Question
Please complete all parts. Benny, an inexperienced accountant at Ace Plus, is reviewing the discount terms on certain invoices from suppliers. Last month he saw
Please complete all parts.
Benny, an inexperienced accountant at Ace Plus, is reviewing the discount terms on certain invoices from suppliers. Last month he saw terms "3/15, n/60" on one of the invoices and someone told him that meant he could get a 3% discount if he pays the invoice on time. That didn't make very much sense so he just paid the invoice on the 20th of the month when he was processing other bills.
This month, he noticed a new invoice from the same supplier but they must have forgotten to apply his 3% discount because the new invoice is for the full amount again. "Oh well," he mutters under his breath, "It was only a 3% discount. Not like that's a big deal anyway."
1. What do the terms "3/15, n/60" really mean and why would a seller offer such a discount?
2. What is the estimated interest rate paid for not taking the discount with terms 3/15, n/60? (Please refer to page 286 in the textbook -- and please show your calculation.) Explain why Benny should be more excited about that 3 percent discount once he understands the true financial impact of missing discounts on purchases.
3. Suppose your hired accountant missed purchase discounts when there was enough cash to take advantage of them. How would you handle that situation?
4. Which of the following credit terms would be more generous to a company's customers: n/30 or n/eom? Please explain why
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