Question 1

Captive finance companies are:

Accepted Answer

A)   parent companies to the subsidiary.
B)   subsidiaries to the parent company.
C)   used by firms with good credit ratings.
D)   Both parent companies to the subsidiary and subsidiaries to the parent company.
E)   Both subsidiaries to the parent company and used by firms with good credit ratings.F) All of the above
G) B) and D)

Question 2

The carrying value of a firm's account receivable is $1,000,000 and the average collection period is 55 days. The firm's credit sales per day are:

Accepted Answer

A)   $33,333.33.
B)   $18,181.82.
C)   $1,000,000.00.
D)   $1,333,333.33.
E)   None of these. eF) A) and E)
G) C) and D)

Question 3

When analyzing the decision to change the cash discount policy,the firm should:

Accepted Answer

A)   choose the policy with the highest order size.
B)   choose the policy with the lowest variable cost.
C)   choose the policy with the lowest NPV.
D)   choose the policy with the highest NPV.
E)   choose the policy offering the lowest cash discount.F) B) and E)
G) B) and D)

Question 4

To collect on the accounts receivable due to the firm,a firm can:

Accepted Answer

A)   send a delinquency letter of past due status to the customer.
B)   make personal contact by telephone.
C)   employ a collection agency.
D)   take legal action against the customer as necessary.
E)   All ofF) A) and B)
G) B) and D)

Question 5

The carrying value of a firm's account receivable is $1,500,000 and the average collection period is 45 days. The firm's credit sales per day are:

Accepted Answer

A)   $18,181.82.
B)   $33,333.33.
C)   $1,000,000.00.
D)   $1,500,000.00.
E)   None of these.F) A) and E)
G) B) and D) B

Question 6

Factoring refers to:

Accepted Answer

A)   determining the aging schedule of the firm's accounts receivable.
B)   the sale of a firm's accounts receivable to a financial institution.
C)   the determination of the average collection period.
D)   scoring a customer based on the 5 C's of credit.
E)   All ofF) A) and B)
G) A) and C)

Question 7

Frank's Formals rents apparel throughout the year. They have experienced non-payment by about 15% of their customers with an average loss of $400. Frank's wants to stem their losses by using an instant electronic credit check on the customer. These checks will cost them $15 on each of the 1,000 customers. The opportunity cost is 2.0% for the credit period. Should they pursue the credit check?

Accepted Answer

A)   No, because the $15,000 cost is too high.
B)   No, because a $400 loss is minor.
C)   Yes, because the net gain is $30,000.
D)   Yes, because the net gain is $45,000.
E)   Yes, because the net gain is $60,000.F) B) and E)
G) A) and E)

Question 8

Rockwell Heating is selling a commercial heating unit at the price of $100,000 per unit. The variable cost of producing this unit is $75,000. Rockwell is considering offering credit terms to their customers,which would allow payment to be delayed one month. Rockwell predicts that offering these terms will increase monthly sales from 50 units to 60 units. Rockwell does not expect the increased production to change variable cost and Rockwell does not expect to charge a higher price. The appropriate discount rate is 1% a month. Determine the probability of payment that would make Rockwell indifferent between granting credit and the present policy.
B. b = .968

Accepted Answer

Strategy 1 - Refuse Credit: Pr...

Question 9

The three components of credit policy are:

Accepted Answer

A)   collection policy, credit analysis, and interest rate determination.
B)   collection policy, credit analysis, and terms of the sale.
C)   collection policy, interest rate determination, and repayment analysis.
D)   credit analysis, repayment analysis, and terms of the sale.
E)   interest rate determination, repayment analysis and terms of salE.F) None of the above
G) A) and C) B

Question 10

If a firm refuses to offer credit,the net present value of the transaction is:

Accepted Answer

A)   the cash revenues received minus the cost paid in time period 0.
B)   the discounted value of the revenues from time period 0.
C)   the net cash flow from the future payments to be received.
D)   determined by all of these.
E)   always equal to zero.F) C) and E)
G) B) and C)

