Question 1
Drake Plc manufactures and sells wallboard for use in the construction of mobile homes. The company sells on 30 day-terms to contractors. The following information relates to the last six months’ sales, and the accounts receivables balances are as at the end of June, the present (reporting) month.
You are required to:
i) Calculate the company’s Standard, Best Possible and Delinquent Days Sales Outstanding (DSO) using the adding back method and comment on the results. (10 marks)
i) Construct the company’s overall Ageing Schedule and Overdue Aged Debt Schedule. Comment on your results. (10 marks)
ii) Based on the schedule of disputes given in the table above, prepare the Aged Debt Analysis for the disputed debt of Drake Plc and comment on the methods that can be used to resolve such disputes effectively. (20 marks)
iii) Discuss how the performance of the department might best be reported to the Board of Directors at the end of the month. (10 marks) (Total: 50 marks)
Question 2
Haymoor Ltd. is a medium-sized company that sells most of its goods on credit and has prided itself on having a very stable customer base. The company has standard trade terms, requiring its customers to pay within 30 days from invoice. However, those customers that have been with the company for a long time are given longer credit terms as a reward for their loyalty.
Last year, due to COVID19, invoices were, on average, paid well after the due date and this has adversely affected the company’s cash flow as compared to previous years. Haymoor’s suppliers are paid 30 days from the dispatch of goods and charge interest on any outstanding debts. Since January 2021, the financial situation has worsened and Haymoor is finding it difficult to access external finance. Moreover, the company’s overdraft facility interest rate has recently increased to 15% per annum.
On examining the company’s recent records, the management team reports that only 25% of its customers pay within the standard 30-day credit-period. Of the remaining customers, 10% pay after two months, 30% pay after three months and 30% delay the payment by as long as four months.
The credit manager has come up with several suggestions to alleviate the collection problem. One of the options for bringing settlement forward is to offer a 3% discount for payment within 30 days.
A survey of the existing customer base indicates that if the discount is offered to all customers, 75% would take it. However, 2% would pay two months later, 7% would pay after three months and 14% would pay after four months. The administration cost of setting up the system and managing it is estimated at £10,000. The company’s turnover is £10m per annum.
You are required to:
i) Calculate the costs-benefits of introducing the proposed discount scheme and advise the management team on whether the scheme should be introduced. Discuss any possible problems associated with such a scheme. (16 marks)
ii) Comment on the “possible” suggestions made by the credit manager and identify other ways the company can use to reduce the collection problem and improve its liquidity problem. (16 marks)
iii) Critically discuss the use of factoring and invoice discounting as ways the company can pursue the collection of money on time, and comment on any similarities and differences. (18 marks) (Total: 50 marks)
Question 3
Individuals and companies should look after their credit ratings, especially during economic downturns, crises, recessions and pandemic uncertainty. These special circumstances affect borrowing costs, whether these relate to loans, mortgages, credit cards, car insurance, mobile phone contracts, utility bills or any other sort of borrowing.
You are required to:
i) Explain the importance, both to companies and to individuals, of protecting their credit ratings and credit scores. (24 marks)
ii) Critically discuss how companies and individuals can take care of their very important credit ratings/scores to protect themselves from paying a high premium when entering any borrowing contract. (26 marks)
(Total: 50 marks)
Question 4
It is often argued that export trade credit payment terms are only worth the paper they are written on if they are enforced to the letter.
You are required to:
i) Critically analyse the statement above, discussing different credit terms, and highlighting issues that are encountered by companies selling on credit to overseas customers. (26 marks)
ii) Discuss ways of mitigating the risks arising from late payment and default. (24 marks)
(Total: 50 marks)
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