AR and AP Management (4)

Question 1

What would save $250 on an invoice of $10000 (settlement discounts)

Answer 1

Customers may be granted 30 days’ credit but offered a 2.5% discount for payment within seven days

Question 2

How to decide whether settlement discounts are a good policy?

Answer 2

The cost of the discount must be compared to the cost of financing accounts receivable

Question 3

What must cost of discount be expressed as?

Answer 3

An annual effective cost

Question 4

What do early settlement discounts make more difficult?

Answer 4

Budgeting for receipts from customers is likely to be more complex due to uncertainty whether a customer will take a discount

Question 5

What is trade credit?

Answer 5

A flexible source of short-term finance

Question 6

What if early payment discount exceeds the overdraft rate?

Answer 6

The discount should be accepted

Question 7

What should the annual effective cost of refusing an early payment discount be compared to?

Answer 7

The overdraft rate

Question 8

What may supplier charge?

Answer 8

Interest on late payments or increase selling prices to compensate for the finance provided

Question 9

Advantage of trade credit?

Answer 9

Settlement discounts taken, result in cheap source of financing

Convenient and informal. Great for short-term

Can be used if unable to obtain credit from financial institutions.

Question 10

Importing and accounts payable risk?

Answer 10

There may be specific complications (e.g. slow customs clearance, unexpected import duties or quotas)

Question 11

What may overseas supplier be concerned about?

Answer 11

The risk of non-payment and may demand (e.g. cash against documents, bills of exchange, documentary letters of credit)