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Unformatted text preview: 234 Business Finance (ACC501) Lesson 44 Review of the Previous Lecture • Float and Cash Management – Cash Disbursement – Investing Idle Cash • Credits and Receivables – Terms of Sale Topics under Discussion • Credits and Receivables • Credit Period • Discount • Instruments • Optimal Credit Policy • Credit Analysis • Collection Policy Credits and Receivables • Credit Period – The basic length of time for which the credit is granted. – If a cash discount is offered, then credit period has two components • Net credit period – length of time customer has to pay • Cash discount period – time during which discount is a vailable – Invoice date is the shipping date or billing date of invoice, a written account of merchandise shipped to the buyer. • Two most important factors influencing the length of credit period are buyer’s inventory period and operating cycle. The shorter these are, the shorter the credit period will be • We know that operating cycle has two components – Inventory period – Receivables period • By extending credit we finance a portion of our buyer’s operating cycle and shorten the buyer’s cash cycle • If our credit period exceeds the buyer’s inventory period, we are not only financing buyer’s inventory purchases but part of the buyer’s receivables as well 235 • If our credit period exceeds buyer’s operating cycle, then we are providing financing for customer’s business beyond the immediate purchase and sale of our merchandise – Buyer has a loan from us even after the merchandise is resold • A number of other factors which influence the credit period are: – Perishability and collateral value • Perishable items have rapid turnover and low collateral value; thus credit periods for these goods are shorter – Consumer demand • Well established products have rapid turnover. While newer or slow moving products will require longer credit periods....
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This note was uploaded on 08/04/2011 for the course ACCT 501 taught by Professor Na during the Spring '11 term at Virtual University of Pakistan.
- Spring '11