CA Intermediate · Financial Management and Strategic Management · Management of Payables (Creditors)
A supplier offers terms "2/10, net 40". Using a 360-day year and ignoring compounding, what is the approximate annual cost of forgoing the cash discount?
The annual cost of forgoing a 2/10, net 40 discount is about 24.49%. The discount is 2 on an effective payment of 98, and the extra credit of 30 days repeats 12 times in a 360-day year, giving 2/98 times 12.
- A24.00%
- B24.49%Correct
- C18.37%
- D14.69%
Explanation
Cost = (2/98) x (360/30) = 0.020408 x 12 = 24.49%. Check: 2/98 = 2.0408%; times 12 = 24.49%. Option 24.00% wrongly uses 2/100 as the base. Option 18.37% uses 45 days wrongly, and 14.69% uses 50 days wrongly.
Did you get it right without looking?
One question tells you little. A timed set on Management of Payables (Creditors) shows your real accuracy, how long you take and where you lose marks.
More Management of Payables (Creditors) questions
- Which of the following is a recognised technique or arrangement for managing trade payables in which the buyer's bank pays the supplier earl…
- Mehta Industries buys Rs 36,00,000 of raw material annually (360 days) on terms "2/10, net 40". A bank offers a loan at 14% p.a. The firm ca…
- Which of the following is generally an advantage of effective payables management, particularly for a firm that delays payments within the a…
- Supplier invoices to Kaveri Traders carry terms "3/15, net 45". If Kaveri forgoes the cash discount and pays on day 45, what is the approxim…
- Kaveri Traders buys goods worth ₹12,00,000 a year on terms '1/15 net 45'. A bank offers a short-term loan at 10% per annum. Taking a 360-day…
- Which of the following is a correct statement about a bill of exchange as an instrument used in managing payables?