Question Tag: Accounts Receivable

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FM – Nov 2024 – L2 – Q5a – Management of Receivables

Evaluate the financial implications of different strategies for managing Abaa LTD's accounts receivable.

Question

Abaa LTD, a company that manufactures and sells electronic appliances, has been facing challenges with its accounts receivable management. Currently, the company allows its customers 60 days of credit. Due to the highly competitive market, Abaa LTD has been experiencing an increasing amount of bad debts and delayed payments, which has adversely affected its cash flow and profitability. To address these issues, the company’s Finance Manager is considering several strategic changes:

Reduction in Credit Period: Reducing the credit period from 60 days to 45 days. It is estimated that this change could reduce sales by 5% due to the stricter credit terms, but it would also decrease the bad debt ratio from 4% to 2% of sales.
Offering Early Payment Discounts: Introducing a 2% discount for customers who pay within 30 days. The company anticipates that 30% of its customers will take advantage of this discount, which would improve cash flow and reduce the average collection period by 15 days.
Engagement of a Factor: The company is also considering engaging a factoring company to manage its receivables. The factor would advance 80% of the invoice value upon the sale of goods at 200 basis points below the company’s cost of capital and charge a 3% fee on all sales. The factor is expected to reduce the bad debt ratio to 1% of sales and further reduce the average collection period by 20 days. Engaging the factor will lead to annual administrative savings of GH¢90,000.

Abaa LTD’s current annual sales are GH¢20 million, and the variable cost of sales is 60% of sales. The company’s cost of capital is 12% per annum.

Required:
Evaluate the financial implications of the following:
i) Reduction in Credit Period
ii) Offering Early Payment Discounts
iii) Engagement of a Factor
iv) Recommend the appropriate method to manage the credit sales

Answer

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Tags: Accounts Receivable, Bad Debts, Cash Flow, Cost of Capital, Credit Period, Early Payment Discounts, Factoring, Working Capital
Level: Level 2

Topic: Management of receivables and payables
Series: Nov 2024

AA – Nov 2024 – L2 – Q5b – Substantive Testing of Accounts Receivable

Explain three substantive tests for verifying accounts receivable balance.

Question

Baaba & Associates, an audit firm, is conducting a year-end audit of Rashida LTD. The audit team is particularly concerned about the accuracy of the accounts receivable balance reported on the statement of financial position as of December 31, 2023. Therefore, as part of their audit procedures, they need to perform substantive tests to identify any material misstatements, errors, or fraud that could impact the accuracy of the financial statements.

Required:
Explain THREE substantive tests that the audit team at Baaba & Associates should perform to obtain sufficient appropriate audit evidence regarding the accuracy of Rashida LTD’s accounts receivable balance.

Answer

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Tags: Accounts Receivable, Audit evidence, Audit Procedures, Financial Reporting, Risk Assessment, Substantive Testing
Level: Level 2

Topic: Audit and Assurance Evidence
Series: Nov 2024

ICMA – Nov 2024 – L1 – Q2b – Working Capital

Calculates total amount held in working capital excluding cash and equivalents.

Question

Working Capital Calculation
A company has annual sales revenues of GH¢45 million and the following working capital periods:

Working Capital Item	Period (months)
Inventory conversion period	2.5
Accounts receivable collection period	2.0
Accounts payable payment period	1.5

Production costs are 70% of sales revenue.

Required:
Calculate the total amount held in working capital excluding cash and cash equivalents.

Answer

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Tags: Accounts Payable, Accounts Receivable, Budgeting, Costing, Inventory
Level: Level 1

Topic: Budgeting, Cost and Cost Behaviour
Series: Nov 2024

MI – Nov 2015 – L1 – SB – Q6b – Accounting for Cost Elements

Calculates cash receipts expected over three months, considering credit sales terms and bad debts.

