Accounting and Finance Foundations

Unit 10

Accounting and Finance Foundations Unit 10: Credit 758

Credit

Chapter 22

Lesson 22.4

Student Guide

Impact of Credit on Financial Decisions

So far, the sections in this unit have dealt primarily with credit decisions affecting consumers. Beginning

with this section, you are going to evaluate the effect of credit when making financial decisions.

Businesses use a variety of methods to motivate customers to buy products and make payments for their

purchases. The principal methods include: (1) allowing consumers to use credit cards to pay for their pur-

chases; (2) extending direct credit and discounts for early payment to business customers; and (3) allow-

ing returns from all customers under certain stated circumstances. These methods, in turn, affect the way

we compute net sales revenue.

Businesses may decide to accept credit cards for a variety of reasons:

n To increase customer traffic

n To avoid the cost of providing credit directly to consumers, including recordkeeping and bad debts

n To lower losses due to bad checks

n To receive money faster

Remember, earlier you learned that credit card companies charge a fee for the service they provide. For

example, let’s say you have a lumber company, Deals. For each dollar of lumber that Deals sell to custom-

ers using credit cards, the company only gets $0.97 of the dollar. The other $0.03 goes to the credit card

company. That’s because the credit card company charges a three percent fee (credit card discount) for its

service. As a business owner, you must understand the effect of this fee on your net sales.

Example:

Deals’ daily credit card sales were $3,000. If the credit card company charges a 3% fee, what are the net

sales?

Solution:

Sales $3,000

Less: Credit Card Discount (3,000 X 3%) - 90

Net Sales (reported on the income statement) $2,910

Individuals, businesses, and organizations aren’t the only debtors in this country. Even

governments borrow funds on credit. In fact, the federal government’s total debt is currently

around $16 trillion! Who or what are the government’s creditors? Social Security and Medi-

care trust funds, the Federal Reserve, other nations (including China, Japan, Russia, Mexico,

and Canada), and even smaller trust funds such as the Harry S. Truman Scholarship Founda-

tion and the Cheyenne River Sioux Tribe’s habitat restoration fund. And, just like individuals,

businesses, and organizations, the United States has a credit rating. If the federal government

continues to borrow at the same pace it has in recent years, its credit rating may suffer. What

impact do you think a reduced U.S. credit rating would have on you?