Part 2 : 01/14/19 11:29:00
Question 1 - CMA 1295 1.7 - Trade Credit
Which one of the following statements concerning cash discounts is correct?
A. With trade terms of 2/15, net 60, if the discount is not taken, the buyer receives 45 days of free credit.
B. The cost of not taking the discount is higher for terms of 2/10, net 60 than for 2/10, net 30.
C. The cost of not taking a 2/10, net 30 cash discount is usually less than the prime rate.
D. The cost of not taking a cash discount is generally higher than the cost of a bank loan.
Question 2 - CMA 1294 1.18 - Trade Credit
If a retailer's terms of trade are 3/10, net 45 with a particular supplier, what is the cost on an annual basis of not taking
the discount? Assume a 360-day year.
A. 36.00%
B. 37.11%
C. 24.00%
D. 31.81%
Question 3 - ICMA 10.P2.178 - Trade Credit
A firm is given payment terms of 3/10, net 90 and forgoes the discount, paying on the net due date. Using a 360-day
year and ignoring the effects of compounding, what is the effective annual interest rate cost?
A. 13.5%.
B. 13.9%.
C. 12.0%.
D. 12.4%.
Question 4 - CMA 1296 1.12 - Trade Credit
Which one of the following statements about trade credit is correct? Trade credit is
A. usually an inexpensive source of external financing.
B. not an important source of financing for small firms.
C. subject to risk of buyer default.
D. a source of long-term financing to the seller.
Question 5 - CMA 687 1.28 - Trade Credit
Richardson Supply has a $100 invoice with payment terms of 2/10, net 60. Richardson can either take the discount or
place the funds in a money market account paying 6% interest. Using a 360-day year, Richardson's cost of not taking
the cash discount is
A. 8.7%.
B. 6.4%.
C. 12.2%.
(c) HOCK international, page 1
Part 2 : 01/14/19 11:29:00
C. 12.2%.
D. 6.2%.
Question 6 - CMA 694 1.20 - Trade Credit
Using a 360-day year, what is the opportunity cost to a buyer of not accepting terms of 3/10, net 45?
A. 55.67%
B. 31.81%
C. 101.73%
D. 22.27%
Question 7 - CMA 691 1.6 - Trade Credit
When a company offers credit terms of 2/10, net 30, the annual interest cost, based on a 360-day year, is
A. 36.0%.
B. 36.7%.
C. 35.3%.
D. 24.0%.
Question 8 - CMA 1295 1.9 - Trade Credit
Which one of the following financial instruments generally provides the largest source of short-term credit for small
firms?
A. Installment loans.
B. Trade credit.
C. Commercial paper.
D. Bankers' acceptances.
Question 9 - ICMA 10.P2.177 - Trade Credit
Dudley Products is given terms of 2/10, net 45 by its suppliers. If Dudley forgoes the cash discount and instead pays
the suppliers 5 days after the net due date, what is the annual interest rate cost (using a 360-day year)?
A. 18.0%.
B. 24.5%.
C. 18.4%.
D. 21.0%.
Question 10 - CMA 697 1.8 - Trade Credit
Garo Company, a retail store, is considering foregoing sales discounts in order to delay using its cash. Supplier credit
terms are 2/10, net 30. Assuming a 360-day year, what is the annual cost of credit if the cash discount is not taken and
Garo pays net 30? (c) HOCK international, page 2
A. 36.7%
B. 24.5%
C. 36.0%
Part 2 : 01/14/19 11:29:00
Garo Company, a retail store, is considering foregoing sales discounts in order to delay using its cash. Supplier credit
terms are 2/10, net 30. Assuming a 360-day year, what is the annual cost of credit if the cash discount is not taken and
Garo pays net 30?
A. 36.7%
B. 24.5%
C. 36.0%
D. 24.0%
Question 11 - CMA 1295 1.15 - Trade Credit
Which one of the following provides a spontaneous source of financing for a firm?
