Question

Part III ABC Corporation is a motor accessories trading company who has a huge long overdue outstanding debt from his customers. You are the newly appointed financial controller of ABC Corporation and suggests that interest should be charged to customers whose debts is overdue for 60 days. An interest-bearing note must be issued to these customers and signed by them. You are now at the meeting with the management of ABC Corporation.

Required: Briefly explain four advantages to the management to support your suggestion (Note: no marks will be given if answer is in point form).

Answer 1

ADVANTAGES

1. Early receipt of Accounts receivable------ Since an extra interest is charged on the amount overdue after 60 days, customers would not want to pay the unnecessary burden in terms of interest, hence will be motivated to pay timely.

2. Interest income charged will recover the opportunity cost----------- Since company's funds are blocked hence it looses the opportunity to earn extra while investing the money , but interest income charged will balance out the same.

3. Liquidity of company is enhanced-------- Since overdue amount will be received early thereby increasing the liquidity of company and mobility of working capital , which business can further reinvest in ordinary course of operations.

4. Additional profitability to company------- Interest income charged will be regarded as profit which adds on to the net income of company