CA Intermediate · Financial Management and Strategic Management · Management of Receivables
Anand Traders offers credit terms of 2/10, net 30 to its customers. Using a 360-day year and ignoring compounding, what is the approximate annualised cost to a customer of forgoing the cash discount?
The annualised cost is about 36.73%. A customer who skips the discount pays 2 extra on a net amount of 98 to gain 20 extra days of credit (30 less 10). So the cost is 2/98 multiplied by 360/20, which comes to 36.73%.
- A36.73%Correct
- B36.00%
- C24.49%
- D73.47%
Explanation
Cost = [2 / (100 - 2)] × [360 / (30 - 10)] = 0.020408 × 18 = 36.73%. Using 2/100 instead of 2/98 gives 36%, which ignores that the customer actually pays only ₹98 for the use of funds. Using 30 days instead of 20 gives 24.49%.
Did you get it right without looking?
One question tells you little. A timed set on Management of Receivables shows your real accuracy, how long you take and where you lose marks.
More Management of Receivables questions
- Kaveri Foods has annual credit sales of ₹60,00,000 with a 30-day average collection period. Variable cost is 70% of sales and bad debts are …
- Which of the following best describes the 'collection period' component of the credit policy of a firm managing its trade receivables?
- In the context of credit policy for managing receivables, which one of the following is correctly described as a 'Capacity' consideration am…
- Which of the following best describes the 'collection policy' of a firm in the context of management of receivables?
- In the traditional framework for credit evaluation of a customer, which of the 'Five Cs' refers to the judgement of the customer's ability t…
- A firm has credit sales of ₹9,00,000 for the year (360 days) and receivables outstanding at year end of ₹1,50,000. What is its debtors turno…