Question

1. The average credit sales for Jiffy Co. is $375,000. Accounts receivables average balance is $68,000. Jiffy factors its receivables by discounting them 3%. What is the effective cost of factoring?
2. Bob’s Hobby has annual average purchases of $138,000 and an ending accounts payable balance of $21,748. How long, on average, does it take Bob’s to pay for its purchases?
3. Marcos Inc. wants to maintain a minimum cash balance of $20 million, which is what the company currently has on hand. The company currently has a receivables balance of $187 million and has developed the following sales and cash disbursement budgets in millions:

4.                                                 Q1      Q2       Q3       Q4

   Sales                                       $315    $390 $475 $435

   Total cash disbursement         $265 $340 $560 $375

   Cash Collections                      $385     $363     $445 $449                          

   Complete the following cash budget for the company.

                                                   Q1      Q2       Q3       Q4

   Beginning receivables           

   Sales   

   Cash collections         

   Ending receivables     

   Total cash collections

   Total cash disbursements      

   Net cash inflow          

   Beginning cash balance         

   Net cash inflow          

   Ending cash balance  

   Minimum cash balance         

   Cumulative surplus (deficit)  

Answer 1

Compute the accounts receivables turnover (ART) ratio, using the equation as shown below:

ART ratio = Net credit sales/ Average receivables

                 = $375,000/ $68,000

                 = 5.51470588

Hence, the ART ratio is 5.51470588.

Compute the annual percentage rate (APR), using the equation as shown below:

APR = (ART ratio*Discounting factor)/

         = (5.51470588*3%)/ (1 – 0.03)

         = 0.17055791388

Hence, the APR is 0.17055791388.

Compute the effective cost of factoring, using the equation as shown below:

Effective cost = [1 + {Discounting factor/(1 – Discounting factor)}]^ATR – 1

                       = [1 + {3%/(1 – 0.03)}]^5.51470588 – 1

                       = (1.03092783505)^5.51470588 – 1

                       = 1.182905346 – 1

                       = 0.182905346 or 18.2905346%

Hence, the effective factoring cost is 18.2905346%