Question

Qno.2 (a) What would be the approximate cost of not taking a discount if the credit terms of "2/10, net 40" are offered? (Assume a 365-day year). (b) Ninety-percent of XYZ's total sales of $600,000 is on credit. Caleulate the average collection period and year-end receivables if its year-end receivables turnover is 5.

Answer 1

a. cost of not taking a discount = discount / (100- discount) * 365 days / (total period - discount period)

=>[2 /(100-2) ]* 365 / (40-10)

=>0.24829928

=>24.83%.....(rounded to two decimals)

b.year end receivables turnover = 5

net credit sales / year end receivables = 5

here,

net credit sales = $600,000*90% =>$540,000

540,000 / year end receivables = 5

=>year end receivables =$108,000....................(540,000/5).

average collection period.= 365 days / accounts receivable turnover

=>365 / 5

=>73 days.