Terms of sale Credit
Type of credit
Low cost, low
High credit risk
Basic Form: 2/10 net 45.
• 2% discount if paid in 10 days.
• Total amount due in 45 days if
discount is not taken.
Buy $500 worth of
merchandise with the
credit terms given above.
• Pay $500(1 − .02) = $490 if you
pay in 10 days.
• Pay $500 if you pay in 45 days.
Finding the implied interest
rate when customers do not
take the discount.
Credit terms of 2/10 net 45
and $500 loan.
• $10 interest (= .02 × 500).
• Period rate = 10 / 490 = 2.0408%.
• Period = (45 − 10) = 35 days.
• 365 / 35 = 10.4286 periods per
EAR = (1.020408)10.4286 − 1 =
Time draft ﻷجل =كمبيالة
When draft presented,
buyer “accepts” it.
• Indicates promise to pay.
• “Trade acceptance.”
Seller may keep or sell
Which customers should
with the firm
Character = applicant’s record of meeting past obligations
Capacity = applicant’s ability to repay the requested credit
Capital = applicant’s debt relative to equity
Collateral = The amount of assets the applicant has available for use
in securing the credit.
Conditions = Current general and industry-specific economic conditions
and any unique conditions surrounding a specific transaction
Credit scoring refers to the process of
calculating a numerical rating for a
customer based on information
collected; credit is then granted or
refused based on the result.
For example, a firm might rate a
customer on a scale of 1 (very poor) to
10 (very good) on each of the five Cs of
credit using all the information
available about the customer.
A credit score could then be calculated
based on the total.
From experience, a firm might choose
to grant credit only to customers with a
score above, say, 30.
3. CREDIT MONITORING
an ongoing review of the firm’s accounts receivable to determine
whether customers are paying according to the stated credit
Slow payments are costly to a firm because they lengthen the
average collection period and thus increase the firm’s investment
in accounts receivable
Firms usually monitor the credits by:
• By watching the average collection period and
• By constructing an aging schedule for their accounts receivable
3.1. Average collection period
the average number of days that credit sales are
the time from sale until the
customer places the
payment in the mail
the time to receive,
process, and collect the
Average sales per day
significantly > 30
problem is to “age”
3.2. Aging schedule
The accounts receivable balance on the books of Dodd Tool on
December 31, 2015, was $200,000. The firm extends net 30-day
credit terms to its customers. The average collection period is