The Following Questions Must Be Answered When Setting Credit Terms

question 59

True/False

The following questions must be answered when setting credit terms: How long should the firm extend credit? What type of cash discount should the firm offer to encourage early payments?

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Definitions:

FV

Future Value, the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today.

Compound Interest

Interest calculated on the initial principal of a deposit or loan, as well as on the accumulated interest from previous periods.

Interest on Interest

The interest earned on the reinvestment of previous interest payments, commonly associated with compounding interest.

Reinvestment

The process of using dividends, interest, or any form of return earnings to purchase additional shares or units instead of receiving the earnings in cash.