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

Which statement about trade credit as a source of working capital finance is correct?

Forgoing a cash discount makes trade credit costly, and the annualised cost is higher when the additional credit period gained beyond the discount period is shorter. Trade credit is therefore not always free, and it is a short-term, usually unsecured source.

  1. ACash discount forgone makes trade credit costly, and the cost rises as the credit period beyond the discount period shortensCorrect
  2. BTrade credit is always a free source of finance
  3. CTrade credit requires a pledge of stock to the supplier
  4. DTrade credit is a long-term source of finance

Explanation

If a discount such as 2/10 net 30 is forgone, the implicit annualised cost is high, and it increases when the extra days of credit gained are fewer. Trade credit is not always free, needs no pledge, and is short-term.

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