Question

McGriff Dog Food Company normally takes 24 days to pay for average daily credit purchases of $9,650. Its average daily sales are $10,570, and it collects accounts in 27 days.

a. What is its net credit position?

	Net credit position

b-1. If the firm extends its average payment period from 24 days to 30 days (and all else remains the same), what is the firm's new net credit position? (Negative amount should be indicated by a minus sign.)

	Net credit position

b-2. Has the firm improved its cash flow?

• Yes

• No

Answer 1

Requirement (a)-The Net credit position

The Net credit position = Accounts receivables – Accounts payables

= [Average daily credit sales x Average collection period] - [Average daily credit purchases x Average payment period]

= [$10,570 x 27 Days] – [$9,650 x 24 Days]

= $285,390 - $231,600

= $53,790

Requirement (b)(1)-The Net credit position if the average payment period from 24 days to 30 days

The Net credit position = Accounts receivables – Accounts payables

= [Average daily credit sales x Average collection period] - [Average daily credit purchases x Average payment period]

= [$10,570 x 27 Days] – [$9,650 x 30 Days]

= $285,390 - $289,500

= -$4,110 (Negative)

Requirement (b)(2)

YES. The firm has improved its cash flow.