CFA Level I · CFA Level I Exam · Working Capital and Liquidity
A company offers credit terms of 2/10, net 30. Which of the following is the most likely effect of a customer paying on day 10 rather than day 30?
The company receives less cash per invoice, because the 2% discount is taken, but it collects 20 days sooner. Earlier collection lowers days of sales outstanding and raises receivables turnover, so the effects described in the other options would move in the wrong direction.
- AThe company receives less cash per invoice but collects soonerCorrect
- BThe company's days of sales outstanding rises
- CThe company's receivables turnover falls
Explanation
Paying within the discount period reduces the cash received by 2% but brings collection forward by 20 days. Faster collection lowers days of sales outstanding and raises receivables turnover, so options B and C describe the opposite effects.
Did you get it right without looking?
One question tells you little. A timed set on Working Capital and Liquidity shows your real accuracy, how long you take and where you lose marks.
More Working Capital and Liquidity questions
- A manufacturer's treasurer says the firm's primary working capital objective is to ensure the company can meet its short-term obligations wh…
- A retailer's cash conversion cycle is currently 45 days. If the retailer negotiates longer payment terms with suppliers, with no other chang…
- A treasurer compares a 90-day Treasury bill with a 90-day commercial paper issue from a highly rated corporation. Compared with the Treasury…
- A company has days of sales outstanding of 45, days of inventory on hand of 60 and days payables outstanding of 30. Management negotiates lo…
- Two companies in the same industry have identical current ratios of 1.8. Company X holds most of its current assets in cash and receivables,…
- Which of the following is most likely a feature of effective liquidity management at a corporate issuer?