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# Cost of Trade Credit, Cash Conversion Cycle

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Cost of Trade Credit
Calculate the nominal annual cost of nonfree trade credit under each of the following terms. Assume payment is made either on the due date or on the discount date.

A. 1/15, net 20.
B. 2/10, net 60.
C. 3/10, net 45
D. 2/10, net 45
E. 2/15, net 40

Cash Conversion Cycle
The Zocco Corporation has an inventory conversion period of 75 days, a receivables collection period of 38 days, and a payable deferral period of 30 days.

A. What is the length of the firm's cash conversion cycle?
B. If Zocco's annual sales are \$3,421,875 and all sales are on credit, what is the firm's investment in accounts receivable?
C. How many times per year does Zocco turn over its inventory?

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#### Solution Preview

Cost of Trade Credit
Calculate the nominal annual cost of nonfree trade credit under each of the following terms. Assume payment is made either on the due date or on the discount date.

A. 1/15, net 20.
B. 2/10, net 60.
C. 3/10, net 45
D. 2/10, net 45
E. 2/15, net 40

The cost of non free trade credit is given as %Discount/(100-% discount) X 365/(Payment Days-Discount Period)
The trade term 1/15,net 20 means that a discount of 1% can be ...

#### Solution Summary

The solution explains the calculation of cost of trade credit and the cash conversion cycle

\$2.19