Question

The following information was extracted from the books of LAHA Limited:

Product P (units)	Product Q (units)
November	1,500
December	2,000
January	1,000
February	2,000
March	3,000

Product P is sold for ₦200 per unit, and Product Q for ₦300 per unit. All sales are on credit. 20% of total sales are received in the month of sale, 40% in the following month, and the remaining balance (excluding bad debts) is received at the end of the second month. Bad debts are 2% of total sales and are written off at the end of the second month following sale.

Required:
Calculate the cash receipts expected in January, February, and March. (12 Marks)

Answer

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Tags: Accounts Receivable, Bad Debts, Cash Flow, Cash Receipts, Credit Sales, Sales Revenue
Level: Level 1

Topic: Accounting for Cost Elements
Series: NOV 2015

FA – Nov 2015 – L1 – SB – Q5c – Bank Reconciliation

Reconcile accounts receivable ledger control with ledger balances and clear the suspense account.

Question

The trial balance of Mbobo Limited includes the following items:

The following information is available:

The total of debit balances in the accounts receivable ledger is ₦116,374, and the total of credit balances is ₦1,234.
The accounts receivable ledger includes a debit balance of ₦700 for Entity C, and the accounts payable ledger includes a credit balance of ₦800 relating to Entity C. Only the net amount will eventually be paid.
Included in the credit balances in the accounts receivable ledger is a balance of ₦600 in the name of H. Potoka. This arose because a sales invoice for ₦600 had earlier been posted in error from the sales day book to the debit of the account of M. Potoka in the accounts payable ledger.
An allowance of ₦300 granted to a customer for some damaged goods had been omitted from the appropriate account in the accounts receivable ledger. This allowance had been included in the accounts receivable control account.
A cash receipt from a credit customer for ₦345 had been entered in the cash book as ₦245.
The bank balance of ₦1,700 had been included in the trial balance, in error, as an overdraft.
The debit balance on the insurance account in the nominal ledger of ₦3,456 has been included in the trial balance as ₦3,546.

Required:
(i) Prepare a reconciliation of the accounts receivable ledger control account and the accounts receivable ledger balances (8 marks).
(ii) Open a suspense account and post the entries required to clear this account (2 marks).

Answer

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Tags: Accounts Receivable, Control Accounts, Reconciliation, Suspense account
Level: Level 1

Topic: Bank reconciliations
Series: NOV 2015

CR – Nov 2017 – L3 – Q2d – IAS 10: Events After the Reporting Period

Recommend the accounting treatment for a doubtful debt arising after the reporting period.

Question

Adonko Ltd is a listed Ghanaian company that reports under International Financial Reporting Standards (IFRS) with 31 December as the financial year-end. The company performed some work for Adenta Municipal Assembly, a local government authority, during 2016 and issued an invoice for the work for GH¢12 million in July 2016. The invoice was accepted as valid by the local government authority but remains unpaid at the year-end.

In January 2017, following extensive press coverage, financial information was published showing that Adenta Municipal Assembly is heavily indebted and is unable to meet its obligations and pay its suppliers, including Adonko Ltd. This was unexpected by Adonko Ltd, and no allowance had previously been made against the debt in Adonko Ltd’s financial statements.

The Government of Ghana stated on 1 February 2017 that it was not prepared to fund the excesses of regional and local governments and that regional and local governments will need to make the necessary sacrifices to balance their budgets. Adenta Municipal Assembly stated that its priority was the provision of social amenities and economic well-being of its inhabitants and that other suppliers must wait for payment, with no date specified. Based on written correspondence with the local government’s legal advisers, Adonko Ltd believes it will eventually receive full payment, although this may take several years, and that interest on late payments is unlikely.

Required:
As the Finance Director of Adonko Ltd, recommend the accounting treatment of the above, in the financial statements for the year ended 31 December 2016.

Answer

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Tags: Accounts Receivable, Doubtful Debts, Events After Reporting Period, Impairment
Level: Level 3

Topic: IAS 10: Events After the Reporting Period
Series: NOV 2017

FM – May 2021 – L2 – Q3c – Factoring Agency

Define what a factoring agency is and explain its role.

Question

What is a factoring agency?

