorecomplexandcostlytoOfferingachoicetocustomersofpaymentLikelytomakethebudgetingofreceiptsfromcustomersmoredifficult,asthecouldnotbesurewhetherthediscountwillorwillnotbetakenInPracticecustomerpayovernormaltermsbutstilltakethecashdiscountQuestionPipsLimitedisconsideringofferingacashsettlementdiscounttoitscustomers.Currentlyitsannualsalesare$10manditsnormalpaymenttermsare90days.Customerswillbeabletotakea2%discountforpaymentsafter10days.Pipsanticipatethat20%ofcustomerswilltakethediscount.CurrentlyPipshasanoverdraftonwhichitispaying10%AssesswhetherPipsshouldoffertheQuestion12×2%×20%=Beforeaccountsreceivable=90×10m=Afteraccountsreceivable=20%×10×10m+80%×90×10m= Reduction=$438,355Interestsaved=$438,355×10%=$43,835Netbenefit=EarlysettlementPercentagecostofanearlysettlementThepercentagecostofanearlysettlementdiscounttothe givingitcanbeestimatedbytheformula: 365 100-

Ød=thediscountoffered(5%=5,Øt=thereductioninthepaymentperiodindaysthatisnecessarytoobtaintheearlypaymentdiscountEarlysettlementEg:Aoffersitsgoodstocustomerson30days'credit,subjecttosatisfactorytradereferences.Italsooffersa2%discountifpaymentismadewithintendaysofthedateofthe.RequiredCalculatethecosttotheofofferingthediscount,assuminga365dayThepercentagecostofthediscount=(100/(100-2))365/20-EarlysettlementEg:Aoffersitsgoodstocustomerson30days'credit,subjecttosatisfactorytradereferences.Italsooffersa2%discountifpaymentismadewithintendaysofthedateofthe.RequiredCalculatethecosttotheofofferingthediscount,assuminga365dayThepercentagecostofthediscount=(100/(100-2))365/20-Afactor,usuallyownedbyabank,isafinancialintermediarythatpurchasesreceivablesfroma.Afactorprovidesthreekindsofservice.Acanchooseone,ortwo,ofalloftheservices.)ofbad风险担保 费3Also,factorschargetheinsuranceforaCreditprotection（风险担保With

Without•itself•itselfmustbearlossifthereisanybadThus mustthefactorforallbad••Thefactorprovidesprotectionagainstbaddebts.Ifacustomerdefaults,thebearsthelossofbadAtypicalfactoringprocesswithrecourseisas1)Sellgoodspaidin30days

3)Upto80%ofthedebtvalueispaidinadvance5)Paysthebalanceslessanadministrationfeeandfinancingfee

Foratoconsiderwhethertotakeafactoringservice,itneedstobalancetherelativecostsandbenefits. FactoringFactoringfee,maybeadministrationfeeandinsuranceAdmincostExtrafinanceBaddebtInterestsavedfromoverdraftFactoringismostsuitableSmallandmediumfirms,whichcan’taffordsophisticatedcreditandsalesaccountingsystem,FirmsthatexpandFactoringalsohasadvantagesandSavingSavinginadministratingFactoringislikelytobemoreexpensivethanefficientinternalcreditcontrolProfessionalservicefrom

Customermaynotwishtodealwitha••Reductionintheneedformanagementcontrol,hencemanagementhavetimetofocusonFactoringhasabadreputationassociatedfailingcompanies.UsingafactormayhasmoneyParticularlyusefulforsmallandfast-businesswherethecreditcontroldepartmentmaynotbeabletokeeppacewithvolumegrows

Oncethestartsfactoring,itisdifficulttoreverteasilytoaninternalcreditcontrol.maygiveuptheopportunitiesdecidetowhomcreditmaybeQuestion16BenefitsBenefitsofCurrenttradereceivables=Revisedtradereceivables=26,750,00035/360=$2,600,694Reductionintradereceivables=$1,857,306Reductioninfinancingcost=1,857,3060.05=$92,865Savinginbaddebts=26,750,0000010.7=$187,250Reductioninadministrationcosts$50,000Totalbenefit=92,865+187,250+50,000=Question16Costsoffactor&netIncreaseinfinancingcost=2,600,6940.8(0.07–0.05)=$41,611Factor’sannualfee=26,750,0000.0075=$200,625Totalcosts=41,611+200,625=Netbenefits=330,115–200,625= discountingisthepurchase(bytheproviderofthediscountingservice)oftradedebtsatadiscount. discountingenablesthe fromwhichthedebtsarepurchasedtoraiseworkingcapital.discountingisrelatedtofactoringandmanyfactorswillprovidediscountingservice.The discounterdoesnottakeovertheadministrationofthe'ssalesledger.Thekeyadvantageof discountingisthatitisa dealingwiththefactors,thecustomerdoesn’tneedtoknowaboutit.Question17(2013/12Discusshow discountingandfactoringcanaidthemanagementoftradereceivables.Question17discountingreferstothepurchaseofselected sbyafinancialatadiscounttotheirfacevalue. discountingcanprovideimmediatecashtoa ratherthanwaitingforthe stobesettled.Ittendstobeusedasanoccasionalsourceofshort-termfinance,ratherthanaregularsourceofcash. discountingcanthereforeaidinthemanagementoftradereceivablesbyacceleratingcashinflowfromtradereceivableswhenshort-termcashflowproblemsarise.Question17Factoringreferstoacommercialarrangementwherebyafinancialtakesoverthemanagementofa’stradereceivables.Thiswillincludeinvoicingcustomers,accountingforsalesandcollectionsofamountsowed.Factorswilladvancecashtoaagainsttheamountsoutstanding.Iftherequires,insuranceagainstbaddebtsmayalsobeprovided(non-recoursefactoring).Factoringcanassistinthemanagementoftradereceivablesthroughtheexpertiseofferedbythefactoring.Thismayleadtoareductioninbaddebts,adecreaseintheleveloftradereceivables,adecreaseintheamountofmanagerialtimedevotedtochasingslowpayers,andtakingadvantageofearlysettlementdiscountsfromtradersduetotheavailabilityofcashfromtradereceivables.ManagingforeignaccountInrelationtoReceivables,exportersfacetheproblemsAsgoodsareexported,thepaperworkmaybecomplexandtransportationmaybeslow.Becauseofthedelayinforeigntrade,theexportercompaniesoftenbuildupalargevolumeofinvestmentininventoriesandreceivable,whichneedtobefinancedTheriskofbaddebtishigherthanthatofdomestictransactions.Iftheforeigncustomerrefusestopay,theexporterhastocollectthedebtintheforeigncustomer’scountry,whichcouldbequitecomplicated. ManagingaccountsEffectivemanagementoftradeaccountspayableinvolvesseekingsatisfactorycreditterms r,gettingcreditextendedduringperiodsofcashshortageandmaintaininggoodrelationswith Ifa roffersadiscountfortheearlypaymentofdebts,theevaluationofthedecisionwhetherornottoacceptthediscountissimilartotheevaluationofthedecisionwhetherornottoofferadiscount.CostVSTheinterestcost ThediscountsQuestionPipsLimitedhasbeenofferedadiscountof2.5%foranearlysettlementbyamajorrfromwhichitpurchasesgoodsworth£1,000,000eachyear.Pip’snormalpaymenttermsare30days,earlysettlementrequiresthepaymenttobemadewithin10days.CurrentlyPipshasanoverdraftonwhichitispaying10%AssesswhetherPipsshouldtakethediscountandsettletheafter10Question19==$1000,000×Beforea