CHAPTER 20
CREDIT AND INVENTORY MANAGEMENT
Solutions to Questions and Problems
NOTE: All end of chapter problems were solved using a spreadsheet. The final answer for each problem is found
without rounding during any step in the problem.
Basic
1.
a.
There are 30 days until account is overdue. If you take the full period, you must remit:
Remittance= 200($95)
Remittance= $19,000
b.
There is a 2 percent discount offered, with a 10 day discount period. If you take the discount, you will
only have to remit:
Remittance = (1 – .02)($19,000)
Remittance = $18,620
c.
The implicit interest is the difference between the two remittance amounts, or:
Implicit interest = $19,000 – 18,620
Implicit interest = $380
The number of days’ credit offered is:
Days’ credit = 30 – 10
Days’ credit = 20 days
2.
The receivables turnover is:
Receivables turnover = 365/Average collection period
Receivables turnover = 365/48
Receivables turnover = 7.604 times
And the average receivables are:
Average receivables = Sales/Receivables period
Average receivables = $65 million/7.604
Average receivables = $8,547,945
3.
a.
The average collection period is the percentage of accounts taking the discount times the discount period,
plus the percentage of accounts not taking the discount times the days’ until full payment is required, so:
Average collection period = .65(10 days) + .35(30 days)
Average collection period = 17 days
b
And the average balance sheet is:
Average balance = 1,200($2,200)(17)(12/365)
Average balance = $1,475,506.85
156
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The interest rate for the term of the discount is:
Interest rate = .02/.98
Interest rate = .0204 or 2.04%
And the interest is for:
40 – 9 = 31 days
So, using the EAR equation, the effective annual interest rate is:
EAR = (1 + Periodic rate)
m
– 1
EAR = (1.0204)
365/31
– 1
EAR = .2685 or 26.85%
a.
The periodic interest rate is:
Interest rate = .03/.97
Interest rate = .0309 or 3.09%
And the EAR is:
EAR = (1.0309)
365/31
– 1
EAR = .4314 or 43.14%
b.
The EAR is:
EAR = (1.0204)
365/51
– 1
EAR = .1556 or = 15.56%
c.
The EAR is:
EAR = (1.0204)
365/25
– 1
EAR = .3431 or 34.31%
6.
The receivables turnover is:
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 Fall '10
 ND
 Finance, Net Present Value, Receivables Turnover

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