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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?

Problem is attached as a Word Doc. You Must show your work and include all Formulas used.

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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 ...

Solution Summary

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

$2.19
See Also This Related BrainMass Solution

What should the nominal cost of trade credit be to those customers who do not take discounts, based on a 365 day year, assuming that they pay on time, even though they do not?

I have been given a sample of study questions for my upcoming financial management test. Most of it I have been able to do fairly easily, but there are 5 questions I am having a difficult time with. Specifically, I am looking for not only the answer to these following questions, but how you came to get them as this is what I really need to know for the test. I've attached a file with the 5 questions on it. Any help at all will be appreciated.

The following information is to be used to answer questions 5 questions:

Discount percentage 3%
Days of credit w/o being late 40
Discount period 10
Days nondiscount customers take to pay 65
Annual sales $900,000
% of customers who take the discount 30%
% of customers who don't take the discount 70%
% cost per period 3.09%
Number of periods per year, assuming customers pay on time 12.167
Number of periods per year, assuming customers pay late 6.636

Acme Co. sells on terms of 3/10, net 40. Total sales for the year are $900,000. 30% of the customers pay on the 5th day and take discounts; the other 70% pay, on average, 65 days after their purchases, so they pay late. Assume a 365 day year for this problem, and also assume that both sales and accounts receivable are recorded net of discounts, regardless of whether or not customers take discounts.

Nominal cost of trade credit
1. What should the nominal cost of trade credit be to those customers who do not take discounts, based on a 365 day year, assuming that they pay on time, even though they do not?

a. 35.12%
b. 37.63%
c. 39.44%
d. 41.82%
e. 43.35%

Nominal cost of trade credit
2. What is the actual nominal cost of trade credit to those customers who do not take discounts, based on a 365 day year, recognizing that they do not pay on time?

a. 18.66%
b. 19.22%
c. 19.90%
d. 20.52%
e. 21.75%

Effective cost of trade credit
3. What is the effective cost of trade credit to those customers who do not take discounts, based on a 365 day year, recognizing that they do not pay on time?

a. 22.40%
b. 22.88%
c. 23.46%
d. 24.03%
e. 24.91%

Determining accounts receivable
4. Assuming that Acme's sales are constant from year to year and also during each year, how much accounts receivable does the company have? Assume that both annual sales and accounts receivable are based on net sales, regardless of whether or not all customers take discounts.

a. $109,231
b. $114,871
c. $119,589
d. $123,257
e. $127,984

Days sales outstanding
5. What is Acme's DSO?

a. 42.5 days
b. 44.0 days
c. 45.5 days
d. 47.0 days
e. 48.5 days

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