. With regard to accounts payable:Explain (including computations) the rationale of taking a cash discount, such as 4/8, n/30. Assume a purchase of $1,000,000.Additionally, determine the approximate balance of accounts payable, if a company stretches its payables to 40 days and on average, they make purchases of $1,000,000 per day from their vendors.

Discount Terms (4/8, n/30):4/8 means a 4% cash discount is offered if payment is made within 8 days, otherwise, the net amount is due in 30 days.Cash Discount = Purchase Amount × Discount PercentageCash Discount = $1,000,000 × 4% = $40,000Net payment amount = Invoice amount - Discount amountNet payment amount = $1,000,000 - $40,000 = $960,000Given:Average daily purchases: $1,000,000Payment delay: 40 daysDaily outstanding accounts payable = Average daily purchases × Payment delay Daily outstanding accounts payable = $1,000,000 × 40 days = $40,000,000Approximate balance of accounts payable = Daily outstanding accounts payableApproximate balance of accounts payable = $40,000,000Hence, Taking a 4% cash discount on a $1,000,000 purchase yields a $40,000 saving. Stretching payables to 40 days with daily $1,000,000 purchases results in an approximate $40,000,000 accounts payable balance.

Answered: With regard to accounts payable:…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Related questions

Concept explainers

Question

. With regard to accounts payable:

Explain (including computations) the rationale of taking a cash discount, such as 4/8, n/30. Assume a purchase of $1,000,000.
Additionally, determine the approximate balance of accounts payable, if a company stretches its payables to 40 days and on average, they make purchases of $1,000,000 per day from their vendors.

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 6 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

Similar questions