A. Accounts payable.
B. Debentures.
C. Accounts receivable.
D. Mortgage bonds.
Question 12 - CMA 692 1.23 - Trade Credit
If a firm's credit terms require payment within 45 days but allow a discount of 2% if paid within 15 days (using a
360-day year), the approximate cost or benefit of the trade credit terms is
A. 24.49%.
B. 16%.
C. 48%.
D. 2%.
Question 13 - ICMA 10.P2.159 - Trade Credit
Global Manufacturing Company has a cost of borrowing of 12%. One of the firm's suppliers has just offered new terms
for purchases. The old terms were cash on delivery and the new terms are 2/10, net 45. Should Global pay within the
first ten days?
A. No, the use of debt should be avoided if possible.
B. Yes, the cost of not taking the trade discount exceeds the cost of borrowing.
C. No, the cost of trade credit exceeds the cost of borrowing.
D. The answer depends on whether the firm borrows money.
Question 1 - CMA 1295 1.7 - Trade Credit
A. The extra 45 days is not free credit because the customer loses the discount in order to pay on day 60.
B. The cost of not taking the discount is higher for credit terms of 2/10, net 30 than for credit terms of 2/10, net 60
because the same discount is received for payment within 10 days, but the period for paying in full is shorter.
C. A bank's prime rate is the rate it charges its most creditworthy borrowers. If we do the math, we will determine that
the cost of not taking this discount is 36%, which is higher than the prime rate.
(c) HOCK international, page 3
D. Generally, the cost of not taking the discount is higher than the cost of a bank loan. Therefore, in most
cases the cash discount should be taken.
Part 2 : 01/14/19 11:29:00
Question 1 - CMA 1295 1.7 - Trade Credit
A. The extra 45 days is not free credit because the customer loses the discount in order to pay on day 60.
B. The cost of not taking the discount is higher for credit terms of 2/10, net 30 than for credit terms of 2/10, net 60
because the same discount is received for payment within 10 days, but the period for paying in full is shorter.
C. A bank's prime rate is the rate it charges its most creditworthy borrowers. If we do the math, we will determine that
the cost of not taking this discount is 36%, which is higher than the prime rate.
D. Generally, the cost of not taking the discount is higher than the cost of a bank loan. Therefore, in most
cases the cash discount should be taken.
Question 2 - CMA 1294 1.18 - Trade Credit
A.
This question is solved using the following formula:
360 Discount %
×
Total period for payment 100% − Discount %
− Period for discount payment
This answer could result from two errors:
(1) Using 30 as the denominator in the first part of the formula. However, the total period for payment is 45 days, and
the period for the discount payment is 10 days. 45 − 10 = 35, not 30; and
(2) Using 0.03 as the second part of the formula. The second part of the formula should be 0.03 ÷ (100% − Discount
%).
B.
This question is solved using the following formula:
360 Discount %
×
Total period for payment 100% − Discount %
− Period for discount payment
This answer results from using 30 as the denominator in the first part of the formula. However, the total period for
payment is 45 days, and the period for the discount payment is 10 days. 45 − 10 = 35, not 30.
C.
This answer results from two errors: (1) using the total period for payment in the denominator of the first part of the
formula for calculating the cost of not taking a cash discount that is offered for early payment and (2) using 100% (or
1.00) in the denominator of the second part of the formula. The denominator of the first part of the formula should be
Total Period for Payment − Period for Discount Payment. The denominator of the second part of the formula should be
100% (or 1.00) minus the discount % (or the discount % in decimal form). The correct formula is:
360 Discount %
× (c) HOCK international, page 4
Total period for payment 100% − Discount %
− Period for discount payment
Part 2 : 01/14/19 11:29:00
360 Discount %
×
Total period for payment 100% − Discount %
− Period for discount payment
D. This question is solved using the following formula:
360 Discount %
×
Total period for payment 100% − Discount %
− Period for discount payment
Inputting the information from the question into the formula, we get 31.81%, as follows:
360 0.03
× = 10.28571428 × 0.030927835 = 0.3181 or 31.81%.
45 − 10 1.00 − 0.03
This is the cost of not taking the discount.
Question 3 - ICMA 10.P2.178 - Trade Credit
A.
