Explore BrainMass

Explore BrainMass

    Curent Asset Management

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Company X has credit sales of $144,000 yearly with credit terms of net 30 days, which is also the average collection period. Company X does not offer a discount for early payment, so it's customers take 30 days to pay.

    If Company X offered a 2% discount for payment in 10 days and every customer took advantage, (using full sales of $144,000 to calculate receivables) the new average receivables would be?

    Then Company X reduces its bank loan which costs 10% by the cash generated from reduced receivables, please help calculate what the net gain or loss is to the company and should it offer the discount?

    Then assume the new trade terms of 2/10, net 30 will increase sales by 15%. If company X earns 20% before discounts, should it offer the discount?

    © BrainMass Inc. brainmass.com June 3, 2020, 10:00 pm ad1c9bdddf

    Solution Preview

    Question 1:
    To handle this question efficiently, we would use the idea of account receivable collection period, which is calculated by the formula

    Account receivable collection period = 365 * Daily Account Receivable / Total Net Sales
    = Annual Credit Sales / Total Net Sales
    Here, the account receivable collection period = 30
    annual credit sales = $144,000, so we get
    30 = $144,000 / Total Net Sales
    Total Net ...

    Solution Summary

    This solution of 316 words calculates the new average of receivables for Company X and provides a recommendation on discounts based on new trade terms. All steps are shown with justifications.