Future Business Leaders of America (FBLA) Accounting Practice Test

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What does 'credit terms' refer to?

The agreement length for payment after a sale
The conditions for generating credit
The method of calculating sales tax
The interest rate associated with credit purchases

The correct answer is: The agreement length for payment after a sale

The term 'credit terms' specifically refers to the conditions under which a buyer is allowed to pay for goods or services purchased on credit. This includes details such as the length of time the buyer has to make the payment after the sale has occurred. For instance, 'net 30' would mean that the payment is due within 30 days of the invoice date, while '2/10 net 30' indicates that the buyer can take a 2% discount if the payment is made within 10 days; otherwise, the full payment is due in 30 days. Recognizing this concept is essential for understanding how businesses manage cash flow and the implications of granting credit to customers. The clarity of credit terms helps in maintaining positive relationships between sellers and buyers, as well as in effective financial planning and risk management for the selling business.