Fundamentals of Financial Management Study Set 1
Quiz 15: Working Capital Management
Because Money Has Time Value,a Cash Sale Is Always More
Because money has time value,a cash sale is always more profitable than a credit sale.
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If a firm sells on terms of 2/10,net 30 days,and its DSO is 28 days,then the fact that the 28-day DSO is less than the 30-day credit period tell us that the credit department is functioning efficiently and there are no past due accounts.
If a firm switched from taking trade credit discounts to paying on the net due date,this might cost the firm some money,but such a policy would probably have only a negligible effect on the income statement and no effect whatever on the balance sheet.
If a profitable firm finds that it simply must "stretch" its accounts payable,then this suggests that it is undercapitalized,i.e. ,that it needs more working capital to support its operations.
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