This answer results from using 100% (or 1.00) in the denominator of the second part of the formula for calculating the
cost of not taking a cash discount that is offered for early payment. The denominator should be 100% (or 1.00) minus
the discount % (or the discount % in decimal form). The correct formula is:
360 Discount %
×
Total period for payment 100% − Discount %
− Period for discount payment
B.
This is a straightforward question that is solved by using the formula for calculating the cost of not taking a
cash discount that is offered for early payment.
This formula is:
360 Discount %
×
Total period for payment 100% − Discount %
− Period for discount payment
Inputting the information from the question into the formula, we get 13.9%, as follows:
360 0.03
× = 4.5 × 0.030927835 = 0.139 or 13.9%.
90 − 10 1.00 − 0.03
(c) HOCK international, page 5
C.
This answer results from two errors: (1) using the total period for payment in the denominator of the first part of the
Part 2 : 01/14/19 11:29:00
90 − 10 1.00 − 0.03
C.
This answer results from two errors: (1) using the total period for payment in the denominator of the first part of the
formula for calculating the cost of not taking a cash discount that is offered for early payment and (2) using 100% (or
1.00) in the denominator of the second part of the formula. The denominator of the first part of the formula should be
Total Period for Payment − Period for Discount Payment. The denominator of the second part of the formula should be
100% (or 1.00) minus the discount % (or the discount % in decimal form). The correct formula is:
360 Discount %
×
Total period for payment 100% − Discount %
− Period for discount payment
D.
This answer results from using the total period for payment in the denominator of the first part of the formula for
calculating the cost of not taking a cash discount that is offered for early payment. The denominator should be Total
Period for Payment − Period for Discount Payment. The correct formula is:
360 Discount %
×
Total period for payment 100% − Discount %
− Period for discount payment
Question 4 - CMA 1296 1.12 - Trade Credit
A. When a discount is offered for payment within 10 days or so, trade credit is usually a relatively expensive source of
financing, as is demonstrated by the calculation of the cost of not taking the discount.
B. Trade credit is a very important source of financing for small firms.
C. Any type of credit is subject to the potential of default by the buyer (the borrower).
D. Trade credit is a source of short-term financing for the buyer.
Question 5 - CMA 687 1.28 - Trade Credit
A.
This question is a little bit more involved than the standard cash discount question because we need to take
into account the fact that Richardson can invest money at 6% if they have it. If they pay within the discount
period, they will save $2. However, if they do not pay within the period, they will have an additional $98
available for 50 days that they would not have had if they had paid early. That money will be able to earn 6%.
Over the 50 days, that $98 will earn $0.817 ($98 × 0.06 ÷ 360 × 50). This means that they would have an
incremental cost of $1.183 for the 50 days covered by this receivable ($2 − $0.817). Dividing this by the $98
that they have available from not paying early, we get a cost of 1.2%. However, this is rate for a period of only
50 days so it needs to be multiplied by 7.2 (calculated as 360 ÷ 50) in order to get an annual rate. The annual
rate is 8.7%.
An alternative way of reaching the same (c)
answer
HOCKis international,
to calculate the cost
page 6 of not taking the discount and then
subtract from that cost the annual rate that could be received by investing the money in a money market
account, as follows:
(360/[Total Period − Period for Discount]) × (Discount % / [100 − Discount %])
Part 2 : 01/14/19 11:29:00
rate is 8.7%.
An alternative way of reaching the same answer is to calculate the cost of not taking the discount and then
subtract from that cost the annual rate that could be received by investing the money in a money market
account, as follows:
(360/[Total Period − Period for Discount]) × (Discount % / [100 − Discount %])
(360 / [60 − 10]) × (2 / [100 − 2]) = 7.2 × 0.0204 = 0.1469
0.1469 − 0.06 = 0.0869 or 8.7%
B.
This is not the correct answer. Please see the correct answer for an explanation.
