Consider the following condensed financial information for Yes Lock Incorporated

Question

Consider the following condensed financial information for Yes Lock Incorporated: 2013 $410,775.00 $37,075.00 $63,750.00 Entry Cost of Goods Sold Accounts Payable Notes Payable The firm pays 6.00% APR on its notes payable. To reduce the accounts payable to the new level, the firm must have the cash to pay suppliers sooner. In other words, they must finance the reduction in accounts payable. What NEW financing will allow the firm to reach the goal? (HINT: How will notes payable change? Ignore the savings from the discount for now)

Explanation / Answer

YES LOCK Incorporate can reduce its account payable by financing it through Note Payable. In this case, YES LOCK Incorporate has to pay interest on accounts payables which is 6% (given) i.e. $2,224.5 ($37075*6%) per annum.

The position will be as under in case of financing the accounts payable:

cost of goods sold (COGS) $410,775

accounts payable $0

notes payable $100,825 ($63,750+$37,075)

Please, remeber that additional interest has to be paid $2,224.5.

Hence, YES LOCK Incorporate can finance its account payable at additional cost of interest $2,224.5.

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