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ACCA Applied Skills · Financial Management · Management of inventories, accounts receivable, accounts payable and cash

Brantley Co purchases 3,650,000 of materials a year, all on credit, and pays suppliers after 45 days on average. It is considering delaying payment to 60 days, which will not affect prices. Assuming a 365-day year and a short-term borrowing rate of 8% a year, what is the annual financing benefit of the change?

Daily purchases are 10,000, so 15 extra days of credit adds 150,000 of supplier funding. At an 8% borrowing rate that saves 12,000 a year in financing cost.

  1. A12,000Correct
  2. B15,000
  3. C120,000
  4. D8,000

Explanation

Daily purchases = 3,650,000/365 = 10,000. Extending credit by 15 days increases payables by 150,000. Benefit = 150,000 x 8% = 12,000 a year. The 120,000 option forgets to apply the 8% correctly (scaling error), and 15,000 uses 10% in error.

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