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CHAPTER 20
CREDIT AND INVENTORY MANAGEMENT
Basic
1.
(
LO2)
a.
There are 30 days until account is overdue. If you take the full period, you must remit:
Remittance = 400($125)
Remittance = $50,000
b.
There is a 1 percent discount offered, with a 10 day discount period. If you take the discount, you
will only have to remit:
Remittance = (1 – .01)($50,000)
Remittance = $49,500
c.
The implicit interest is the difference between the two remittance amounts, or:
Implicit interest = $50,000 – 49,500
Implicit interest = $500
The number of days’ credit offered is:
Days’ credit = 30 – 10
Days’ credit = 20 days
2.
(LO1)
The receivables turnover is:
Receivables turnover = 365/Average collection period
Receivables turnover = 365/36
Receivables turnover = 10.139 times
And the average receivables are:
Average receivables = Sales/Receivables period
Average receivables = $47,000,000 / 10.139
Average receivables = $4,635,616
3.
(
LO1)
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 daily balance is:
Average balance = 1,300($1,700)(17)(12/365)
Average balance = $1,235,178.08
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View Full Document5.
(LO2)
The interest rate for the term of the discount is:
Interest rate = .01/.99
Interest rate = .0101 or 1.01%
And the interest is for:
35 – 10 = 25 days
So, using the EAR equation, the effective annual interest rate is:
EAR = (1 + Periodic rate)
m
– 1
EAR = (1.0101)
365/25
– 1
EAR = .1580 or 15.80%
a.
The periodic interest rate is:
Interest rate = .02/.98
Interest rate = .0204 or 2.04%
And the EAR is:
EAR = (1.0204)
365/25
– 1
EAR = .3431 or 34.31%
b.
The EAR is:
EAR = (1.0101)
365/50
– 1
EAR = .0761 or = 7.61%
c.
The EAR is:
EAR = (1.0101)
365/20
– 1
EAR = .2013 or 20.13%
6.
(LO1)
The receivables turnover is:
Receivables turnover = 365/Average collection period
Receivables turnover = 365/39
Receivables turnover = 9.3590 times
And the annual credit sales are:
Annual credit sales = Receivables turnover × Average daily receivables
Annual credit sales = 9.3590($47,500)
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 Fall '10
 ND
 Finance

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