 Hello and welcome to the session in which we would look at accounts payable management. Usually accounts payable is one of the largest sources of short-term financing and for some companies could be the main source of financing. If you don't have loans you might buy your product, your services on account, so it's going to be a large portion of your liabilities or the largest. So it's very important that we know how to manage this. Now accounts payable is covered both on the BEC section and on the FAR section on the CPA exam. That's why I always tell students first complete FAR because FAR is the basics for other topics. So for example in FAR you have learned that accounts payable is created when you debit an asset or an expense, when you create an asset or an expense and you buy it on account you credit accounts payable. So this is the basic idea of accounts payable. So you have to be familiar with that idea and that's why FAR is important to take before BEC, before audit. 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Now, on the CPA exam, they want you to know, do you know how much is the discount, the savings on the discount? And here's how you compute the savings on the discount. I'm going to show you the formula. Then I'm going to show you a quick way to find the answer without even going through the formula, because on the CPA exam, speed is important. Now, it's important that you know the formula, but it's also more important if you can answer the questions without performing any computation. And the formula goes something like this. You will take 360 days divided by pay period minus, and I'm going to explain this, minus the discount period. Well, like, yeah, this minus the discount period. Then you multiply this by the discount divided by 100% minus the discount. And don't worry, this is a really easy formula. Okay, so what are we saying here? Well, 360 is 360. Let's fill in what's required. The pay period is the credit period. Well, let's not call it pay period. I'm going to since I to keep the terminology consistent, I'm going to call it your credit period. Your credit period is 30 days. So you'll take 30 days minus the discount period. The discount period I told you it's 10 days. If you pay within 10 days. So here's what's happened. You take 360, which is this is how many days in a year. And if they told you to use 365 use 365, usually they're going to say 360, be careful, whatever they tell you in the problem 360 divided by 20. Now, what is this 20? This is how many days you are paying earlier. So you are saving 20 days. Okay, you multiply this by the discount rate, which happens to be 2% 0.02 or 2% divided by one minus 2%, which is 0.98. Now, if you know anything, 2 divided by one is 2%, 2 divided by 0.98 is a little bit over. This is going to be a little bit over 2%. It's going to be a little bit over 2%. Why? Because 2 divided by 1, I'm sorry, 2 divided by 100 is 2%, or 2 or 0.02 divided by 1 equal to exactly 2%. So 0.2 divided by 0.98 is a little bit over 2%. You can say approximately 2%, but it's a little bit over. Now, so you're saving approximately 2%, and how many times are you saving this 2%. Well, if you are paying 10 days on day 10, and we're assuming you're paying on day 10, you're saving 2% every 20 days. So what does that mean? How many 20 days do we have in a year? 360. So now that's 360 divided by 20. This should be around 18. Okay, around 18. Now, what you do is you will take 18, so you're saving this 2% 18 times a year. You will take 18 times approximately 2%. It should be around 38 to 40% the savings. Now, you can exactly find this. If you want to try it, it's going to be approximately between 38 to 40%, something in that ballpark. Now, if I told you that your discount rate happens to be 1%, the discount rate is 1%, well, guess what? Then you're going to be saving 1%, a little bit over 1%, a little bit over 1%, 18 times the year. So your discount rate, it's going to, your savings is approximately 18 plus, 18% plus. It's a little bit over 18%. So any number below 18%, you would eliminate. Any number that's so far away from 18%, you eliminate. Now, if you're given 18.02, now let's assume you're given 18.19 and 19%, then I would say do some computation that's going to be closer to 18%. But what I'm trying to say is you should be able to ballpark the savings, to ballpark the savings without doing any computation. Now, remember, it's the discount period minus the, I'm sorry, the credit period minus the discount period. So this is the credit period. So the credit period minus the discount period is you're saving, you're doing those savings every 20 days. Very easy questions if you understand this. Again, you don't have, you don't have to do the computation. You should be able to do it. For example, if the discount rate, for example, let me just, without doing any computation, again, if the discount rate, if they're giving me 3%, I'm saving 3% every 18 times. That's, that's quite a bit of savings, good savings for the year. So just so you can ballpark your numbers. Okay. What other method to manage accounts payable? Well, guess what? If you're making the payment, you want to slow down the disbursement as much as possible. Okay. How do you do that? Well, rather than sending them, why you write them a check and not only write checks, write checks from geographical area that's distant from your customers. So if you know your customers are in New York, you'd write checks from LA. Okay. It's a different, it's a different Federal Reserve Bank. So it takes longer for the check to clear. It's going to give you more, it's going to give your money more time in your bank account and also mail checks from remote areas, from remote post offices. Again, it's going to delay the process. That's the point. The point is to delay the process. Now, this is debatable on two reasons, on ethical and economic grounds, because you have to understand what's your, what's that when you say 2% within 10 days, is it, you have, do they have to receive the payment by day 10 or is the mail has to be dated by 210. If it's dated by 210, you don't mail it until day 10 and you mail it from LA and you mail it from a remote office. So it's going to take five, six and during coronavirus, that may take a month for them to get it. But if it's the posted date, then that's the posted date. Okay. So again, again, these, this topic is becoming less and less relevant and the reason is not, not, not straightforward, but the reason is simple. Most companies now, they, they make payments, guess what, using electronic funds. Okay. But if, if I was a company and I want to manage my cash, I don't, I would like to receive my payment in direct fund, direct transfer from the bank, but my disbursement will be made in a check. Also what companies can do, they can do what's called the zero balance account, what are zero, zero balance account, you will make an agreement with your bank account that you will have two accounts. One is a main account and you might have some sub accounts or accounts. And what happened is this, so if this is the main account, what you do, you will create that sub account. And this sub account, for example, it's going to pay your suppliers, the sub account is for your suppliers. So what you do is you, you, you keep a zero balance in this account. So only you transfer money to this account when you need to, when the, when you need to clear the checks. Okay. So what is that going to do? Because if you have a regular account, if you have two accounts, if you have two main accounts, you have to, in one of the account, you have to keep a minimum balance. You know, you have to keep a minimum balance. You don't want to tie up any minimum balance. So you would say this account, you call it zero balance account. Zero balance means I will not transfer money until I have payments on this account. Therefore, I only have to keep, I only have to tie up the money in the main account, a minimum balance. Okay. So you'll have one for your suppliers and usually companies use one for payroll as internal control. So this is what you do. Zero balance accounts where you only transfer the money when needed. So you don't need a safety dollar amount in the zero balance account. You only need the safety amount, a minimum balance in your main account. Also another way to do this is to something called controlled disbursement account. Again, what you do is if it's you're doing a wire, you only transfer the money to that account when that went the day of the payment. So you don't have to keep any extra money there. Again, those are topics. The key in account spable is to delay the disbursement as much as possible. And the opposite is true. When we deal with account receivable management, you want to receive the payment as early as possible. Once again, at the end of this recording, I'm going to remind you, if you're studying for your CPA exam, give me a chance. Take a look at my material. I don't replace your CPA review course. I work along hand in hand with them, not along with them themselves, the company along their material. So I can help you with any course you are taking. I can help you succeed. Good luck. Study hard. And of course, stay safe.