Certified Management Accountant 2025 – 400 Free Practice Questions to Pass the Exam

To determine the net cost of adding a cash discount to credit terms, the company needs to analyze the total cash lost due to discounts alongside the savings realized from early payments received.

When a company offers cash discounts, it reduces the cash inflow from customers who take advantage of these discounts. This represents a loss in terms of cash flow, as the company receives less revenue than it would have otherwise without offering the discount. However, those discounts often incentivize customers to pay earlier than they normally would, leading to savings on interest or financing costs. By quantifying both the total cash lost to the discounts offered and the financial benefits from quicker collection of accounts receivable, the company can accurately assess the net cost associated with the cash discount.

Other options are not effective in determining the net cost. Focusing solely on total discounts given does not account for the savings from early payments and presents a one-sided view. Analyzing inventory costs and accounts payable does not directly relate to cash discounts and their effect on revenue. Assessing overall sales growth over time provides a wide-angle view of business performance but fails to pinpoint the specific financial impact of cash discount policies on cash flow management.