Question

McGriff Dog Food Company normally takes 27 days to pay for average daily credit purchases of \(9,530. Its average daily sales are \)10,680, and it collects accounts in 32 days.

b. If the firm extends its average payment period from 27 days to 37 days (and all else remains the same), what is the firm’s new net credit position? Has it improved its cash flow?

Short answer

The net credit position is -$10,850 and it has increased the cash flow of the firm.

Step-by-step solution

Information provided in the question

Average credit purchases = $9,530

Average payment period = 37 days

Average daily sales = $10,680

Average collection period = 32 days

Calculation of accounts receivables

The accounts receivables is $341,760.

$\begin{array}{rcl}\mathrm{Accounts}\mathrm{receivables}& =& \mathrm{Average}\mathrm{daily}\mathrm{credit}\mathrm{sales}\times \mathrm{Average}\mathrm{collection}\mathrm{period}\\ & =& \$10,680\times 32\mathrm{days}\\ & =& \$341,760\end{array}$

Calculation of accounts payable

The accounts payable is $257,310.

$\begin{array}{rcl}\mathrm{Accounts}\mathrm{payable}& =& \mathrm{Average}\mathrm{daily}\mathrm{credit}\mathrm{purchases}\times \mathrm{Average}\mathrm{payment}\mathrm{period}\\ & =& \$9,530\times 37\mathrm{days}\\ & =& \$352,610\end{array}$

Calculation of net credit position

The net credit position is $10,850. The firm has improved its cash flow as now it is extending less credit than it is achieving.

$\begin{array}{rcl}\mathrm{Net}\mathrm{credit}\mathrm{position}& =& \mathrm{Accounts}\mathrm{receivables}-\mathrm{Accounts}\mathrm{payable}\\ & =& \$341,760-\$352,610\\ & =& -\$10,850\end{array}$