QUESTION FIVE (a) Kaluba Ltd achieves current annual sales of K1,800,000. The cost of sales is 80% of this amount but bad debts average 1% of total sales, and the annual profit is as follows: K Sales Less: cost of sales Gross profit Less: bad debts 1,800,000 (1,440,000) 360,000 (18,000) 342,000 Net profit The current debt collection period is one month, and the management consider that if credit terms were eased (option A below) then the effects would be as follows: Present Policy Option A Additional Sales 25% Average collection Period 1 month 2 months Bad debts (% of sales) 1% 3% The company requires a 20% return on its investments. If the cost of sales are 75% variable and 25% fixed and on the assumption that: there would be no increase in fixed costs from the additional turnover there would be no increase in average stocks or creditors Required: What is the preferable policy, Option A or the present one? (b)What is meant by the cash conversion cycle?

QUESTION FIVE (a) Kaluba Ltd achieves current annual sales of K1,800,000. The cost of sales is 80% of this amount but bad debts average 1% of total sales, and the annual profit is as follows: K Sales Less: cost of sales Gross profit Less: bad debts 1,800,000 (1,440,000) 360,000 (18,000) 342,000 Net profit The current debt collection period is one month, and the management consider that if credit terms were eased (option A below) then the effects would be as follows: Present Policy Option A Additional Sales 25% Average collection Period 1 month 2 months Bad debts (% of sales) 1% 3% The company requires a 20% return on its investments. If the cost of sales are 75% variable and 25% fixed and on the assumption that: there would be no increase in fixed costs from the additional turnover there would be no increase in average stocks or creditors Required: What is the preferable policy, Option A or the present one? (b)What is meant by the cash conversion cycle?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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