Question

Delta Steel Company has been producing steel beams for 25 years and is growing at the...

Delta Steel Company has been producing steel beams for 25 years and is growing at the rate of 5 percent per year. The CEO and CFO of Delta is considering changing their credit terms from 30 days same as cash to 60 days same as cash. This change would be effective May 1, 2019. You have just started preparing the 2019-2020 cash budget, which starts on May 1, 2019.

How would these new credit terms affect the new cash budget?

1.

None of the above
2.

Most likely it would have little, if any, affect
3.

Your accounts receivable collections would speed up
4.

You can expect more delinquent payments of accounts receivable
5.

You would need additional cash to cover the delayed accounts receivable payments due to the new terms
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Answer #1

Option 5 is correct

You would need additional cash to cover the delayed accouts recievable payments due to the new terms.

If we increase the credit terms then we are giving the extra credit to the customers. It will be more attractive to the customers since they can avail the extra credit of 30 days with no interest costs. While preparing the cash budget we have defer our reciepts by further 30 days. But we need the cash to pay our debts that falls due. So we need cash to bring in.

Please let me know if you need any clarification.

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