Question

McGriff Dog Food Company normally takes 27 days to pay for average daily credit purchases of $9,460. Its average daily sales are $10,700, and it collects accounts in 27 days.  
  
a. What is its net credit position?
  

b-1. If the firm extends its average payment period from 27 days to 38 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.)

Answer 1

(a)-Net Credit Position

Net Credit Position = Accounts Receivables – Accounts Payable

Accounts Receivables = Average daily sales x Average Collection Period

= $10,700 per day x 27 Days

= $288,900

Accounts Payable = Average daily credit purchases x Average Payment Period

= $9,460 per day x 27 Days

= $255,420

Therefore, the Net Credit Position = Accounts Receivables – Accounts Payable

= $288,900 - $255,420

= $33,480

(b)-Firm's new net credit position if the firm extends its average payment period from 27 days to 38 days

Accounts Receivables = Average daily sales x Average Collection Period

= $10,700 per day x 27 Days

= $288,900

Accounts Payable = Average daily credit purchases x Average Payment Period

= $9,460 per day x 38 Days

= $255,420

Therefore, the Net Credit Position = Accounts Receivables – Accounts Payables

= $288,900 - $359,480

= -$70,580 (Negative)