Effective credit management involves establishing credit standards for extending

Question

Effective credit management involves establishing credit standards for extending credit to customers, determining the company's terms of credit, and setting up procedures for invoicing and collecting past-due accounts The following statement refers to a credit management policy. Select the best term to complete the sentence The minimum financial strength a customer must have to be granted credit is indicated by the company's credit terms collection policy credit standards Stowe-Arts Holdings Co. Stowe-Arts Holdings Co. has a very attractive credit policy, and none of its customers pays in cash when the firm makes a sale. Stowe-Arts Holdings Co. sells to its customers on credit terms of 2/10, net 30 If a customer bought $200,000 worth of goods and paid the firm cash eight days after the sale, how much cash would Stowe-Arts Holdings Co. get from the customer? $196,000 O $200,000 O $160,000 O $185,000 If the customer paid off the account after 15 days, Stowe-Arts Holdings Co. would receive Approximately 30% of Stowe-Arts Holdings Co.'s customers take advantage of the discount and pay on the 10th day The remaining 70% take an average of 35 days to pay off their accounts, what is Stowe-Arts Holdings Co.'s days sales outstanding (DSO), or the average collection period? 30.3 days O 24.8 days O 27.5 days O 22.0 days

Explanation / Answer

X/Y, net Z means that the buyer can earn a discount of X% if paid within Y days, otherwise pay the complete amount within Z days

so

2/10, net 30 is terms of payment here

a) Since 8 days after sale, the amount paid (after getting 2% discount) = 200000 * .98 = $ 196,000

if after 15 days, then complete amount of $ 200,000 is to be paid by the buyer

b) DSO = (Accts receivables * number of days)/Credit Sales

(0.3*10*196000 + 0.7*35*200000)/200000 = 27.44

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