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FM --> Problem on Credit Policy

K K (Student) (83 Points)

03 April 2010

Pls find the Question and Answer from the Attached file. It is the problem from Credit Policy topic from ICAI FM Text Book.

In the problems, I didnot understand How to calculate the

1) Additional bad debts &

2) Average receivables Investment in receivables

Please someone explain these 2 points.

Thanks,

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(Guest)

Dear KK,

First answer to your 1st question---

Before calculating additional bad debts, you calculate the total bad debts on expected future sales... In case A sales is 600000+ 30000 on which baddebts % is 1.5% so total bad debts on 630000 will be 9450(630000*1.5%)... similarly you calculate for all cases.

when you are done with all the cases for total bad debts, now as per question actual bad debts on existing 600000 sales is 6000..... so additinal bad debts on account of increase in sales for case A will be 9450- 6000 which is 3450... similarly calculate for all cases...

Now answer to your second question----

Avg. recievable investment in recievables means your how much money is blocked in working capital cycle in terms of recievables on an Avg. basis.... This you can calculate by first calculating Recievables turnover ratio(RTR).. RTR is mathematical indication which means in how much time your investment of recievables get converted into cash/bank..... It is calculated as--- RTR= Days in a year/ credit period allowed.... so in existing case of sales 600000 RTR will be 12times(360/30)... In case A, RTR will be 9(360/40)... similarly calculate RTR for all cases..

Now for Avg. ivestment in recievables ,, in existing sales of 600000 will be 50000( sales/ RTR)... In case A it will be 70000(sales/ RTR)... Similarly calculate for all cases...

HOpe you understood.... ALL the best......