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CA Intermediate · Financial Management and Strategic Management · Financing of Working Capital

Kapoor Textiles has annual credit sales of ₹36,00,000 and an average collection period of 60 days (year = 360 days). A factor agrees to the following: reserve 10% of receivables, commission 2% of receivables, and interest at 12% p.a. on the advance, deducted in advance for the 60 days. What is the net advance the firm receives against average receivables?

The net advance is ₹5,17,440. Average receivables are ₹6,00,000. Deduct the 10% reserve of ₹60,000 and the 2% commission of ₹12,000 to get ₹5,28,000. Interest at 12% for 60 days on this is ₹10,560, leaving ₹5,17,440.

  1. A₹5,17,440Correct
  2. B₹5,28,000
  3. C₹5,16,000
  4. D₹5,40,000

Explanation

Average receivables = 36,00,000 × 60/360 = ₹6,00,000. Commission = 12,000 and reserve = 60,000, so the amount available is 5,28,000. Interest = 5,28,000 × 12% × 60/360 = 10,560, giving a net advance of 5,28,000 − 10,560 = ₹5,17,440. The ₹5,16,000 option charges interest on the full ₹6,00,000, which is wrong.

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