Answering Questions

  • Read each question carefully.
  • When you answer a question, your answer will automatically be saved.
  • You can revisit questions and change your answers at any time during the exam.
  • The only permitted characters for numerical answers are:
    • Numbers
    • One full stop as a decimal point if required
    • One minus symbol at the front of the figure if the answer is negative.

              For example: -10234.35

No other characters, including commas, are accepted.

Navigating between questions

  • Click Next Button to move to the next question.
  • Click Previous Button to move back to the previous question.
  • Click on a question number from the Exam Progress Details panel (see next page) to move directly to that question.
  • A message will be displayed when you click to move away from a question which has been partially attempted. You can choose to stay on the question and review your answer(s) or continue.
  • When reviewing your answer(s) for partially attempted questions ensure you read any message displayed in red text below the question in Section A or below the question
    part(s) in Section B
    .

PNP Plc (June 07 – Modified)

The following financial information relates to PNP plc, for the year just ended.

 

$000

Sales revenue

5,242.0

Variable cost of sales

3,145.0

Inventory

603.0

Receivables

744.5

Payables

574.5

Segmental analysis of receivables

 

Balance

Average payment period

Discount

Irrecoverable

Class 1

$200,000

30 days

1.0%

None

Class 2

$252,000

60 days

Nil

$12,600

Class 3

$110,000

75 days

Nil

$11,000

Overseas

$182,500

90 days

Nil

$21,900

 

$744,500

 

 

$45,500

The receivables balances given are before taking account of irrecoverable debts. All sales are on credit. Production and sales take place evenly throughout the year. Current sales for each class of receivables are in proportion to their relative year-end balances before irrecoverable debts.

It has been proposed that the discount for early payment be increased from 1.0% to 1.5% for settlement within 30 days.

It is expected that this will lead to 50% of existing Class 2 receivables becoming Class 1 receivables, as well as attracting new business worth £500,000 in revenue. The new business would be divided equally between Class 1 and Class 2 receivables. Fixed costs would not increase as a result of introducing the discount or by attracting new business. PNP finances receivables from an overdraft at an annual interest rate of 8%.

Required:

A. Calculate the net benefit or cost of increasing the discount for early payment and comment on the acceptability of the proposal.
B. Calculate the current cash operating cycle and the revised cash operating cycle caused by increasing the discount for early payment.
C. Identify and explain the key elements of a receivables management system suitable for PNP plc.

Leave a Reply

Your email address will not be published. Required fields are marked *