Suppose a firm makes purchases of $3.65 million per year under terms of 2/10, net 30, and

Question:

Suppose a firm makes purchases of $3.65 million per year under terms of 2/10, net 30, and takes discounts.

a. What is the average amount of accounts payable net of discounts? (Assume that the $3.65 million of purchases is net of discounts—that is, gross purchases are $3,724,490, discounts are $74,490, and net purchases are $3.65 million.)

b. Is there a cost of the trade credit the firm uses?

c. If the firm did not take discounts but it did pay on the due date, what would be its average payables and the cost of this non-free trade credit?

d. What would its cost of not taking discounts be if it could stretch its payments to 40 days?

Accounts Payable
Accounts payable (AP) are bills to be paid as part of the normal course of business.This is a standard accounting term, one of the most common liabilities, which normally appears in the balance sheet listing of liabilities. Businesses receive...