Question

In: Operations Management

Suppliers may provide a cash discount for early payment and foregoing discounts can be very expensive....

Suppliers may provide a cash discount for early payment and foregoing discounts can be very expensive. Whether a firm should take a discount depends on the relative costs of alternative sources of financing.

Under what circumstances would it be advisable to borrow money to take a cash discount?

Solutions

Expert Solution

Answer –

A firm provides discounts to customers due to various reasons like indirectly lowering down the prices of goods and attracting them, accelerating the cash flow with early receivables, reducing risks of non payments at the end of due date, it could be a sources of financing for suppliers to gain more business.

Yes, a firm should take a discount depending upon the relative costs of alternative sources of financing. A firm should compare the cost of credits given to customers with the cost of other alternative sources of financing. If costs of trade credit is less then only firm should take a discount option.

A buyer could borrow money from outside source to avail the cash discounts by paying early to the supplier only when the cost of borrowing the money is less than the cash discount offered or cost of trade credit. Buyer should calculate the effective cost of trade credit and cost of borrowing, only if cost of borrowing is less then it is advisable to borrow money to take a cash discount.


Related Solutions

P16-2 Cost of giving up early payment discounts  Determine the cost of giving up the discount under...
P16-2 Cost of giving up early payment discounts  Determine the cost of giving up the discount under each of the following terms of sale. (Note: Assume a 365-day year.) 2/10 net 30. 1/10 net 30. 1/10 net 45. 3/10 net 90. 1/10 net 60. 3/10 net 30. 4/10 net 180.
A journal entry with a debit to cash of $980, a debit to Sales Discounts of $20, and a credit to Accounts Receivable of $1,000 means that a customer has taken a 10% cash discount for early payment.
PG. 34A journal entry with a debit to cash of $980, a debit to Sales Discounts of $20, and a credit to Accounts Receivable of $1,000 means that a customer has taken a 10% cash discount for early payment.
3. The percentage discount offered by suppliers if the customer or buyer pays early is known...
3. The percentage discount offered by suppliers if the customer or buyer pays early is known as the _____________discount. 4. The average length of time between the point in which a firm originally receives its inventory and the point at which it receives the cash from selling its product(s) is known as the __________cycle. Meaning of Cash Cycle is the average length of time between when a firm originally purchases its inventory and when it receives the cash back from...
1. Cash discount (LO1) Compute the cost of not taking the following cash discounts. a. 2/10,...
1. Cash discount (LO1) Compute the cost of not taking the following cash discounts. a. 2/10, net 40. b. 2/15, net 30. c. 2/10, net 45. d. 3/10, net 90. 2. Effective rate on discounted loan (LO2) Sol Pine borrows $5,000 for one year at 13 percent interest. What is the effective rate of interest if the loan is discounted? 3. Net credit position (LO1) McGriff Dog Food Company normally takes 27 days to pay for average daily credit purchases...
Date accuracy is very important because dates are used for discounts, payment terms and many reports....
Date accuracy is very important because dates are used for discounts, payment terms and many reports. True True False
If the beginning balance of the bond (issued at a discount) is $885.30, the cash payment...
If the beginning balance of the bond (issued at a discount) is $885.30, the cash payment is $50 (coupon rate is 5%, face value of bond is $1,000), and the annual market interest rate for the period is 6%, what is the amount of amortization and the ending balance of the bond? Select one: a. Amortization = Interest Expense – Payment = ($885.30 * 6%) – $50 = $3.12 / Ending Balance = Beginning Balance + Amortization = $885.30 +...
1) Credit terms that allow for a 4% discount for early payment : a- 2/10, N/60...
1) Credit terms that allow for a 4% discount for early payment : a- 2/10, N/60 b- n/45 c- FOB destination d- FOB shipping point e- 4/10, N/45 2) Shipping terms that would typically mean that the seller has to pay the freight charges : a- 2/10, N/60 b- n/45 c- FOB destination d- FOB shipping point e- 4/10, N/45 3) Credit terms that allow for a 2% discount for early payment: a- 2/10, N/60 b- n/45 c- FOB destination...
Early Payment Discount Jones Equipment is a private company that sells and installs HVAC systems. Jones...
Early Payment Discount Jones Equipment is a private company that sells and installs HVAC systems. Jones offers payment term of 2/10, n/30 where customers making payment within 10 days of installation will receive a discount of 2% off the purchase price or must pay the full balance due within 30 days. Jones has just received payment from a new customer who paid within the 10-day window and is thus entitled to the 2% discount. The gross sales price of the...
Calculate the final dates on which cash discounts for the following invoices may be taken, and...
Calculate the final dates on which cash discounts for the following invoices may be taken, and the amount to remit. Invoice total is $5,500 and invoice date is 6/13. Merchandise is received on 6/19. (5 pts.) a. 6/10 EOM b. 4/15 n/30 c. 3/10 ROG
With regard to purchase discounts, can someone explain each of the following terms: discount percent, days...
With regard to purchase discounts, can someone explain each of the following terms: discount percent, days in discount period, net, and total credit period?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT