Payables

Question 1

What is the meaning of cash discount terms of “2/10, n/30”?

Answer 1

The terms 2/10, n/30 is a typical credit term and means the following:

1. The first digit (2) is the percent discount offered by the seller
2. The second digits (10) is the number of day within which the discount is available
3. n/30 indicates that if the buyer does not pay the (full) invoice amount within the 10 days to qualify for the discount, than the net amount is due within 30 days after the sales invoice date.

Question 2

Why are cash discounts offered on trade accounts?

Answer 2

Cash discounts are offered to encourage early payment of amounts due on trade accounts.

Question 3

List the disadvantages of using short-term payables (for financing purposes).

Answer 3

1. Requires payment tin the short-term
2. Use specific
3. Lost discounts increase cost

Question 4

Define “compensating balance”.

Answer 4

An amount that a borrower may be required to maintain in a demand deposit account with a lender as a condition of receiving a loan or other bank services.

Question 5

List the advantages of short-term notes (for financing purposes).

Answer 5

1. Commonly available for creditworthy firms
2. Flexible - amounts and periods (within one year) can be varied
3. Generally, no collateral required
4. Provides cash

Question 6

List the advantages of using short-term payables (for financing purposes).

Answer 6

1. Ease of use
2. Flexible
3. Usually interest free
4. Usually no security required
5. Discounts may be offered for early payment

Question 7

What are the disadvantages of using short-term notes for short-term financing purposes?

Answer 7

1. Poor credit rating = High interest rate
2. Requires satisfaction in the short term
3. May require compensating balance or security

Question 8

Describe trade accounts payable (also called trade credit) as a means of short-term financing.

Answer 8

Deferred payment for goods or services provided by suppliers in the normal course of business. May carry the offer of a cash discount for early payment of obligation.