CA Intermediate · Financial Management and Strategic Management · Management of Payables (Creditors)
Sharma Traders buys on terms '2/10, net 40'. Taking a 360-day year and ignoring compounding, the approximate annual cost of forgoing the discount, using the formula [Discount/(100 - Discount)] x [360/(Credit period - Discount period)], is closest to:
The annual cost is about 24.49%. The discount of 2 on an effective payment of 98 gives 2/98, and the 30 extra days (40 minus 10) allow 360/30 = 12 periods a year. Multiplying 2.0408% by 12 gives 24.49%.
- A24.49%Correct
- B16.33%
- C23.97%
- D20.00%
Explanation
Cost = (2/98) x (360/(40-10)) = 0.020408 x 12 = 24.49%. Using 360/40 = 9 gives 18.37%, a wrong base for days. Using 2/100 instead of 2/98 gives 24.00%, which ignores that the amount actually paid is 98 per 100 invoiced.
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
- Ritu Textiles has annual credit purchases of ₹7,30,000 and average trade payables of ₹80,000. Taking a 365-day year, what is the average pay…
- Which of the following is a correct statement about a bill of exchange as an instrument used in managing payables?
- A supplier offers terms of '2/10 net 30'. Ignoring compounding and using a 360-day year, what is the approximate annualised implicit cost of…
- Sharma Traders buys goods on terms '3/15, net 45'. Using the simple (non-compounded) formula on a 360-day year, what is the approximate annu…
- Which of the following is a feature of trade credit as a source of short-term finance for a firm?
- Gupta Ltd has annual purchases of Rs 7,20,000 (360 days) on terms 2/10, net 40. Taking the discount means paying on day 10 with the discount…