ern C. Charles Smith recently was hired as president of Delloe Office Equipment
ID: 2819291 • Letter: E
Question
ern C. Charles Smith recently was hired as president of Delloe Office Equipment Ioc. a small manufacturer of metal office equipment. As his assistant, you have been asked to review the company's short-term financing policies and to prepare a report for Smith and the board of directors. To help you get started, Smith has prepared some questions that, when answered, will give him a better idea of the company's short-term financing policie a. What is short-term credit, and what are the four major sources of this credit? b. Is there a cost to accruals, and do firms have much control over them? c. What is trade credit? d. Like most small companies, Dellvoe ias two primary sources of shont-term debt: trade credit and bank loans. One supplier, which supplies Dellvoe with $50,000 of materials a year, offers Dellvoe terms of 2/10, net 50 (1) What are Dellvoe's net daily purchases from this supplier? What is the average level of Dellvoe's accounts payable to this supplier if the discount is taken? What is the average level if the discount is not taken? What are the amounts of free credit and costly credit under both discount policies? (2) (3) What is the APR of the costly trade credit? What is its EAR?Explanation / Answer
Answer C A
Short-term Credit and it's sourcre.
short-term credit. From Longman Business Dictionary. Related topics: Trade, Banking. short-term credit [countable, uncountable] loans for a year or lessThey provided short-term credit to finance ongoing working capital and capital expenditure requirements.
Source # 1. Indigenous Bankers:
Private money-leaders and other country bankers used to be the only sources of finance prior to the establishment of commercial banks. They used to charge very high rates of interest and exploited the customers to the largest extent possible.
Source # 2. Trade Credit:
Trade credit refers to the credit extended by the suppliers of goods in the normal course of business. As present day commerce is built upon credit, the trade credit arrangement of a firm with its suppliers is an important source of short-term finance. The credit-worthiness of a firm and the confidence of its suppliers are the main basis of securing trade credit.
Source # 3. Installment Credit:
This is another method by which the assets are purchased and the possession of goods is taken immediately but the payment is made in Installment over a pre-determined period of time. Generally, interest is charged on the unpaid price or it may be adjusted in the price.
Source # 4. Advances:
Some business houses get advances from their customers and agents against orders and this source is a short-term source of finance for them. It is a cheap source of finance and in order to minimise their investment in working capital, some firms having long production cycle, especially the firms manufacturing industrial products prefer to take advance from their customers.
Answer 3 B.
Accrued cost is the cost of goods or services received or incurred during a period, when the lack of a supplier billing forces the buyer to accrue the related cost. The lack of a supplier billing is typically because the invoice is in transit, and does not arrive from the supplier until after the books have been closed for the reporting period.
There are two reasons why accruals are used:
Answer 3 C
Trade credit
A trade credit is a B2B agreement in which a customer can purchase goods on account (without paying cash up front), paying the supplier at a later date. Usually when the goods are delivered, a trade credit is given for a specific number of days, say 30, 60 or 90 days. Jewelry businesses sometimes extend credit to 180 days or longer. Trade credit is essentially credit that one company gives to another for the purchase of goods and services.
Answer 3.
An a Calculating the Cost of Trade Credit. Trade credit is an important source of liquidity and financing for any company. During the discount period, the cost of funds is 0, so the company can benefit by paying at the end of the discount period.
Annual percentage rate (APR)
Annual percentage rate (APR) is the annual rate charged for borrowing or earned through an investment, and is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan. This includes any fees or additional costs associated with the transaction but does not take compounding into account. As loans or credit agreements can vary in terms of interest-rate structure, transaction fees, late penalties and other factors, a standardized computation such as the APR provides borrowers with a bottom-line number they can easily compare to rates charged by other lenders.
EAR 9effective annual interest rate )
The effective annual interest rate is the interest rate that is actually earned or paid on an investment, loan or other financial product due to the result of compounding over a given time period. It is also called the effective interest rate, the effective rate or the annual equivalent rate.
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