We have been unable to determine how to calculate this incorrect answer choice. If you have calculated it, please let
us know how you did it so we can create a full explanation of why this answer choice is incorrect. Please send us an
email at support@hockinternational.com. Include the full Question ID number and the actual incorrect answer choice --
not its letter, because that can change with every study session created. The Question ID number appears at the top of
the question. Thank you in advance for helping us to make your HOCK study materials better.
C. This is (360 / 60) × (2 / [100 − 2]) = 6 × 0.0204 = 0.1224. This is incorrect for two reasons. One, the first part of the
formula is incorrect. It should be (360 / [60 − 10]), the Total Period − Period for Discount. And two, it does not take into
consideration the 6% return available in a money market account.
D. This is {(360 / 60) × (2 / [100 − 2])} − 0.06. The first part of the formula is incorrect. It should be (360 / [60 − 10]), the
Total Period − Period for Discount.
Question 6 - CMA 694 1.20 - Trade Credit
A. This answer results from using 30 days as the total period for payment instead of 45 days.
B.
This question is solved using the following formula:
360 Discount %
×
Total period for payment 100% − Discount %
− Period for discount payment
Inputting the information from the question into the formula, we get 31.81%, as follows:
360 0.03
× = 10.2857 × 0.030928 = 0.3181, or 31.81%.
45 − 10 1.00 − 0.03
C.
This is not the correct answer. Please see the correct answer for an explanation.
We have been unable to determine how to calculate this incorrect answer choice. If you have calculated it, please let
us know how you did it so we can create a full explanation of why this answer choice is incorrect. Please send us an
email at support@hockinternational.com. Include the full Question ID number and the actual incorrect answer choice --
(c) HOCK
not its letter, because that can change with every studyinternational, page
session created. 7 Question ID number appears at the top of
The
the question. Thank you in advance for helping us to make your HOCK study materials better.
D.
Part 2 : 01/14/19 11:29:00
us know how you did it so we can create a full explanation of why this answer choice is incorrect. Please send us an
email at support@hockinternational.com. Include the full Question ID number and the actual incorrect answer choice --
not its letter, because that can change with every study session created. The Question ID number appears at the top of
the question. Thank you in advance for helping us to make your HOCK study materials better.
D.
This is not the correct answer. Please see the correct answer for an explanation.
We have been unable to determine how to calculate this incorrect answer choice. If you have calculated it, please let
us know how you did it so we can create a full explanation of why this answer choice is incorrect. Please send us an
email at support@hockinternational.com. Include the full Question ID number and the actual incorrect answer choice --
not its letter, because that can change with every study session created. The Question ID number appears at the top of
the question. Thank you in advance for helping us to make your HOCK study materials better.
Question 7 - CMA 691 1.6 - Trade Credit
A.
This is (360 / 20) × (2 / 100) = 0.36 or 36%.
The correct formula is:
360 Discount %
×
Total period for payment 100% − Discount %
− Period for discount payment
B.
This question is solved using the following formula:
360 Discount %
×
Total period for payment 100% − Discount %
− Period for discount payment
Inputting the information from the question into the formula, we get 36.7%, as follows:
360 0.02
× = 18 × 0.0204 = 0.367 or 36.7%.
30 − 10 1.00 − 0.02
C.
This is (360 / 20) × (2 / 102) = 0.3529 or 35.3%.
The correct formula is:
360 Discount %
×
Total period for payment 100% − Discount %
− Period for discount payment
(c) HOCK international, page 8
D.
This is (360 / 30) × (2 / 100) = 0.24 or 24%.
Part 2 : 01/14/19 11:29:00
Total period for payment 100% − Discount %
− Period for discount payment
D.
This is (360 / 30) × (2 / 100) = 0.24 or 24%.
The correct formula is:
360 Discount %
×
Total period for payment 100% − Discount %
− Period for discount payment
Question 8 - CMA 1295 1.9 - Trade Credit
A. Installment loans are not usually short-term credit.
B. Trade credit is the largest source of short-term credit for small firms.
C. Commercial paper is issued only by very large companies and is therefore not a large source of credit for small
firms.
D. Bankers' acceptances are not a large source of short-term credit since they are a guarantee of payment, not the
credit itself.