Answer

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Tags: Accounts Receivable, Factoring Agency, Short-term Finance
Level: Level 2

Topic: Working Capital Management
Series: MAY 2021

FM – MAY 2018 – L2 – Q4 – Working Capital Management

Evaluates the impact of extending credit terms on a company’s sales, bad debts, and working capital financing costs.

Question

Adjaye Ltd has current sales of GH¢1.5 million per year. Cost of sales is 75% of sales and bad debts are 1% of sales. Cost of sales comprises 80% variable costs and 20% fixed costs, while the company’s required rate of return is 12%. Adjaye Ltd currently allows customers 30 days credit, but is considering increasing this to 60 days credit in order to increase sales.

It has been estimated that this change in policy will increase sales by 15% and bad debts will increase from 1% to 4%. It is not expected that the policy change will result in an increase in fixed costs, and creditors and stock will be unchanged.

Required:

Advise whether Adjaye Ltd should introduce the proposed policy. Support your answer with relevant computations.

Answer

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Tags: Accounts Receivable, Bad Debts, Credit Policy, Financing Costs, Working Capital
Level: Level 2

Topic: Working Capital Management
Series: MAY 2018

FM – NOV 2018 – L2 – Q4 – Working Capital Management

This question assesses the computation of working capital under different policies and discusses the importance of the cash conversion cycle and effective accounts receivable management.

Question

Kankam Ghana Ltd currently operates a long working capital cash cycle. Management is considering an initiative to reduce the cash cycle in order to manage the size and cost of the company’s working capital. Below are the components of working capital under the existing policy:

Component	Existing (GH¢)
Cash	1,000,000
Debtors	4,000,000
Inventory	6,000,000
Creditors	4,000,000

Under the proposed policy or initiative:

Cash is expected to increase by 50%
Debtors are expected to reduce by 25%
Creditors are expected to increase by 25%
The current ratio is expected to be 1.9 times.

The cost of funds to the company is 20% per annum.

Required:

a) Calculate the company’s net working capital under existing and proposed policies.
(5 marks)

b) Compute the change in the company’s working capital financing cost if the new policy is implemented. Advise management on whether to implement the new policy.
(3 marks)

c) Explain the importance of the cash conversion cycle in ascertaining the working capital needs of the company.
(4 marks)

d) Explain THREE (3) advantages to be derived from effective management of Accounts Receivable.
(3 marks)

Answer

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Tags: Accounts Receivable, Cash Conversion Cycle, Cost of Funds, Working Capital
Level: Level 2

Topic: Working Capital Management
Series: NOV 2018

FA – Nov 2019 – L1 – Q1 – The IASB’s Conceptual Framework

Explain the fundamental qualitative characteristics of financial information and post transactions into various ledger accounts.

Question

a) The IASB Conceptual Framework describes the fundamental qualitative characteristics of useful financial information.

Required:
State and explain the TWO (2) fundamental qualitative characteristics. (10 marks)

b) Kofi Mensah started a furniture business on January 1, 2018, and undertook the following transactions during the year:

On 1/1/18, he paid GH¢150,000 into the business.
On 4/1/18, he borrowed GH¢150,000 from Ama.
He paid GH¢200,000 on 6/1/18 for one room to be used as a small shop for his furniture business.
Kofi Mensah bought furniture costing GH¢80,000 on 8/1/18, which he plans to sell.
On 10/1/18, he bought furniture for resale from Kwame for GH¢150,000 agreeing to pay for them within 15 days.
Kofi Mensah sold furniture which had cost GH¢60,000 for GH¢90,000 on 12/1/18.
Furniture worth GH¢110,000 was sold for GH¢180,000 to AA Ltd on credit on 20/1/18.
On 24/1/18 Kwame was paid GH¢90,000.
On 28/1/18 AA Ltd paid GH¢80,000 of the amount he owed.

Note: All monies paid and received were through the bank account.

