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Chapter 3: 11BP_b (page 250)

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.

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鈥檚 new net credit position? Has it improved its cash flow?

Short Answer

Expert verified

The net credit position is -$10,850 and it has increased the cash flow of the firm.

Step by step solution

01

Information provided in the question

Average credit purchases = $9,530

Average payment period = 37 days

Average daily sales = $10,680

Average collection period = 32 days

02

Calculation of accounts receivables

The accounts receivables is $341,760.

Accountsreceivables=Averagedailycreditsales脳Averagecollectionperiod=$10,680脳32days=$341,760

03

Calculation of accounts payable

The accounts payable is $257,310.

Accountspayable=Averagedailycreditpurchases脳Averagepaymentperiod=$9,530脳37days=$352,610

04

Calculation of net credit position

The net credit position is $10,850. The firm has improved its cash flow as now it is extending less credit than it is achieving.

Netcreditposition=Accountsreceivables-Accountspayable=$341,760-$352,610=-$10,850

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