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

Sharma Ltd has annual credit sales of Rs 36,00,000 and factors its receivables with a factor on a without-recourse basis. The factor charges a commission of 2% of invoice value and advances 80% of the invoice value at an interest rate of 12% p.a. Average collection period is 60 days (360-day year); assume the interest is charged on the advance for the full 60 days and deducted upfront. What is the annual interest cost to Sharma Ltd, treating average receivables as sales x 60/360?

The annual interest cost is Rs 57,600. Average receivables are Rs 6,00,000 (sales of Rs 36,00,000 x 60/360), the factor advances 80% of this, Rs 4,80,000, and interest at 12% on that advance gives Rs 57,600. Using the full receivables as the base would wrongly give Rs 72,000.

  1. ARs 57,600Correct
  2. BRs 72,000
  3. CRs 43,200
  4. DRs 86,400

Explanation

Average receivables = 36,00,000 x 60/360 = Rs 6,00,000. Advance at 80% = Rs 4,80,000. Annual interest = 4,80,000 x 12% = Rs 57,600. Rs 72,000 applies 12% to the full receivables, a wrong base; Rs 43,200 applies 12% to 3,60,000 (75%); Rs 86,400 uses 12% on 7,20,000.

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