2. changing the credit period Making changes to a firm?s credit policy involves
ID: 2645625 • Letter: 2
Question
2. changing the credit period Making changes to a firm?s credit policy involves trade-offs. Assuming that all other factors remain constant, which of the following are outcomes expected to result from an increase in a firm?s cash discount? Check all that apply. A decrease in the creditworthiness of the firm?s customers An increase in the creditworthiness of the firm?s customers An increase in the cost of the discounts given An increase in the firm?s credit sales, a speeding up of customer payments, and a reduction in the firm?s receivables investmentExplanation / Answer
Answer:
1 . If the firm increases cash discount it will increase the sales and decrease the receivables investment but on the other hand it will increase the cost of the discounts given .
Hence last two statements are correct.
2. A.
Current Days sale outstanding = 105 days
Hence, Accounts Receivables *365 / Net credit sales = 105
Accounts Receivables *365 / 7500000 = 105
Hence Current Accounts Receivables = 105*7500000/365 = $2157534.25
Expected Days sale outstanding = 75 days
Hence, Accounts Receivables *365 / Net credit sales = 75
Accounts Receivables *365 / 7500000 =75
Hence Expected Accounts Receivables = 75*7500000/365 = $1541095.89
So Expected change in the Accounts Receivables = 2157534.25 - 1541095.89
= $616438.36
2.B
Cost saving by reduction in the balance of Accounts Receivables = Decrease in AR balance * return rate of investment
= $616438.36 * 12%
= $73972.60
2.C.
It is given that 16% of the customer
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