Suppose the Credit Terms Offered to Your Firm by Your

question 154

Multiple Choice

Suppose the credit terms offered to your firm by your suppliers are 2/10,net 30 days.Out of convenience,your firm is not taking discounts,but is paying after 20 days,instead of waiting until day 30.You point out that the approximate cost of not taking the discount and paying on day 30 is around 37 percent.But since your firm is not taking discounts and is paying on day 20,what is the effective annual percentage cost (not approximate) of your firm's current practice,using a 360-day year?

• A) 36.7%
• B) 105.4%
• C) 73.4%
• D) 43.6%
• E) 106.9%

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Definitions:

Accumulated Depreciation Account

A balance sheet item representing the cumulative amount of depreciation expense charged against an asset over its useful life.

Book Value

Refers to the net value of an asset as recorded on the balance sheet, calculated as the original cost minus accumulated depreciation and impairment.

Accrued Salaries

Salaries that have been earned by employees but have not yet been paid by the company.

Liabilities

Financial obligations or debts owed by a business to external parties or individuals.