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.

The minimum financial strength a customer must have to be granted credit is indicated by the company’s_______

Consider the case of Stowe-Arts Holdings Co.: Stowe-Arts Holdings Co. has a very attractive credit policy, and none of its customers pays in cash when the firm makes a sale. Stowe-Arts Holdings Co. sells to its customers on credit terms of 3/10, net 30.

If a customer bought $125,000 worth of goods and paid the firm cash eight days after the sale, how much cash would Stowe-Arts Holdings Co. get from the customer? $106,250 $121,250 $109,375 $125,000 I

If the customer paid off the account after 15 days, Stowe-Arts Holdings Co. would receive ________

Approximately 25% of Stowe-Arts Holdings Co.’s customers take advantage of the discount and pay on the 10th day. The remaining 75% take an average of 35 days to pay off their accounts. What is Stowe-Arts Holdings Co.’s days sales outstanding (DSO), or the average collection period? 28.75 days 23.00 days 25.88 days 33.06 days?

Answer 1

The minimum financial strength a customer must have to be granted credit is indicated by the company’s credit standard
If customer's pays on eight day from date of purchase then he would receive 3% cash discount and he would therefore pay the balance amount to company
Cash received by Stowe	125000*97%
Cash received by Stowe	$121,250
Thus, cash received would be $121,250
If customer pays after 15 days then there would be no cash discount as cash discount is available within 10 days
Stowe would therefore receive $125,000
Days sales outstanding	(25%*10)+(75%*35)
Days sales outstanding	2.50+26.25
Days sales outstanding	28.75	days