Question

Duk Yu, a beverage company, buys its raw materials from Nessange, a fruits and vegetables exporting company, without making any payment at the time of purchase. Instead, Nessange allows Duk Yu to pay the total purchase amount within a period of 6 months. Which of the following short-term financing options is being used by Duk Yu in the given scenario?a. Trade creditb. Factoringc. Short-term bank loadsd. Commercial Paper

Answer 1

Answer:

Option A Trade Credit

Explanation:

The reason is that the company is using its trade credit facility to finance its Working Capital. If the company raises finance from short term borrowings then it is raising finance from its current liabilities which is payable within a year. In this case, the Duk is financing by opting to suppliers who are allowing a greater credit period which means if $100,000 of purchases are made from Nessange then Duk donot needs $100,000 till the sixth month. Until the sixth month the Duk company will be able to fund by selling the beverages during this period and will pay out of the money received from its customers.