Required:
Post the above transactions to the following ledgers in the books of Kofi Mensah:
i) Bank account (3 marks)
ii) Inventory account (2 marks)
iii) Capital account (1 mark)
iv) Kwame account (2 marks)
v) AA Ltd account (2 marks)

Answer

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Tags: Accounts Receivable, Capital, Inventory, Ledger Accounts, Qualitative Characteristics
Level: Level 1

Topic: The IASB’s Conceptual Framework
Series: NOV 2019

FM – Nov 2024 – L2 – Q5a – Management of Receivables

Evaluate the financial implications of different strategies for managing Abaa LTD's accounts receivable.

Question

Reduction in Credit Period: Reducing the credit period from 60 days to 45 days. It is estimated that this change could reduce sales by 5% due to the stricter credit terms, but it would also decrease the bad debt ratio from 4% to 2% of sales.
Offering Early Payment Discounts: Introducing a 2% discount for customers who pay within 30 days. The company anticipates that 30% of its customers will take advantage of this discount, which would improve cash flow and reduce the average collection period by 15 days.
Engagement of a Factor: The company is also considering engaging a factoring company to manage its receivables. The factor would advance 80% of the invoice value upon the sale of goods at 200 basis points below the company’s cost of capital and charge a 3% fee on all sales. The factor is expected to reduce the bad debt ratio to 1% of sales and further reduce the average collection period by 20 days. Engaging the factor will lead to annual administrative savings of GH¢90,000.

Abaa LTD’s current annual sales are GH¢20 million, and the variable cost of sales is 60% of sales. The company’s cost of capital is 12% per annum.

Answer

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Tags: Accounts Receivable, Bad Debts, Cash Flow, Cost of Capital, Credit Period, Early Payment Discounts, Factoring, Working Capital
Level: Level 2

Topic: Management of receivables and payables
Series: Nov 2024

AA – Nov 2024 – L2 – Q5b – Substantive Testing of Accounts Receivable

Explain three substantive tests for verifying accounts receivable balance.

Question

Answer

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Tags: Accounts Receivable, Audit evidence, Audit Procedures, Financial Reporting, Risk Assessment, Substantive Testing
Level: Level 2

Topic: Audit and Assurance Evidence
Series: Nov 2024

ICMA – Nov 2024 – L1 – Q2b – Working Capital

Calculates total amount held in working capital excluding cash and equivalents.

Question

Working Capital Calculation
A company has annual sales revenues of GH¢45 million and the following working capital periods:

Working Capital Item	Period (months)
Inventory conversion period	2.5
Accounts receivable collection period	2.0
Accounts payable payment period	1.5

Production costs are 70% of sales revenue.

Required:
Calculate the total amount held in working capital excluding cash and cash equivalents.

Answer

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Tags: Accounts Payable, Accounts Receivable, Budgeting, Costing, Inventory
Level: Level 1

Topic: Budgeting, Cost and Cost Behaviour
Series: Nov 2024

MI – Nov 2015 – L1 – SB – Q6b – Accounting for Cost Elements

Calculates cash receipts expected over three months, considering credit sales terms and bad debts.

Question

The following information was extracted from the books of LAHA Limited:

Product P (units)	Product Q (units)
November	1,500
December	2,000
January	1,000
February	2,000
March	3,000

Required:
Calculate the cash receipts expected in January, February, and March. (12 Marks)

Answer

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Tags: Accounts Receivable, Bad Debts, Cash Flow, Cash Receipts, Credit Sales, Sales Revenue
Level: Level 1

Topic: Accounting for Cost Elements
Series: NOV 2015

FA – Nov 2015 – L1 – SB – Q5c – Bank Reconciliation

Reconcile accounts receivable ledger control with ledger balances and clear the suspense account.