Question 11

A conditional sales contract is useful to the seller because:

Accepted Answer

A)   the firm retains legal ownership of the goods until they are completely paid for.
B)   the firm is compensated for their opportunity cost.
C)   there is a sequence of scheduled payments.
D)   All of these.
E)   None of these.F) A) and E)
G) B) and E)

Question 12

Edgeworth Heating is selling a commercial heating unit at the price of $100,000 per unit. The variable cost of producing this unit is $75,000. Edgeworth is considering offering credit terms to their customers,which would allow payment to be delayed one month. Edgeworth predicts that offering these terms will increase monthly sales from 50 units to 60 units. Edgeworth does not expect the increased production to change its variable cost and Edgeworth does not expect to charge a higher price. The default rate on credit customers is predicted to be 2.25%. Which of the following statements is true?

Accepted Answer

A)   At a monthly interest rate of 1%, Edgeworth is indifferent between extending credit and continuing current policies. At higher interest rates Edgeworth would prefer granting credit.
B)   At a monthly interest rate of 1%, Edgeworth is indifferent between extending credit and continuing current policies. At lower interest rates Edgeworth would prefer granting credit.
C)   At a monthly interest rate of 2%, Edgeworth is indifferent between extending credit and continuing current policies. At higher interest rates Edgeworth would prefer granting credit.
D)   At a monthly interest rate of 2%, Edgeworth is indifferent between extending credit and continuing current policies. At lower interest rates Edgeworth would prefer granting credit.
E)   At a monthly interest rate of 3%, Edgeworth is indifferent between extending credit and continuing current policies. At lower or higher interest rates Edgeworth would prefer granting credit.F) C) and D)
G) A) and B)

Question 13

When credit is offered with only the invoice as a formal instrument of credit,the credit procedure is called:

Accepted Answer

A)   invoice account.
B)   open account.
C)   unsecured account.
D)   unsecured note.
E)   None of these.F) A) and B)
G) C) and E)

Question 14

The net credit period for a company with terms of 2/10,net 30 is:

Accepted Answer

A)   10 days.
B)   20 days.
C)   30 days.
D)   40 days.
E)   None of these.F) None of the above
G) A) and E)

Question 15

Which of the following statements is true?

Accepted Answer

A)   Most credit arrangements use promissory notes.
B)   Promissory notes are used when firms do not anticipate a problem with collections.
C)   Promissory notes usually involve no cash discount.
D)   All of these.
E)   None of these.F) B) and E)
G) A) and B)

Question 16

Delta Distributors has an investment in accounts receivable of $3,000,000. Daily credit sales are $120,000. If 30% of Delta's credit customers receive a discount by paying within 10 days and the remainder of Delta's customers pay in 40 days,what is the net period that Delta maintains? (Round up to the next day.)

Accepted Answer

A)   21 days
B)   37 days
C)   39 days
D)   45 days
E)   None of these.F) A) and D)
G) A) and B)

Question 17

Which of the following statements is not true?

Accepted Answer

A)   An aging schedule shows only overdue accounts.
B)   An aging schedule shows the probability that a 67-day account will be unpaid when it is a 68-day account.
C)   Average collection period data is somewhat flawed if sales are seasonal.
D)   Collection efforts may involve legal action.
E)   Investments in accounts receivable equal average daily sales times average collection period.F) A) and D)
G) C) and D)

Question 18

Lengthening the credit period _____ the price paid by the customer. Generally,this acts to _____ sales.

Accepted Answer

A)   increases; increase
B)   increases; decrease
C)   decreases; decrease
D)   decreases; increase
E)   increases; have no effect onF) None of the above
G) A) and C) D

Question 19

Collegiate Tuxedo rents apparel throughout the year. They have experienced non-payment by about 20% of their customers with an average loss of $300. Collegiate wants to stem their losses by using an instant electronic credit check on the customer. These checks will cost them $12 on each of the 1,000 customers. The opportunity cost is 2.0% for the credit period. Should they pursue the credit check?

