CCP Trade Credit Terms & DSO 2 — Questions and Answers
Question 1: A company has annual credit sales of $4,380,000 and an accounts receivable balance of $360,000. What is its DSO?
- 30 days (Correct answer)
- 33 days
- 36 days
- 40 days
Correct answer: 30 days
DSO = (AR / Annual Credit Sales) × 365 = (360,000 / 4,380,000) × 365 = 30 days.
Question 2: Which trade credit term structure offers a buyer the most favorable early-payment incentive relative to the net period?
- 1/10 net 30
- 2/10 net 30
- 2/10 net 60 (Correct answer)
- 1/10 net 60
Correct answer: 2/10 net 60
2/10 net 60 gives the highest discount (2%) and the longest net period (60 days), making the early-pay incentive most favorable.
Question 3: An invoice dated May 1 carries terms of '2/10 EOM.' The last day to take the discount is:
- May 10
- May 31
- June 10 (Correct answer)
- June 30
Correct answer: June 10
EOM means the discount period runs from the end of the invoice month; 10 days after May 31 = June 10.
Question 4: Which of the following would DECREASE a company's DSO?
- Extending credit terms from net 30 to net 45
- Loosening credit standards to approve more customers
- Offering early payment discounts that customers utilize (Correct answer)
- Increasing the credit limit for all existing customers
Correct answer: Offering early payment discounts that customers utilize
When customers take early payment discounts, they pay sooner, reducing the average collection period and DSO.
Question 5: A seller ships goods under terms 'FOB shipping point.' When does credit risk transfer to the buyer?
- When the buyer receives the goods
- When the buyer accepts the invoice
- When the goods leave the seller's dock (Correct answer)
- When the carrier delivers to the buyer's city
Correct answer: When the goods leave the seller's dock
Under FOB shipping point, title and risk of loss transfer to the buyer at the seller's shipping dock.
Question 6: The annualized cost of NOT taking a 1/10 net 30 discount is approximately:
- 12.0%
- 18.4% (Correct answer)
- 36.7%
- 6.0%
Correct answer: 18.4%
Cost = [Discount% / (1 − Discount%)] × [365 / (Net Days − Discount Days)] = (0.01/0.99) × (365/20) ≈ 18.4%.
Question 7: Under consignment terms, when does the buyer's payment obligation to the seller typically arise?
- Upon receipt of goods at the buyer's warehouse
- Upon resale of the goods to an end customer (Correct answer)
- 30 days after shipment regardless of sales
- When the consignment agreement is signed
Correct answer: Upon resale of the goods to an end customer
In a consignment arrangement, the buyer (consignee) only owes payment after the goods are sold to an end customer.
CCP Trade Credit Terms & DSO 2
A company has annual credit sales of $4,380,000 and an accounts receivable balance of $360,000.
What is its DSO?