Page 126 - CalcBus_Flipbook

13-12 Merchandising CH 13]

Solution Algorithm B:

Effective annual interest rate =
Discount % / (1-Discount %) / (360/(Full allowed payment days - Discount days))

Effective annual interest rate = 1.5% / (1− 1.5 %) / [360/(45 - 10)]

Effective annual interest rate = 0.015 / (1 – 0.015) / [360/(45 - 10)] Using decimals

Effective annual interest rate = (0.015 / (1 – 0.015)/ [360/(35)]) Perform arithmetic in Parenthesis

= (0.015 / (1 – 0.015)/ (10.2857))

= (0.015 / [(0.985) / (10.2857)])

= (0.015 / [0.09576])

= 0.156635 x 100% To convert back to a percentage

Effective annual interest rate = 15.664%

Using your hand calculator and having converted all percents to decimals:

Cl/C 45 − 10 = M+ 360 ÷ MR MC M+ 1 − .015

÷ MR = MC M+ .015 ÷ MR X 100 = —> 15.6635 ,

means 15.664%

Three issues with payments on invoices: (1) quick payment and the retailer
increases his profit. (2) Delinquent payment and the retailer reduces his profit by paying the
higher price on the invoice. (3) A retailer's continuing non-compliance and/or delinquency
of payment terms may lead to a supplier's decision to stop offering credit terms to that
customer, and requiring prepayment.

Leniency and grace with EOM invoices. If an invoice with EOM terms is dated on or
after the twenty-sixth day of the month, it is generally treated as if it were dated at the
beginning of the next month. Thus, an invoice dated November 26 with terms of 2/10 EOM
is subject to a cash discount if paid on or before December 10. EOM then means by the End
of the NEXT Month.
As a general rule, when cash discounts are granted but the end of the credit period is
not specified, such as with 2/10, an invoice is considered to have a credit period of 20 days
beyond the cash-discount period. As with ordinary credit terms, the invoice may be paid
during this time without penalty for late payment. An invoice dated November 26 with terms
of 2/10 EOM could be paid on December 30 without penalty for late payment and the
discount is lost.
2/10 net 10 Prox. We have already discussed EOM which means end of the next
month. Prox is another payment date term that refers to due dates being in the following
month rather than the current one. Prox is short for the Latin, "proximo mense," and
translated to English, means for payment "in the following month. A payment term of Net 30
prox indicates that payment is due on the 30th day of the next month. Example, you receive
an invoice with terms 3/10 Prox or 3/10 n Prox on 14 May, this means there is a 3%
discount if paid within the first 10 days, and you have until 30 June, proximo mense, to pay
it in full.

Date-Driven and Relative Clarifications
Broadly speaking, there are two types of payment terms:

1. Relative to the invoice date: Due dates and discount dates are relative to the
invoice date. For example, a relative term of Net 30 would require payment 30 days
from the invoice date.

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