Question

McGriff Dog Food Company normally takes 20 days to pay for average daily credit purchases of $9,520. Its average daily sales are $10,530, and it collects accounts in 25 days.

a. What is its net credit position?

b-1. If the firm extends its average payment period from 20 days to 34 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.)

b-2. Has the firm improved its cash flow? Yes No

Answer 1

a).

Net credit position = Accounts receivable - Accounts payable

=( Average daily credit sales × Average collection period receivable)- (Average daily credit purchases × Average collection period payable)

=( 25 × $ 10530) - (20 × $ 9520)

= $263250-$190400

=$72850

b-1)Accounts payable = 34 × $9520 = $323680

New net credit position = Accounts receivable - Accounts payable

= $263250 - $ 323680

= $ - 60430

b-2) The firm has improved its cash flow position .Instead of extending $ 72850 more in credit ( funds) than it is receiving it has reversed the position and is now the net recipient of $ 60430 in credit.