Skip to content

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

Mehta Traders buys goods on terms of 2/10, net 30. It decides not to take the cash discount and pays on the 30th day. Using a 360-day year, the approximate annual cost of forgoing the discount (ignoring compounding) is:

The cost of forgoing the 2/10 net 30 discount is 36.73% per annum. It is computed as 2/98 multiplied by 360/20, since payment is delayed by 20 days beyond the discount period, giving 0.020408 x 18 = 36.73%.

  1. A36.73%Correct
  2. B24.49%
  3. C37.50%
  4. D18.37%

Explanation

Cost = [Discount/(100 - Discount)] x [360/(Credit period - Discount period)] = (2/98) x (360/20) = 0.020408 x 18 = 36.73%. Option 37.50% wrongly uses 2/96 style or 360/... rounding; 24.49% uses a 30-day gap (360/30 = 12 x 2.04%); 18.37% uses a 40-day gap.

Did you get it right without looking?

One question tells you little. A timed set on Financing of Working Capital shows your real accuracy, how long you take and where you lose marks.

Practise Financing of Working CapitalFree diagnostic mock

More Financing of Working Capital questions