Question

Problem 16-06 Receivables Investment Snider Industries sells on terms of 3/10, net 25. Total sales for the year are $530,000. Thirty percent of customers pay on the 10th day and take discounts; the other 70% pay, on average, 30 days after their purchases. Assume 365 days in year for your calculations. What is the days sales outstanding? Round your answer to one decimal place. days What is the average amount of receivables? Round your answer to the nearest dollar. Do not round intermediate calculations. $ What would happen to average receivables if Snider toughened its collection policy with the result that all nondiscount customers paid on the 25th day? Round your answer to the nearest dollar. Do not round intermediate calculations. $

If a firm buys under terms of 3/15, net 40, but actually pays on the 20th day and still takes the discount, what is the nominal cost of its nonfree trade credit? Assume 365 days in year for your calculations. Do not round intermediate calculations. Round your answer to two decimal places.
%

Does it receive more or less credit than it would if it paid within 15 days?
I. Paying before the discount period and taking the discount gives the firm more credit than it would receive if it paid within 15 days.
II. Paying after the discount period, but still taking the discount gives the firm more credit than it would receive if it paid within 15 days.
III. Paying after the discount period, but still taking the discount gives the firm less credit than it would receive if it paid within 15 days.
-Select-IIIIII

Answer 1

1) Snider Industries

3 / 10 net 25 means that 3% discount will be given if customers pay within 10 days, otherwise the whole amount is payable within 25 days.

30% of the customers pay on the 10th day or within 10 days and the remaining 70% customers pay within 30 days.

Days sales outstanding = 0.30 x 10 days + 0.70 x 30 days = 24 days

Total sales = $530,000

Sales per day = $530,000 / 365 = $1452.05479452

Average receivable = Days sales outstanding x Total sales = 24 days x $1452.05479452 per day = $34,849.315068 or 34,849

If non-discounted customers (70%) pay within 25 days -

Days sales outstanding = 0.30 x 10 days + 0.70 x 25 days = 20.5 days

Average receivable = 20.5 days x $1452.05479452 per day = $29,767.123287 or $29,767

2) Nominal cost of non free trade credit = [ Discount / (1 - Discount) ] x [ 365 days / (Total credit peiod - Discount period) ]

3 / 15 net 40 means the customers get a 3% discount if they within 15 days, otherwise the whole amount is payable within 40 days. The actual discount period for the firm is 20 days.

Discount = 3% or 0.03, Discount period = 20 days, Total period = 40 days

Nominal cost of non free trade credit = [ 0.03 / (1 - 0.03) ] x [ 365 days / (40 days - 20 days) ] = 0.5644329896 or 56.44%

If the firm pays within 15 days, then -

Nominal cost of non free trade credit = [ 0.03 / (1 - 0.03) ] x [ 365 days / (40 days - 15 days) ] = 0.451546 or 45.15%

So, the firm gets more credit if pays after discount period and still takes the discount. (Option II)