McGriff Dog Food Company normally takes 21 days to pay for average daily credit
ID: 2435042 • Letter: M
Question
McGriff Dog Food Company normally takes 21 days to pay for average daily credit purchases of $9,640. Its average daily sales are $10,550, and it collects accounts in 26 days a. What is its net credit position? Net credit position b-1. If the fim extends its average payment period from 21 days to 37 days (and all else remains the same), what is the firm's new net credit position? (Negative amount should be indicated by a minus sign.) Net credit position b-2. Has the firm improved its cash flow? Yes NoExplanation / Answer
a ) Net credit position is calculated vide following formula
Net credit position = Accounts Receivable – Accounts payable
Accounts receivable
= average daily credit sales X average collection period
= $ 10550 * 26 days
= $ 274300
Accounts payable
= average daily credit purchases X average payment period
= $9,640 X 21
= $202440
Net Credit Position = $274300 – $202440= $71,860
b) If the payment period is extended from 21 days to 37 Days
New Accounts payable
= average daily credit purchases X New average payment period
= $9,640 X 37
= $356680
There will not be any change in Accounts receivable
Net Credit Position = $274300 – $356680 = - $82,380
C) Yes, the firm has improved its cash flow position instead in comparison to its previous position.