Dear Pragati,
Actually they not provided enough information to solving this problem they need to give payment terms for like 3/10, net 90 days instead of this they given average receivable amount 880,000 & credit sales 4800,000 and cash discount 2%.
According to this given information in this problem we need to use Accounts receivable turnover ration formula to calculate effective rate of interest here
Credit sales 48,00,000
Average Accounts receivable 8,80,000 = 5.4545 AR Turnover ration
Another thing is given here cash discount 2% mostly all firms did not used cash discount which is offered by his supplier why means they always need time to make payment that's why we need calculating the cost of not taking cash discount that is offered for early payment by this formula.
Discount %
100% - Discount %
0.02
1 – 0.02
0.020408
Now multiple the AR ration 5.4545 * 0.020408 = 0.1113 * 100 = 11.13 ( Effective interest of rate) C is the correct answer as per my opinion.
Logic behide this question CMA exam always test you based your concept understanding level that's why they change the question information according to their method.
Thank you for your kind attention to this solution I hope you understand.
Thanks & Best Regards
Sumair Shaik
Accountant
United Arab Emirates
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