Chapter 22, Problem 1Q

a)

Summary Introduction

To determine: Whether the changes in credit terms can be made.

Explanation of Solution

Cash discounts:

• Cash discounts are generally given to boost the early payments
• To attract the customers by way of lowering the prices effectively.
• Some credit terms are 2/10, net 30 this denotes that a 2% discount will apply when the payment is made within the 10 days or else the account will be paid within 30 days

b)

Summary Introduction

To determine: Seasonal dating

Explanation of Solution

Seasonal dating arranges the invoice date or the date at which the discount and credit period starts, to a time during the own selling season of the buyers irrespective of the actual sale date.

c)

Summary Introduction

To determine: Aging schedule and DSO-days sales outstanding.

Explanation of Solution

An aging schedule divide the accounts receivable according to the time period that is how long the receivables been outstanding. 

It provides a clear picture on the accounts receivables structure than which is provided by DSO. Whereas,

DSO is the measure of average length of time which is taken for customers to make payments on their credit purchases.

d)

Summary Introduction

To determine: Uncollected balances schedule.

Explanation of Solution

It shows the remaining uncollected receivables of each month as a % of month’s sales. By comparing this over time can be find the changes in the payment behavior of the customers, can avoid the misleading signals which are given by aging schedule and DSO when sales are seasonal.

e)

Summary Introduction

To determine: Discount interest, simple interest and add on interest.

Explanation of Solution

• The case when the interest is not earned on interest is termed as simple interest
• Discount interest is determined on the face value of the loan but it is paid in advance.
• Add-on interest is termed as an interest and it is determined and added to the funds which are received to evaluate the face value of an installment loan.