Question 1

**Section B - Case 1: VerdiGrow**

*Scenario:* VerdiGrow is an agricultural technology firm facing cash flow issues due to seasonal demand. The company currently has the following working capital metrics:
- Receivables days: 65 days
- Payables days: 40 days
- Inventory days: 55 days

VerdiGrow's main supplier is offering an early settlement discount of 2% if invoices are paid within 10 days, rather than the current 60 days taken by VerdiGrow. Assume a 365-day year.

**Question:**
What is the annualized percentage cost of the early settlement discount offered by the supplier? (Round to one decimal place).

Accepted Answer

Use the effective annual rate formula for discounts: Cost = [1 + (d / (100-d))] ^ (365 / t) - 1, where d is the discount percentage and t is the reduction in payment days.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Using simple interest instead of compound interest, or using the full 60 days instead of the 50-day difference.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FM — Financial Management Practice Exam 1

More questions from this exam