Question

Effective credit management involves establishing credit standards for extending credit to customers, determining the company’s credit terms, and setting up procedures for invoicing and collecting past-due accounts. The following statement refers to a credit management policy. Select the best term to complete the sentence. How a company handles its credit accounts, including methods of invoicing and collecting past-due accounts, is indicated by the company’s . Consider the case of Wok Bar Co.: Wok Bar Co. has a very attractive credit policy, and none of its customers pays in cash when the firm makes a sale. Wok Bar Co. sells to its customers on credit terms of 1/10, net 30. If a customer bought $100,000 worth of goods and paid the firm cash eight days after the sale, how much cash would Wok Bar Co. get from the customer? $90,000 $105,000 $82,500 $99,000 If the customer paid off the account after 15 days, Wok Bar Co. would receive . Approximately 30% of Wok Bar Co.’s customers take advantage of the discount and pay on the 10th day. The remaining 70% take an average of 35 days to pay off their accounts. What is Wok Bar Co.’s days sales outstanding (DSO), or the average collection period? 26.13 days 28.88 days 30.25 days 27.50 days

Answer 1

Answer and Explanation:

The company handles the credit accounts including methods of invoicing and collecting past-due accounts, is indicated by the collection policy as it includes the net days given to the customers

Now if the customer pays the cash within eight days after the sale, the amount of cash paid is

= $100,000 × 0.99

= $99,000

And, if payment is made after 15 days so no discount would be given as it is exceeded the prescribed time limit i.e 10 days. So in this case the $100,000 cash is paid

Now the days sales outstanding is

= 0.30 × 10 + 0.70 × 35

= 3 +24.5

= 27.50 days