Credit terms. Purchases made on credit are due in full by the end of the billing
ID: 2449428 • Letter: C
Question
Credit terms. Purchases made on credit are due in full by the end of the billing period. Many firms extend a discount for payment made in the first part of the billing period. The original invoice contains a type of shorthand notation that explains the credit terms that apply. (Note: Assume a 365 day year.) Answer ABC&D
a. Write the shorthand expression of credit terms for each of the following
Cash Discount Cash Discount Period Credit Period Beginning of Credit Period
1% 15 days 45 days Date of invoice
2% 10 days 30 days End of Month
2% 7 days 28 days Date of invoice
1% 10 days 60 days End of Month
b. For each of the sets of credit terms in part a, calculate the number of days until full payment is due for invoices dated march 12.
c. For each of the set of credit terms, calculate the cost of giving up the cash discount.
d. If the firms cost of short term financing is 8%, what would you recommend in regard to taking the discount or giving up in each case.
Explanation / Answer
a.
Shorthand expression of credit terms
Cash Discount
Cash Discount Period (Days)
Credit Period (Days)
Shorthand expression
1%
15
45
1/15, net 45
2%
10
30
2/10, net 30
2%
7
28
2/7, net 28
1%
10
60
1/10, net 60
b.
Calculation of number of days until full payment is due:
Invoice date
Credit Period (Days)
Beginning of Credit Period
Days until Payment
12-Mar
45
Date of Invoice
45
12-Mar
30
End of month
49
(19 days in Mar +30 days)
12-Mar
28
Date of Invoice
28
12-Mar
60
End of month
79
(19 days in Mar +60 days)
c.
Calculation of the cost of giving up the cash discount
Cash Discount
Cash Discount Period (Days)
Cost of giving up
A
B
=(A/B)*365
1%
15
24.33%
2%
10
73.00%
2%
7
104.29%
1%
10
36.50%
d.
Cost of giving up
Cost of short term financing
Decision
24.33%
8%
Take Discount
73.00%
8%
Take Discount
104.29%
8%
Take Discount
36.50%
8%
Take Discount
a.
Shorthand expression of credit terms
Cash Discount
Cash Discount Period (Days)
Credit Period (Days)
Shorthand expression
1%
15
45
1/15, net 45
2%
10
30
2/10, net 30
2%
7
28
2/7, net 28
1%
10
60
1/10, net 60
b.
Calculation of number of days until full payment is due:
Invoice date
Credit Period (Days)
Beginning of Credit Period
Days until Payment
12-Mar
45
Date of Invoice
45
12-Mar
30
End of month
49
(19 days in Mar +30 days)
12-Mar
28
Date of Invoice
28
12-Mar
60
End of month
79
(19 days in Mar +60 days)
c.
Calculation of the cost of giving up the cash discount
Cash Discount
Cash Discount Period (Days)
Cost of giving up
A
B
=(A/B)*365
1%
15
24.33%
2%
10
73.00%
2%
7
104.29%
1%
10
36.50%
d.
Cost of giving up
Cost of short term financing
Decision
24.33%
8%
Take Discount
73.00%
8%
Take Discount
104.29%
8%
Take Discount
36.50%
8%
Take Discount
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