What Is the Effective Cost of Credit Terms of 3/5

question 16

Multiple Choice

What is the effective cost of credit terms of 3/5 net 45 if the firm stretches the accounts payable to 60 days?

• A) 12.9%
• B) 35.6%
• C) 39.9%
• D) 22.4%

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Definitions:

Factory Overhead Cost

Factory overhead cost encompasses all indirect costs associated with the manufacturing process, including utilities, equipment depreciation, and factory personnel salaries, not directly tied to production.

Depreciation

The process of allocating the cost of a tangible asset over its useful life, reflecting wear and tear, or obsolescence.

Financial Accounting

The field of accounting focused on the preparation of financial statements for external stakeholders, such as investors, creditors, and regulatory agencies.

Employee Downtime

Periods when employees are not engaged in productive work due to various factors such as system failures or maintenance.