Question

1.The Rowd Company has an average accounts payable balance of $250,000. Its average daily cost of goods sold is $14,000, and it receives terms of 2/15, net 40, from its suppliers. Rowd chooses to forgo the discount. Is the firm managing its accounts payable well?

Rowd’s accounts payable days outstanding

is $250,000/$14,000 = 17.9 days.

If Rowd made payment three days earlier, it could take advantage of the 2% discount.

If for some reason it chooses to forgo the discount, it should not be paying the full

amount until the 40th day.

The firm is not managing its accounts payable well. The earlier it pays, the sooner the cash leaves Rowd.

Thus, the only reason to pay before the 40th day is to receive the discount by paying before the 15^th day.

Paying on the eighteenth day not only misses the discount, but costs the firm 22 days (40 - 18) use of its cash.

2. BBC has an average accounts payable balance of $500,000. Its average daily cost of goods sold is $15,000, and it receives terms of 2/15, net 35, from its suppliers. BBC chooses to forgo the discount. Is the firm managing its accounts payable well?

Given BBC’s AP balance and its daily COGS, we can compute the average number of days it

takes to pay its vendors by dividing the average balance by the daily costs.

Given the terms from its suppliers, BBC should either be paying on the 15th day (the last possible day to get the discount), or on the 35th day (the last possible day to pay).

There is no benefit to paying at any other time.

BC’s accounts payable days outstanding is $500,000/$15,000 = 33.3 days

The firm appears to be managing its accounts payable well based on the A/P days.

However, the discount is being lost and it may be better for BBC to borrow and take the

discount than to pay closer to the 35th day.

–44.6% EAR

Required:

1) BBC has an average accounts payable balance of $500,000. Its average daily cost of goods sold is $15,000, and it receives terms of 2/15, net 35, from its suppliers. BBC chooses to forgo the discount. Is the firm managing its accounts payable well?

2) Max Corp. has an average accounts payable balance of $225,000. Its average daily cost of goods sold is $10,000, and it receives terms of 1/15, net 40, from its suppliers. Max chooses to forgo the discount. Is the firm managing its accounts payable well?

Please solve the questions correctly. Thank You!

Answer 1

Answer is given in tabular format below