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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

Why is some trade credit called free while other credit is called costly? If a firm buys on terms of 2/10, net 30, pays at the end of the 30th day, and typically shows $300,000of accounts payable on its balance sheet, would the entire $300,000 be free credit would it be costly credit, or would some be free and some costly? Explain your answer. No calculations are necessary.

Summary Introduction

To explain: The nature (free or costly) of given purchase.

Introduction:

Trade Credit:

The trade credit refers to the credit sale. This credit owes money for the seller, so it is treated as accounts receivable by the seller and this money is accounted as accounts payable by the buyer.

Explanation
  • The amount related to the first 10 days will be treated as free trade credit as no discount needs to be sacrificed to get the amount.
  • But to get the amount for next 20 days,...

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