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CA Intermediate · Financial Management and Strategic Management · Financing of Working Capital

A trader sells goods on credit and, instead of waiting for payment, gets the bills of exchange of his customers discounted with a bank, receiving cash immediately less a discount charge. Which source of short-term working capital finance is this?

This is bill discounting. The seller gets the customers' bills of exchange discounted with a bank and receives cash immediately, less a discount charge. Commercial paper, trade credit and factoring are different sources, because they involve promissory notes, supplier credit or assignment of receivables respectively.

  1. ABill discountingCorrect
  2. BCommercial paper
  3. CTrade credit from suppliers
  4. DFactoring without recourse

Explanation

When a seller gets customers' bills of exchange discounted with a bank, receiving the amount less a discount charge before the due date, it is bill discounting. Commercial paper is an unsecured promissory note issued by companies, and trade credit is credit received from suppliers. Factoring involves assignment of book debts, not discounting of bills.

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