CCP Trade Credit Terms & DSO 2

Question 1

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

Accepted Answer

30 days

Answer

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

Question 2

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

Accepted Answer

2/10 net 60

Answer

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

Question 3

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

Accepted Answer

June 10

Answer

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

Question 4

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

Accepted Answer

Offering early payment discounts that customers utilize

Answer

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

Question 5

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

Accepted Answer

When the goods leave the seller's dock

Answer

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

(CCP) Certified Credit Professional Practice Test