McGriff Dog Food Company normally takes 27 days to pay for average daily credit
ID: 2687319 • Letter: M
Question
McGriff Dog Food Company normally takes 27 days to pay for average daily credit purchases of $9,530. Its average daily sales are $10,680, and it collects accounts in 32 days. (a) What is its net credit position? (Omit the "$" sign in your response.) Net credit position $ (b-1) 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? (Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.) Net credit position $ (b-2) Has it improved its cash flow? Yes NoExplanation / Answer
Solution: McGriff Dog Food Company a. Net credit position = Accounts Receivable – Accounts payable Accounts receivable = average daily * average collection credit sales period $10,000 * 25 = $250,000 Accounts payable = average daily * average payment credit purchases period Payment Period = $9,000 * 20 = $180,000 Net Credit Position = $250,000 – $180,000 = $70,000 b. Accounts Receivable will remain at $250,000 Accounts Payable = $9,000 * 32 = 288,000 Net Credit Position ($ 38,000) The firm has improved its cash flow position. Instead of extending $70,000 more in credit (funds) than it is receiving, it has reversed the position and is the net recipient of $38,000 in credit.