Trade Credit Terms & DSO Flashcards

A supplier offers terms '3/15 net 45.' A buyer with a bank line at 8% annual interest should:

Answer: Borrow from the bank and take the discount because the discount cost exceeds borrowing cost

The annualized cost of forgoing the 3/15 net 45 discount ≈ 37.1%, far exceeding the 8% borrowing rate, so borrowing to take the discount is economical.

Which of the following represents an 'extended terms' strategy a seller might offer to a seasonal buyer?

Answer: Offering net 90 dating timed to the buyer's selling season

Seasonal dating aligns the payment due date with when the buyer generates revenue, reducing default risk while supporting sales.

Which ratio directly measures how efficiently a company collects its trade receivables?

Answer: Accounts receivable turnover

Accounts receivable turnover (Credit Sales ÷ Average AR) measures how many times receivables are collected per period.

When a seller ships under 'COD' (cash on delivery) terms, who bears freight risk during transit?

Answer: The seller, because payment hasn't been made

Under COD, title typically does not transfer until payment is made at delivery, so the seller retains risk during transit.

A manufacturing company reports AR of $500,000 and credit sales of $6,000,000 annually. Its AR turnover is:

Answer: 12 times

AR Turnover = Annual Credit Sales ÷ AR = $6,000,000 ÷ $500,000 = 12 times per year.

A credit term that allows the buyer to deduct a percentage from the invoice if paid within a specified period is called a:

Answer: Cash (prompt-payment) discount

A cash or prompt-payment discount incentivizes early payment by allowing a percentage reduction from the invoice amount.

If a company's DSO is consistently 15 days above its stated net terms, the most likely collection problem indicated is:

Answer: Customers are routinely slow-paying beyond due dates

A persistent gap between DSO and net terms indicates a systematic pattern of late payment by the customer base.