Revision-Chapter 8

The two major sources of short-term financing are ________

• a line of credit and notes payable

• accounts payable and accruals

• a line of credit and term loans

• accounts receivable and notes payable

Accruals and accounts payable are ________.

• negotiated and secured sources of long-term financing

• negotiated and unsecured sources of short-term financing

• secured sources of short-term financing

• spontaneous and unsecured sources of short-term financing

1/15 net 30 date of invoice translates as ________.

• a 1 percent cash discount may be taken if paid in 15 days; if no cash discount is taken, the

  balance is due in 30 days after the middle of the month

• a 1 percent cash discount may be taken if paid in 15 days; if no cash discount is taken, the

  balance is due 30 days after the invoice date

• a 1 percent cash discount may be taken if paid in 15 days; if no cash discount is taken, the

  balance is due 30 days after the end of the month

• a 1 percent discount may be taken on 15 percent of the purchase if the account is paid within

  30 days after the end of the month

3/10 net 45 end of month (EOM) translates as ________

• a 10 percent cash discount may be taken if paid in three days; if no cash discount is taken, the

  balance is due in 45 days

• a 3 percent cash discount may be taken if paid in 10 days; if no cash discount is taken, the

  balance is due 45 days after transaction is complete

• a 3 percent cash discount may be taken if paid in 10 days; if no cash discount is taken, the

  balance is due 45 days after the end of the month

• a 3 percent discount may be taken on 10 percent of the purchase if the account is paid within

  45 days after the end of the month

If a firm decides to take the cash discount that is offered on goods purchased on credit, the firm should ________.

• pay as soon as possible

• pay on the last day of the credit period

• pay on the last day of the credit period

• pay on or before the last day of the discount period

The cost of giving up a cash discount on a credit purchase is ________.

• added on to the price of the goods in order to make payment quickly

• deducted from the price of the goods in order to make payment quickly

• the implied interest rate paid in order to delay payment for an additional number of days

• deducted from the price of the goods in order to make payment quickly

A firm purchased goods with a purchase price of $1,000 and credit terms of 1/10 net 30. The firm paid for these goods on the 5th day after the date of sale. The firm must pay ________ for the goods.

• $990

• $900

• $1,000

• $1,100

A firm purchased goods on January 27 with a purchase price of $1,000 and credit terms of 2/10 net 30 EOM. The firm paid for these goods on February 9. The firm must pay ________ for the goods.

• $1,000

• $980

• $800

• $900

If a firm gives up the cash discount on goods purchased on credit, the firm should pay the bill ________.

• as per its will

• on the last day of the discount date

• after the credit period

• on the last day of the credit period

A firm is offered credit terms of 2/10 net 45 by most of its suppliers but frequently does not have the cash available to take the discount. The firm has a credit line available at a local bank at an interest rate of 12 percent. The firm should ________.

• give up the cash discount, financing the purchase with the line of credit

• take the cash discount and pay on the 45th day after the date of sale

• take the cash discount and pay on the first day of the cash discount period

• take the cash discount, financing the purchase with the line of credit, the cheaper source of

  funds

Answer explanation

You need to compute the cost of giving up the cash discount first.

Next, compare it with the cost of interest on loan.