A firm offers terms of 4/40, net 70. Currently, two-thirds of all customers take

Question

A firm offers terms of 4/40, net 70. Currently, two-thirds of all customers take advantage of the trade discount; the remainder pay bills at the due date.

What will be the firm’s typical value for its accounts receivable period? (Do not round intermediate calculations.)

What is the average investment in accounts receivable if annual sales are $20 million? (Use 365 days in a year. Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.)

What would likely happen to the firm’s accounts receivable period if it changed its terms to 5/40, net 70?

A firm offers terms of 4/40, net 70. Currently, two-thirds of all customers take advantage of the trade discount; the remainder pay bills at the due date.

Explanation / Answer

a)Accounts Receivabe Period = 40*(2/3) + 70*(1/3)

= 50 Days

..

b)The average investment in accounts receivable if annual sales are $20 million = 20m*(50/365)

= $2.740 million

..

c)The firm’s accounts receivable period if it changed its terms to 5/40, net 70 = Decrease

Reason:-Increased Discount would incourage Debtors to Pay more early to avail discount.So ,irm’s accounts receivable period will decrease.

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