Chapter 16, Problem 16.1STP

a)

Summary Introduction

To determine: The cost of giving up cash discount for each supplier.

Introduction:

Credit term refers to customer’s ability to acquire goods before making payment, depends on the trust that payment will be paid in future.

b)

Summary Introduction

To discuss: Whether it is better to give up the discount or take the discount and borrow from a bank when the firm needs short-term financing.

Introduction:

An external type of financing that have a shorter time span for repaying the loan back is termed as short-term financing. This type of financing has less interest rate as compared to the long-term financing. Every company relies on short-term financing from external sources.

c)

Summary Introduction

To discuss: The impact when the firm can stretch its accounts payable by 20 days from supplier Z.

Introduction:

A process wherein the firm is delaying on the payment of accounts payable for a longer period is termed as stretching accounts payable. This type of process will not damage the credit rating of the firm. Stretching accounts payable can decrease the implicit cost for offering discounts. Therefore, this is effect on the cost of providing discount.