Your Firm Purchases Goods from Its Supplier with a Discount

question 82

Multiple Choice

Your firm purchases goods from its supplier with a discount period of 10 days,and a credit period of 40 days.If the effective annual cost of forgoing the discount is 13%,what is the amount of the discount?

• A)1%
• B)2%
• C)1.5%
• D)2.5%
• E)3%

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Definitions:

Cash Coverage Ratio

A financial metric used to evaluate a company's ability to pay its debt obligations using its cash and cash equivalents.

Current Liabilities

Obligations of a company that are due to be settled within one year or one operating cycle, whichever is longer.

Operating Activities

The day-to-day actions that involve the production, sales, and delivery of a company's product or service, generating most of the company's cash flows.

Price/Earnings Ratio

A valuation ratio of a company's current share price compared to its per-share earnings, indicating the dollar amount investors will pay for $1 of earnings.