11. McGriff Dog Food Company normally takes 27 days to pay for average daily cre

Question

11. 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. What is its net credit position? That is, compute its accounts receivable and accounts payable and subtract the latter from the former. a. Average daily credit sales × Average collection period Accounts receivable = Accounts payable Average daily credit purchase Average payment period 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?

Explanation / Answer

Solution: a. Net credit position 84,450 Working Notes: Accounts receivable=Average daily credit sales x Average collection period =$10,680 x 32 =$341,760 Accounts payable=Average daily credit purchases x Average payment period =$9,530 x 27 =$257,310 Net credit position=Accounts receivable - Accounts payable =$341,760 - $257,310 =$84,450 b-1. Net credit position -10,850 Working Notes: Accounts receivable=Average daily credit sales x Average collection period =$10,680 x 32 =$341,760 Accounts payable=Average daily credit purchases x Average payment period =$9,530 x 37 =$352,610 Net credit position=Accounts receivable - Accounts payable =$341,760 - $352,610 =-10,850 b-2. YES Working Notes: Yes, the firm improved its cash flow , as earlier the firm was net credit provider of $84,450 , but after increased average payment period to 37 days , the firm is net credit receiver of 10,850 Please feel free to ask if anything about above solution in comment section of the question.

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