Solved > 26.2   Trade Credit 1) Collection float is made:1927512 …

26.2   Trade Credit

1) Collection float is made up of all of the following EXCEPT:

A) disbursement float.

B) processing float.

C) mail float.

D) availability float.

2) Which of the following statements is FALSE?

A) Under the Modigliani-Miller assumptions of perfect capital markets, the amounts of payables and receivables are irrelevant.

B) One factor that contributes to the length of a firm’s receivables and payables is the delay between the time a bill is paid and the cash is actually received.

C) Collection float is the amount of time it takes before payments to suppliers actually result in a cash outflow for the firm.

D) The credit that the firm is extending to its customer is known as trade credit.

3) Which of the following statements is FALSE?

A) The Check Clearing for the 21st Century Act (Check 21), which became effective on October 28, 2004, eliminated the disbursement float due to the check-clearing process.

B) Trade credit is, in essence, a loan from the selling firm to its customer.

C) The accounts receivable balance represents the amount that a firm owes its suppliers for goods that it has received but for which it has not yet paid.

D) Providing financing at below-market rates is an indirect way to lower prices for only certain customers.

4) The term 2/10 net 30 means:

A) If the invoice is paid within 10 days a 2% discount can be taken.  If the invoice is paid between 11 and 29 days a 1% discount can be taken.  After 30 days the full invoice is due.

B) If the invoice is paid within 2 days a 10% discount can be taken, otherwise the full invoice is due in 30 days.

C) If the invoice is paid within 2 days a 10% discount can be taken, otherwise a 2% discount can be taken if the invoice is paid in 30 days.

D) If the invoice is paid within 10 days a 2% discount can be taken, otherwise the full invoice is due in 30 days.

5) Your firm purchases goods from its supplier on terms of 1/10, net 30.  The effective annual cost to your firm if it chooses not to take advantage of the trade discount offered is closest to:

A) 16.8%

B) 44.6%

C) 20.1%

D) 13.0%

6) Your firm purchases goods from its supplier on terms of 2/10, net 45.  Calculate the effective annual cost to your firm if it chooses not to take advantage of the trade discount offered.

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