Trade Credit Terms & DSO Flashcards

A company has annual credit sales of $4,380,000 and an accounts receivable balance of $360,000. What is its DSO?

Answer: 30 days

DSO = (AR / Annual Credit Sales) × 365 = (360,000 / 4,380,000) × 365 = 30 days.

Which trade credit term structure offers a buyer the most favorable early-payment incentive relative to the net period?

Answer: 2/10 net 60

2/10 net 60 gives the highest discount (2%) and the longest net period (60 days), making the early-pay incentive most favorable.

An invoice dated May 1 carries terms of '2/10 EOM.' The last day to take the discount is:

Answer: June 10

EOM means the discount period runs from the end of the invoice month; 10 days after May 31 = June 10.

Which of the following would DECREASE a company's DSO?

Answer: Offering early payment discounts that customers utilize

When customers take early payment discounts, they pay sooner, reducing the average collection period and DSO.

A seller ships goods under terms 'FOB shipping point.' When does credit risk transfer to the buyer?

Answer: When the goods leave the seller's dock

Under FOB shipping point, title and risk of loss transfer to the buyer at the seller's shipping dock.

The annualized cost of NOT taking a 1/10 net 30 discount is approximately:

Answer: 18.4%

Cost = [Discount% / (1 − Discount%)] × [365 / (Net Days − Discount Days)] = (0.01/0.99) × (365/20) ≈ 18.4%.

Under consignment terms, when does the buyer's payment obligation to the seller typically arise?

Answer: Upon resale of the goods to an end customer

In a consignment arrangement, the buyer (consignee) only owes payment after the goods are sold to an end customer.