CFA Practice Question
True or False? Bradley Mfg. changed its credit terms from 2/10 net 30 to 2/10 net 40. It is reasonable to assume that the firm's average collection period will be increased by this action.
Correct Answer: True
It would be rational for firms not taking the discount to wait until the 40th day to pay, extending their credit period 10 more days and raising Bradley's accounts receivable.
User Contributed Comments 2
| User | Comment |
|---|---|
| johntan1979 | This is only true because the question is testing our understanding of the formula for cost of trade credit. However, if the short-term cost of borrowing is lower than the cost of trade credit, then regardless of n/30 or n/40, the optimal decision is still to take the discount. |
| ascruggs92 | ^Optimally you wouldn't have to pay at all lol. The cost of trade credit isn't something considered by most companies because the assumption that they would have taken the 2% they saved and reinvested it at a prevailing rate (a key assumption in any time value/yield calculation) is not a reality. Reality is that it minimizing A/R and building A/P are more common goals. Hence, this most likely would lead to a longer average collection period. |