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CA Intermediate · Financial Management and Strategic Management · Management of Receivables

Meera Exports Ltd has annual credit sales of ₹60,00,000 and an average collection period of 45 days (360-day year). It factors all its receivables, and the factor advances 80% of the receivables outstanding, charging interest at 12% p.a. on the advance for the 45-day period. What is the interest charged by the factor?

The factor charges ₹9,000. Receivables outstanding are ₹60,00,000 × 45/360 = ₹7,50,000, and 80% of that, ₹6,00,000, is advanced. Interest at 12% p.a. for 45 days on ₹6,00,000 equals ₹9,000. Interest on the full receivables would wrongly give ₹11,250.

  1. A₹9,000Correct
  2. B₹72,000
  3. C₹11,250
  4. D₹1,20,000

Explanation

Receivables = 60,00,000 × 45/360 = ₹7,50,000. Advance = 80% = ₹6,00,000. Interest = 6,00,000 × 12% × 45/360 = ₹9,000. Charging interest on the full receivables gives ₹11,250, which is wrong because interest applies only to the advance. A full year's interest on the advance gives ₹72,000.

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