Question 9 - ICMA 10.P2.177 - Trade Credit
A.
This answer results from using 100% (or 1.00) in the denominator of the second part of the formula for calculating the
cost of not taking a cash discount that is offered for early payment. The denominator should be 100% (or 1.00) minus
the discount % (or the discount % in decimal form). The correct formula is:
360 Discount %
×
Total period for payment 100% − Discount %
− Period for discount payment
B.
This answer results from using 30 days as the denominator of the first part of the formula for calculating the cost of not
taking a cash discount that is offered for early payment. The denominator of the first part of the formula should be Total
Period for Payment − Period for Discount Payment.
The formula for the cost of not taking the discount is
360 Discount %
×
Total period for payment 100% − Discount %
− Period for discount payment (c) HOCK international, page 9
However, instead of using the number of days Dudley is allowed to take to pay according to the terms (45 days) as the
total period for payment, we must use the number of days the company would actually take to pay. The problem says
Part 2 : 01/14/19 11:29:00
×
Total period for payment 100% − Discount %
− Period for discount payment
However, instead of using the number of days Dudley is allowed to take to pay according to the terms (45 days) as the
total period for payment, we must use the number of days the company would actually take to pay. The problem says
Dudley would pay the suppliers 5 days after the net due date. Since the net due date is 45 days, we must use 50 days
in the formula as the total period for payment. So the denominator needs to be 50 − 10, or 40.
C.
This is solved using the formula for the cost of not taking the discount, but it has a twist to it.
The formula for the cost of not taking the discount is
360 Discount %
×
Total period for payment 100% − Discount %
− Period for discount payment
Instead of using the number of days Dudley is allowed to take to pay according to the terms (45 days) as the
total period for payment, we must use the number of days the company would actually take to pay. The
problem says Dudley would pay the suppliers 5 days after the net due date. Since the net due date is 45 days,
we must use 50 days in the formula as the total period for payment. Note that the question does not mention
anything about Dudley incurring any interest by paying 5 days late, so we assume Dudley does not incur any
interest by paying 5 days late.
Inputting the information from the question into the formula, we get 18.4%, as follows:
360 0.02
× = 9 × 0.020408 = 0.184 or 18.4%.
50 − 10 1.00 − 0.02
D.
The formula for the cost of not taking the discount is
360 Discount %
×
Total period for payment 100% − Discount %
− Period for discount payment
This answer results from using the number of days Dudley is allowed to take to pay (45 days) as the total period for
payment in the formula. However, the problem says Dudley would pay the suppliers 5 days after the net due date.
Since the net due date is 45 days, 5 days after the due date would be 50 days; so we must use 50 days in the formula
as the total period for payment.
Question 10 - CMA 697 1.8 - Trade Credit
A.
This question is solved using the following formula:
360 Discount %
× (c) HOCK international, page 10
Total period for payment 100% − Discount %
− Period for discount payment
Part 2 : 01/14/19 11:29:00
360 Discount %
×
Total period for payment 100% − Discount %
− Period for discount payment
Inputting the information from the question into the formula, we get 36.7%, as follows:
360 0.02
× = 18 × 0.020408 = 0.367 or 36.7%.
30 − 10 1.00 − 0.02
B.
This answer results from using the total period for payment in the denominator of the first part of the formula for
calculating the cost of not taking a cash discount that is offered for early payment. The denominator of the first part of
the formula should be Total Period for Payment − Period for Discount Payment. The correct formula is:
360 Discount %
×
Total period for payment 100% − Discount %
− Period for discount payment
C.
This answer results from using 100% (or 1.00) in the denominator of the second part of the formula for calculating the
cost of not taking a cash discount that is offered for early payment. The denominator should be 100% (or 1.00) minus
the discount % (or the discount % in decimal form).
This answer results from using the total period for payment in the denominator of the first part of the formula for
calculating the cost of not taking a cash discount that is offered for early payment. The denominator of the first part of
the formula should be Total Period for Payment − Period for Discount Payment. The correct formula is:
360 Discount %
×
Total period for payment 100% − Discount %
− Period for discount payment
D.