Accepted Answer

A)   No, because the $24,000 cost is too high.
B)   No, because a $300 loss is minor.
C)   Yes, because the net gain is $30,000.
D)   Yes, because the net gain is $48,000.
E)   Yes, because the net gain is $60,000.F) All of the above
G) D) and E)

Question 20

If 20% of the customers pay on day 10 and 80% pay on day 30,the average collection period is:

Accepted Answer

A)   20 days.
B)   22 days.
C)   26 days.
D)   30 days.
E)   None of these.F) B) and E)
G) A) and C)

Exam 28: Credit and Inventory Management

Captive finance companies are:

Correct Answer
verified

The carrying value of a firm's account receivable is $1,000,000 and the average collection period is 55 days. The firm's credit sales per day are:

Correct Answer
verified

When analyzing the decision to change the cash discount policy,the firm should:

Correct Answer
verified

To collect on the accounts receivable due to the firm,a firm can:

Correct Answer
verified

The carrying value of a firm's account receivable is $1,500,000 and the average collection period is 45 days. The firm's credit sales per day are:

Correct Answer
verified
B

Factoring refers to:

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Strategy 1 - Refuse Credit: Pr...
View Answer

The three components of credit policy are:

Correct Answer
verified
B

If a firm refuses to offer credit,the net present value of the transaction is:

Correct Answer
verified

A conditional sales contract is useful to the seller because:

Correct Answer
verified

Correct Answer
verified

When credit is offered with only the invoice as a formal instrument of credit,the credit procedure is called:

Correct Answer
verified

The net credit period for a company with terms of 2/10,net 30 is:

Correct Answer
verified

Which of the following statements is true?

Correct Answer
verified

Correct Answer
verified

Which of the following statements is not true?

Correct Answer
verified

Lengthening the credit period _ the price paid by the customer. Generally,this acts to _ sales.

Correct Answer
verified
D

Correct Answer
verified

If 20% of the customers pay on day 10 and 80% pay on day 30,the average collection period is:

Correct Answer
verified

Exam 28: Credit and Inventory Management

Captive finance companies are:

Correct AnswerverifiedShow Answer

The carrying value of a firm's account receivable is $1,000,000 and the average collection period is 55 days. The firm's credit sales per day are:

Correct AnswerverifiedShow Answer

When analyzing the decision to change the cash discount policy,the firm should:

Correct AnswerverifiedShow Answer

To collect on the accounts receivable due to the firm,a firm can:

Correct AnswerverifiedShow Answer

The carrying value of a firm's account receivable is $1,500,000 and the average collection period is 45 days. The firm's credit sales per day are:

Correct AnswerverifiedB

Factoring refers to:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedStrategy 1 - Refuse Credit: Pr...View AnswerShow Answer

The three components of credit policy are:

Correct AnswerverifiedB

If a firm refuses to offer credit,the net present value of the transaction is:

Correct AnswerverifiedShow Answer

A conditional sales contract is useful to the seller because:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

When credit is offered with only the invoice as a formal instrument of credit,the credit procedure is called:

Correct AnswerverifiedShow Answer

The net credit period for a company with terms of 2/10,net 30 is:

Correct AnswerverifiedShow Answer

Which of the following statements is true?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is not true?

Correct AnswerverifiedShow Answer

Lengthening the credit period _____ the price paid by the customer. Generally,this acts to _____ sales.

Correct AnswerverifiedD

Correct AnswerverifiedShow Answer

If 20% of the customers pay on day 10 and 80% pay on day 30,the average collection period is:

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
B

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Strategy 1 - Refuse Credit: Pr...
View Answer

Correct Answer
verified
B

Correct Answer
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Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Lengthening the credit period _ the price paid by the customer. Generally,this acts to _ sales.

Correct Answer
verified
D

Correct Answer
verified

Correct Answer
verified