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Question about Trade Credit and Receivables

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Trade Credit and Receivables. A firm offers terms of 2/15, net 30. Currently, two-thirds of all customers take advantage of the trade discount; the remainder pay bills at the due date.

a. What will be the firm's typical value for its accounts receivable period?

b. What is the average investment in accounts receivable if annual sales are $20 million?

c. What would likely happen to the firm's accounts receivable period if it changed its terms to 3/15, net 30?

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Solution calculates the firm's typical value for its accounts receivable period and the average investment in accounts receivable.

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a. What will be the firm's typical value for its accounts receivable period?

Currently two-thirds of all customers take advantage of the trade discount. This means that they pay on day 15

Currently one -thirds of all customers do not take advantage of the trade discount. This means that they pay on day 30

Value for Accounts Receivable period:

15 days x 2/3 = 10 days

30 days x 1/3 = 10 days

Total =10 + 10 = 20 days

Answer: 20 days

b. What is the average investment in accounts receivable if annual sales are ...

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