Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 59

Cash discounts—ROI Annual credit sales of Nadak Co. total $340 million. The firm gives a 2% cash discount for payment within 10 days of the invoice date; 90% of Nadak’s accounts receivable are paid within the discount period.

Required:

a. What is the total amount of cash discounts allowed in a year?

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b. Calculate the approximate annual rate of return on investment that Nadak Co.’s cash discount terms represent to customers who take the discount.

Step 1 of 4

Cash discounts – ROI (Return on Investments)

ROI:

• It is a performance measure tool used to estimate the effectiveness (returns) of an investment or to check the competency of a particular investment with a numeral of different investments.

• Return on investment indicates the performance of the investment. It is very useful to compare with different investments and to select best investment. To calculate return on investment, the benefit from the investment i.e. income or return by the original cost of investment.