Credit period, Managerial Accounting

Assignment Help:

It refers to the length of time given to the buyer to pay for their purchases. Throughout this period no interest is charged on the excellent amount. The credit period usually varies from 30 to 90 days and in some businesses still a period of 180 days is permitted. If a firm permits 45 days of credit along with no discount for early payment credit terms are stated like 'net 45'. In case the firm permits discount for early payment the credit terms are stated as 1.5/15, net 45' showing that if the payment is made in 15 days a discount of 1.5 % is permitted else the whole amount is to be paid in 45 days.

Raising the credit period results in raised sales but at similar time entails raised investment in debtors and higher incidence of bad debts.  Reducing the credit period would have the opposite outcome. The consequence of rising the credit period on net profit can be estimated along with the assist of equation 2.

? NP   = [? S (1-V) - ? Sbn] (1- t) - k ? I

In this case ? I computed as:

? I = (ACPn - ACP0) [S0/360] + V(ACPn)( ?S/360)

Here

? I = raise in investments

ACPn = new average collection period

ACP0 = old average collection period

In equation 2a the first term shows incremental investments in receivables related with existing sales and the next term presents the investment in receivables arising out incremental sales.


Related Discussions:- Credit period

MAKE OR BUY DECISIONS , MAKE OR BUY DECISIONS (NO LIMITING FACTORS) The...

MAKE OR BUY DECISIONS (NO LIMITING FACTORS) The choice between making and buying a given component is one which is likely to face all businesses at some time.  It is often one

Predetermined Overhead Rate, Logan Products computes its predetermined over...

Logan Products computes its predetermined overhead rate annually on the basis of direct labor hours. At the beginning of the year, it estimated that 39,000 direct labor-hours would

Financial statement, how to i get financial report for my company Anuz Wpp

how to i get financial report for my company Anuz Wpp

Arrival rates-service rates-traffic intensity, Arrival Rates, Service Rates...

Arrival Rates, Service Rates, and Traffic Intensity The (average) arrival rate is the rate of arrival of customers at a queue, and is often denoted by x. If 10 customers arr

Explain decision unit - zero base budgeting, Explain decision unit - zero b...

Explain decision unit - zero base budgeting Decision units: an organization is divided among decision units. The manager of the decision unit justifies the relative budget

Determine the stages in activity based costing, Stages in activity based co...

Stages in activity based costing The different stages in activity based costing are listed below and are shown in figure below. 1) Identification of the activities that may

Minimal regret criterion-laplace criterion of rationality, Minimal Regret C...

Minimal Regret Criterion : This method seeks to minimize the maximum regret that would occur from choosing a particular strategy or alternative.  The regret is the opportunit

Full service recourse factoring, Full Service Recourse Factoring : In this ...

Full Service Recourse Factoring : In this kind of factoring the client has to bear the risk of default made through the debtors. There the factor had advanced funds against book de

What are the advantages of budgetary control, What are the Advantages of bu...

What are the Advantages of budgetary control This budgetary control system helps in fixing the goals for the organization as a whole and concerts efforts are made for its achie

What are the advantages of ratio analysis, Advantages of ratio analysis ...

Advantages of ratio analysis 1) Helpful in financial analysis: financial analysis is easier if accounting ratios are used to analyze the different financial statement relatio

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd