Question

Explain 2/10 net 30 payment terms.

Explain MACRS

A/R went down (good or bad for cash?)   

Answer 1

1. 2/10 net 30 payment terms:

The terms refers to the trade credit option given to a customer by the company. It means that if the amount is paid within 10 days, the customer will get 2% discount on the invoice value. Otherwise, the amount shall be due in full in 30 days.

2. MACRS

MACRS stands for Modified Accelerated Cost Recovery System (MACRS). It was introduced in 1986 and is the current tax depreciation system in the United States. Depreciation is a kind of non-cash business expense allowed by IRS (and also accounting standards) to allow for the wear & tear, deterioration and replacement of fixed assets (Plant, property and equipment). MACRS was introduced to remove uncertainties in the earlier depreciation method regarding salvage value and asset useful lives.

Under MACRS

- The system groups different types of assets into different classes and assigns each class a defined useful life.

- Salvage value of each asset is assigned zero.

- The capitalized cost of the tangible property is recovered over the specified life by annual deductions in the form of depreciation.

- IRS published the detailed tables of lives for different classes of assets. Company can compute annual depreciation using any of the two methods : a) Declining Balance method b) Straight line method

3. A/R went down: Good or bad (for cash)

A/R refers to account receivable. A/R can go down due to multiple reasons:

1) Lower credit extended to customers- Company may tighten credit terms to its customers leading to lower A/R days which is good for cash and overall net working capital goes down.

2) Drop in revenues - A drop in absolute value of A/R (in dollar values) can also be due to drop in overall sales which is not good for business.

3) Upfront trade discount - A drop in A/R can also be due to higher trade discount offered by the company for early payments. Though it will reduce overall net working capital but company's net profitability will also reduce.