Accounts receivable are funds due from a customer and a firm's credit policy has a direct impact on the level of receivables held by a firm. The credit policy is a set of rules that consists of four variables: credit period, discounts, credit standards, and collection policy. The credit period is the length of time customers have to pay for purchases; discounts are price reductions given for early payments; credit standards reflect the financial strength of customers that must be exhibited to qualify for credit; and the collection policy is the degree of toughness in enforcing the credit terms. Credit policy is important for three major reasons: (1) It has a major effect on sales. (2) It influences the amount of funds tied up in receivables. (3) It affects bad debt losses. The total amount of accounts receivable outstanding at any given time is determined by the volume of credit sales and the average length of time between sales and collections. This equation can be written as:

Receivables = Average daily sales Days' sales outstanding

\\[ \\text { Receivables }=\\text { Average daily sales } \\times \\text { Days' sales outstanding } \\] credit sales and recorded as an account receivable by the seller and as an account payable by the buyer. Trade credit has a portion that is if the payment occurs during the discount period. If the firm does not take the discount then the trade credit is . The nominal annual cost of trade credit is calculated as: \\[ \\text { Nominal annual cost of trade credit }=\\frac{\\text { Discount } \\%}{100-\\text { Discount } \\%} \\times \\frac{365}{\\text { Days credit is outstanding-Discount period }} \\] interest loan is one where interest only is paid monthly. The interest rate per day is the nominal interest rate divided by the number of days in the year. The interest charge for the month is calculated as follows: \\[ \\text { Monthly interest }=\\text { Rate per day } \\times \\text { Amount of loan } \\times \\text { Days in month } \\] an add-on loan is calculated as follows: cost source