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FM12 Ch 27 Solutions Manual - ANSWERS TO END-OF-CHAPTER...

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Chapter 27 Providing and Obtaining Credit ANSWERS TO END-OF-CHAPTER QUESTIONS 27-1 a. Cash discounts are often used to encourage early payment and to attract customers by effectively lowering prices. Credit terms are usually stated in the following form: 2/10, net 30. This means a 2 percent discount will apply if the account is paid within 10 days, otherwise the account must be paid within 30 days. b. Seasonal dating sets the invoice date, or date at which the credit and discount periods begin, to a time during the buyer’s own selling season, regardless of the actual sale date. c. An aging schedule breaks down accounts receivable according to how long they have been outstanding. This gives the firm a more complete picture of the structure of accounts receivable than that provided by days sales outstanding. Days sales outstanding (DSO) is a measure of the average length of time it takes a firm's customers to pay off their credit purchases. d. The payments pattern approach is a procedure which measures any changes that might occur in customers' payment behavior. The advantage of this approach is that it is not affected by changes in sales levels due to cyclical or seasonal factors. The uncollected balances schedule, which is an integral part of the payments pattern approach, helps a firm monitor its receivables better and also forecast future receivables balances. e. The situation when interest is not compounded, that is, interest is not earned on interest, is simple interest. Discount interest is interest that is calculated on the face amount of a loan but is paid in advance. Add-on interest is interest that is calculated and added to funds received to determine the face amount of an installment loan. 27-2 The latest date for paying and taking discounts is May 10. The date by which the payment must be made is June 9. 27-3 False. An aging schedule will give more detail, especially as to what percentage of accounts are past due and what percentage of accounts are taking discounts. 27-4 No. Although B sustains slightly more losses due to uncollectible accounts, its credit manager may have a wise policy that is generating more sales revenues (and thus profits) than would be the case if he had a policy which cut those losses to zero. Answers and Solutions: 27 - 1
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27-5 A/R Sales Profit a. The firm tightens its credit standards. - - 0 b. The terms of trade are changed from 2/10, net 30, to 3/10, net 30. 0 + 0 c. The terms are changed from 2/10 net 30, to 3/10, net 40. 0 + 0 d. The credit manager gets tough with past-due accounts. - - 0 Explanations: a. When a firm “tightens” its credit standards, it sells on credit more selectively. It will likely sell less and certainly will make fewer credit sales. Profit may be affected in either direction. b. The larger cash discount will probably induce more sales, but they will likely be from customers who pay bills quickly. Further, some of the current customers who do not take the 2 percent discount may be induced to start paying earlier. The effect of this
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