Question

The trial balance of Mbobo Limited includes the following items:

The following information is available:

The total of debit balances in the accounts receivable ledger is ₦116,374, and the total of credit balances is ₦1,234.
The accounts receivable ledger includes a debit balance of ₦700 for Entity C, and the accounts payable ledger includes a credit balance of ₦800 relating to Entity C. Only the net amount will eventually be paid.
Included in the credit balances in the accounts receivable ledger is a balance of ₦600 in the name of H. Potoka. This arose because a sales invoice for ₦600 had earlier been posted in error from the sales day book to the debit of the account of M. Potoka in the accounts payable ledger.
An allowance of ₦300 granted to a customer for some damaged goods had been omitted from the appropriate account in the accounts receivable ledger. This allowance had been included in the accounts receivable control account.
A cash receipt from a credit customer for ₦345 had been entered in the cash book as ₦245.
The bank balance of ₦1,700 had been included in the trial balance, in error, as an overdraft.
The debit balance on the insurance account in the nominal ledger of ₦3,456 has been included in the trial balance as ₦3,546.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Accounts Receivable, Control Accounts, Reconciliation, Suspense account
Level: Level 1

Topic: Bank reconciliations
Series: NOV 2015

CR – Nov 2017 – L3 – Q2d – IAS 10: Events After the Reporting Period

Recommend the accounting treatment for a doubtful debt arising after the reporting period.

Question

Required:
As the Finance Director of Adonko Ltd, recommend the accounting treatment of the above, in the financial statements for the year ended 31 December 2016.

Answer

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Tags: Accounts Receivable, Doubtful Debts, Events After Reporting Period, Impairment
Level: Level 3

Topic: IAS 10: Events After the Reporting Period
Series: NOV 2017

FM – May 2021 – L2 – Q3c – Factoring Agency

Define what a factoring agency is and explain its role.

Question

What is a factoring agency?

Answer

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Tags: Accounts Receivable, Factoring Agency, Short-term Finance
Level: Level 2

Topic: Working Capital Management
Series: MAY 2021

FM – MAY 2018 – L2 – Q4 – Working Capital Management

Evaluates the impact of extending credit terms on a company’s sales, bad debts, and working capital financing costs.

Question

Required:

Advise whether Adjaye Ltd should introduce the proposed policy. Support your answer with relevant computations.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Accounts Receivable, Bad Debts, Credit Policy, Financing Costs, Working Capital
Level: Level 2

Topic: Working Capital Management
Series: MAY 2018

FM – NOV 2018 – L2 – Q4 – Working Capital Management

This question assesses the computation of working capital under different policies and discusses the importance of the cash conversion cycle and effective accounts receivable management.

Question

Component	Existing (GH¢)
Cash	1,000,000
Debtors	4,000,000
Inventory	6,000,000
Creditors	4,000,000

Under the proposed policy or initiative:

Cash is expected to increase by 50%
Debtors are expected to reduce by 25%
Creditors are expected to increase by 25%
The current ratio is expected to be 1.9 times.

The cost of funds to the company is 20% per annum.

Required:

a) Calculate the company’s net working capital under existing and proposed policies.
(5 marks)

b) Compute the change in the company’s working capital financing cost if the new policy is implemented. Advise management on whether to implement the new policy.
(3 marks)

c) Explain the importance of the cash conversion cycle in ascertaining the working capital needs of the company.
(4 marks)

d) Explain THREE (3) advantages to be derived from effective management of Accounts Receivable.
(3 marks)

Answer

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Tags: Accounts Receivable, Cash Conversion Cycle, Cost of Funds, Working Capital
Level: Level 2

Topic: Working Capital Management
Series: NOV 2018

FA – Nov 2019 – L1 – Q1 – The IASB’s Conceptual Framework

Explain the fundamental qualitative characteristics of financial information and post transactions into various ledger accounts.

Question

a) The IASB Conceptual Framework describes the fundamental qualitative characteristics of useful financial information.