This answer results from two errors: (1) using the total period for payment in the denominator of the first part of the
formula for calculating the cost of not taking a cash discount that is offered for early payment and (2) using 100% (or
1.00) in the denominator of the second part of the formula. The denominator of the first part of the formula should be
Total Period for Payment − Period for Discount Payment. The denominator of the second part of the formula should be
100% (or 1.00) minus the discount % (or the discount % in decimal form). The correct formula is:
360 Discount %
×
Total period for payment 100% − Discount %
− Period for discount payment
(c) HOCK international, page 11
Question 11 - CMA 1295 1.15 - Trade Credit
A. Accounts payable (or trade credit) is a spontaneous source of financing because it does not need to be
applied for before the transaction is entered into. It is created automatically at the time of purchase.
Part 2 : 01/14/19 11:29:00
Question 11 - CMA 1295 1.15 - Trade Credit
A. Accounts payable (or trade credit) is a spontaneous source of financing because it does not need to be
applied for before the transaction is entered into. It is created automatically at the time of purchase.
B. Debentures are not a source of spontaneous financing. Spontaneous financing occurs without special effort on the
part of the borrower. The borrower must issue debentures.
C. Accounts receivable are not a source of spontaneous financing because in order to finance through receivables, a
factoring agreement must be entered into. Spontaneous financing occurs without special effort on the part of the
borrower.
D. Mortgage bonds are not a source of spontaneous financing. Spontaneous financing occurs without special effort on
the part of the borrower. The borrower must issue mortgage bonds.
Question 12 - CMA 692 1.23 - Trade Credit
A.
This question is solved using the following formula:
360 Discount %
×
Total period for payment 100% − Discount %
− Period for discount payment
Inputting the information from the question into the formula, we get 24.49%, as follows:
360 0.02
× = 12 × 0.020408 = 0.2449 or 24.49%.
45 − 15 1.00 − 0.02
B.
This is (360 / 45) × (2 / 100) = 0.16 or 16%.
The correct formula is:
360 Discount %
×
Total period for payment 100% − Discount %
− Period for discount payment
C.
This is (360 / 15) × (2 / 100) = 0.48 or 48%.
The correct formula is:
360 Discount %
×
Total period for payment (c) HOCK
100% − Discount % international, page 12
− Period for discount payment
D.
Part 2 : 01/14/19 11:29:00
×
Total period for payment 100% − Discount %
− Period for discount payment
D.
This is the amount of the discount for paying within 15 days.
The correct formula is:
360 Discount %
×
Total period for payment 100% − Discount %
− Period for discount payment
Question 13 - ICMA 10.P2.159 - Trade Credit
A.
Paying the supplier after the 10-day discount period is using debt. The debt is owed to the supplier, and it has an
interest cost. The interest cost is the difference between the gross amount due the supplier if paid after the discount
period and the net amount that would be paid if the invoice is paid within the 10-day discount period.
The decision of whether or not to take the discount should be based on whether the interest imputed in not taking the
discount is greater than the interest cost to borrow the funds to pay within the discount period.
Even if the company does not need to borrow to pay within the discount period, it will have a cost for paying within the
discount period. The cost will be an opportunity cost — the interest the company could have earned had it invested the
funds for 35 additional days (45 days minus 10 days) before paying the invoice.
B.
The cost of not taking the trade discount is:
(360 / [45 – 10]) × 0.02 / 0.98
= 10.2857 × 0.020408
= 0.2099 or 20.99%
This is higher than the company’s borrowing cost of 12%. Therefore, Global should pay within the first ten
days because the cost of not taking the trade discount is greater than the cost of borrowing.
C. It is true that the cost of the trade credit exceeds the company's cost of borrowing. However, that does not mean
that Global should not pay within the first ten days to get the discount.
D. Even if the company does not need to borrow to pay within the discount period, it will have a cost for paying within
the discount period. The cost will be an opportunity cost — the interest the company could have earned had it invested
the funds for 35 additional days (45 days minus 10 days) before paying the invoice.
(c) HOCK international, page 13
