Multiple Choice
How do managers use break-even analysis in relation to net sales?
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4. Merchandising Operations
Net Sales
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Why would a vendor offer a cash discount to a customer?
A
To delay the recognition of revenue until payment is received.
B
To reduce the cost of goods sold on the income statement.
C
To encourage customers to pay their invoices earlier, improving the vendor's cash flow.
D
To increase the selling price of goods and maximize profit.
Verified step by step guidance1
Understand the concept of a cash discount: A cash discount is a reduction in the invoice amount offered by a vendor to customers who pay their bills promptly, typically within a specified period.
Recognize the purpose of offering cash discounts: Vendors use cash discounts to incentivize customers to pay earlier, which helps improve the vendor's cash flow by reducing the time it takes to collect receivables.
Analyze the incorrect options: Delaying revenue recognition until payment is received is not the purpose of a cash discount, as revenue is typically recognized when earned, not when cash is received. Similarly, reducing the cost of goods sold or increasing the selling price are unrelated to the concept of cash discounts.
Focus on the correct reasoning: The primary goal of offering a cash discount is to encourage early payment, which reduces the vendor's reliance on external financing and improves liquidity.
Conclude with the financial benefit: By offering cash discounts, vendors can reduce the risk of bad debts and improve their working capital management, ensuring smoother business operations.
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