Principles of Managerial Finance

CHAPTER 15 Current Liabilities Management 659

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SELF-TEST PROBLEM (Solution in Appendix B)

ST 15–1 Cash discount decisions The credit terms for each of three suppliers are shown

in the following table.

a. Determine the approximatecost of giving up the cash discount from each

supplier.

b. Assuming that the firm needs short-term financing, indicate whether it would

be better to give up the cash discount or take the discount and borrow from a

bank at 15% annual interest. Evaluate each supplier separatelyusing your

findings in part a.

c. What impact, if any, would the fact that the firm could stretch its accounts

payable (net period only) by 20 days from supplier Z have on your answer in

part brelative to this supplier?

PROBLEMS

15–1 Payment dates Determine when a firm must pay for purchases made and

invoices dated on November 25 under each of the following credit terms.

a. net 30 date of invoice c. net 45 date of invoice

b. net 30 EOM d.net 60 EOM

15–2 Cost of giving up cash discounts Determine the cost of giving up cash dis-

counts under each of the following terms of sale.

a. 2/10 net 30 e. 1/10 net 60

b. 1/10 net 30 f. 3/10 net 30

c. 2/10 net 45 g.4/10 net 180

d. 3/10 net 45

15–3 Credit terms Purchases made on credit are due in full by the end of the billing

period. Many firms extend a discount for payment made in the first part of the

billing period. The original invoice contains a type of “short-hand” notation that

explains the credit terms that apply.

a. Write the short-hand expression of credit terms for each of the following.

Cash Beginning of

Cash discount discount period Credit period credit period

1% 15 days 45 days date of invoice

2 10 30 end of month

2 7 28 date of invoice

1 10 60 end of month

Supplier Credit terms

X 1/10 net 55 EOM

Y 2/10 net 30 EOM

Z 2/20 net 60 EOM