Your firm purchases goods from its supplier on terms of 1/10 net 30. The effective annual cost to your firm if it chooses not to take advantage of the trade discount offered and stretches the accounts payable to 45 days is closest to:
A)11.1%.
B)20.1%.
C)15.9%.
D)13.0%.

Question

Quizplus · Accepted Answer

The effective annual cost is 11.1% because the firm is not taking advantage of the 1% trade discount and is stretching the accounts payable to 45 days. This means that the firm is paying 1% more for the goods and is also paying interest on the accounts payable for an additional 15 days. The effective annual cost is calculated as follows:Effective annual cost = (1 + (1/10)) * (360 / (30 + 15)) - 1 = 11.1%

Your Firm Purchases Goods from Its Supplier on Terms of 1/10