The managers of Finozest Ltd are worried about the level of the company's interest payments. Financial information for the last 30 months is given below. Details 2 years ago 2 years ago 1 year ago 1 year ago Current year Jan to June July to Dec Jan to June July to Dec Jan to June Total sales (K'000) 3294 3267 3430 3412 3583 Credit sales as a percentage of total sales 85 90 90 95 95 Average accounts receivable (K’000) 694 842 972 1148 1334 Average inventory: Raw materials (K'000) 95 90 110 115 120 Work in progress (K’000) 210 220 200 190 220 Finished goods (K’000) 115 90 100 95 80 Percentage of credit sales represented by customers taking the early settlement discount 50 45 45 40 40 Average overdraft interest rate for Finozest (% per year) 8.5 8.5 8.0 8.0 9 Finozest Ltd offers a cash discount of 2% for payment within seven days. The normal credit period is 45 days. In Groups allocated, required: a) Finozest's manager estimates that the interest cost of financing inventory and accounts receivable has increased by more than 50% during the last 30 months. Evaluate whether you agree with this estimate, demonstrating: (i) why interest costs have increased; and (ii) any significant changes in inventory management and accounts receivable payment patterns. b) Evaluate why the percentage of credit sales represented by customers taking the early settlement discount has fallen, and recommend whether the company should continue to offer the early settlement discount for payment in seven days. c) Discuss strategies that the managers of Finozest Ltd might adopt to reduce the interest costs of accounts receivable and inventory.

Cornerstones of Financial Accounting

4th Edition

ISBN:9781337690881

Author:Jay Rich, Jeff Jones

Publisher:Jay Rich, Jeff Jones

Chapter5: Sales And Receivables

Section: Chapter Questions

Problem 43BE

See similar textbooks

Related questions

Question

100%

The managers of Finozest Ltd are worried about the level of the company's interest payments.
Financial information for the last 30 months is given below.

Details	2 years ago	2 years ago	1 year ago	1 year ago	Current year
	Jan to June	July to Dec	Jan to June	July to Dec	Jan to June
Total sales (K'000)	3294	3267	3430	3412	3583
Credit sales as a percentage of total sales	85	90	90	95	95
Average accounts receivable (K’000)	694	842	972	1148	1334
Average inventory: Raw materials (K'000)	95	90	110	115	120
Work in progress (K’000)	210	220	200	190	220
Finished goods (K’000)	115	90	100	95	80
Percentage of credit sales represented by customers taking the early settlement discount	50	45	45	40	40
Average overdraft interest rate for Finozest (% per year)	8.5	8.5	8.0	8.0	9

Finozest Ltd offers a cash discount of 2% for payment within seven days. The normal credit period is 45 days.
In Groups allocated, required:
a) Finozest's manager estimates that the interest cost of financing inventory and accounts receivable has increased by more than 50% during the last 30 months. Evaluate whether you agree with this estimate, demonstrating:
(i) why interest costs have increased; and
(ii) any significant changes in inventory management and accounts receivable payment
patterns.
b) Evaluate why the percentage of credit sales represented by customers taking the early settlement discount has fallen, and recommend whether the company should continue to offer the early settlement discount for payment in seven days.
c) Discuss strategies that the managers of Finozest Ltd might adopt to reduce the interest costs of accounts receivable and inventory.

Expert Solution

Step by step

Solved in 4 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.