Required:
State and explain the TWO (2) fundamental qualitative characteristics. (10 marks)

b) Kofi Mensah started a furniture business on January 1, 2018, and undertook the following transactions during the year:

On 1/1/18, he paid GH¢150,000 into the business.
On 4/1/18, he borrowed GH¢150,000 from Ama.
He paid GH¢200,000 on 6/1/18 for one room to be used as a small shop for his furniture business.
Kofi Mensah bought furniture costing GH¢80,000 on 8/1/18, which he plans to sell.
On 10/1/18, he bought furniture for resale from Kwame for GH¢150,000 agreeing to pay for them within 15 days.
Kofi Mensah sold furniture which had cost GH¢60,000 for GH¢90,000 on 12/1/18.
Furniture worth GH¢110,000 was sold for GH¢180,000 to AA Ltd on credit on 20/1/18.
On 24/1/18 Kwame was paid GH¢90,000.
On 28/1/18 AA Ltd paid GH¢80,000 of the amount he owed.

Note: All monies paid and received were through the bank account.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Accounts Receivable, Capital, Inventory, Ledger Accounts, Qualitative Characteristics
Level: Level 1

Topic: The IASB’s Conceptual Framework
Series: NOV 2019

Question Tag: Accounts Receivable

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FM – Nov 2024 – L2 – Q5a – Management of Receivables

Evaluate the financial implications of different strategies for managing Abaa LTD's accounts receivable.

AA – Nov 2024 – L2 – Q5b – Substantive Testing of Accounts Receivable

Explain three substantive tests for verifying accounts receivable balance.

ICMA – Nov 2024 – L1 – Q2b – Working Capital

Calculates total amount held in working capital excluding cash and equivalents.

MI – Nov 2015 – L1 – SB – Q6b – Accounting for Cost Elements

Calculates cash receipts expected over three months, considering credit sales terms and bad debts.

FA – Nov 2015 – L1 – SB – Q5c – Bank Reconciliation

Reconcile accounts receivable ledger control with ledger balances and clear the suspense account.

CR – Nov 2017 – L3 – Q2d – IAS 10: Events After the Reporting Period

Recommend the accounting treatment for a doubtful debt arising after the reporting period.

FM – May 2021 – L2 – Q3c – Factoring Agency

Define what a factoring agency is and explain its role.

FM – MAY 2018 – L2 – Q4 – Working Capital Management

Evaluates the impact of extending credit terms on a company’s sales, bad debts, and working capital financing costs.

FM – NOV 2018 – L2 – Q4 – Working Capital Management

This question assesses the computation of working capital under different policies and discusses the importance of the cash conversion cycle and effective accounts receivable management.

FA – Nov 2019 – L1 – Q1 – The IASB’s Conceptual Framework

Explain the fundamental qualitative characteristics of financial information and post transactions into various ledger accounts.

FM – Nov 2024 – L2 – Q5a – Management of Receivables

Evaluate the financial implications of different strategies for managing Abaa LTD's accounts receivable.

AA – Nov 2024 – L2 – Q5b – Substantive Testing of Accounts Receivable

Explain three substantive tests for verifying accounts receivable balance.

ICMA – Nov 2024 – L1 – Q2b – Working Capital

Calculates total amount held in working capital excluding cash and equivalents.

MI – Nov 2015 – L1 – SB – Q6b – Accounting for Cost Elements

Calculates cash receipts expected over three months, considering credit sales terms and bad debts.

FA – Nov 2015 – L1 – SB – Q5c – Bank Reconciliation

Reconcile accounts receivable ledger control with ledger balances and clear the suspense account.

CR – Nov 2017 – L3 – Q2d – IAS 10: Events After the Reporting Period

Recommend the accounting treatment for a doubtful debt arising after the reporting period.

FM – May 2021 – L2 – Q3c – Factoring Agency

Define what a factoring agency is and explain its role.

FM – MAY 2018 – L2 – Q4 – Working Capital Management

Evaluates the impact of extending credit terms on a company’s sales, bad debts, and working capital financing costs.

FM – NOV 2018 – L2 – Q4 – Working Capital Management

This question assesses the computation of working capital under different policies and discusses the importance of the cash conversion cycle and effective accounts receivable management.

FA – Nov 2019 – L1 – Q1 – The IASB’s Conceptual Framework

Explain the fundamental qualitative characteristics of financial information and post transactions into various ledger accounts.

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