Deck 20: Credit and Inventory Management

Question 1

The following statement pertains to credit policy: A customer who forfeits a cash discount is
accepting a high cost for credit financing.

Answer 1

True

Question 2

One effect of granting credit to customers is that total revenues may increase if both the quantity
sold and the price per unit increase when credit is granted.

Answer 2

True

Question 3

Average annual sales/average collection period correctly specifies the level of the firm's
receivables balance.

Answer 3

False

Question 4

One of the most important factors influencing the length of the credit period offered by the seller is
the operating cycle of the seller.

Question 5

The total investment in receivables mainly depends on the total amount of cash sales and the cash
discount amount.

Question 6

One effect of granting credit to customers is that both the cost of default and the cost of discounts
must be considered before granting credit.

Question 7

Average collection period/average daily sales correctly specifies the level of the firm's receivables
balance.

Question 8

When ABC Co. makes a sale of inventory on credit to XYZ Co., then a receivable is created for ABC
and XYZ's inventory is increased.

Question 9

Credit sales/Accounts receivable turnover correctly specifies the level of the firm's receivables
balance.

Question 10

ABC Co. is considering giving a 2% cash discount to its customers who pay within 10 days. (The firm
currently offers no discount.) If it institutes this policy, it is likely that the buyers will be able to
reduce their cost of goods sold, and buyers who do not take the discount will be using an
expensive source of financing.

Question 11

Average daily sales × average collection period correctly specifies the level of the firm's receivables
balance.

Question 12

The following statement pertains to credit policy: A firm that begins to offer credit to its customers
may in fact increase its total revenue as a result of the credit offering.

Question 13

All else equal, the credit period offered to a firm's customers is likely to be shorter when (A) the
seller operates in a marginally competitive market, and (B) the size of the account is large.

Question 14

The following statement pertains to credit policy: The cost of sales will initially be delayed when a
credit policy is first adopted.

Question 15

The fact that auto parts stores face shorter credit periods than florists is consistent with the factors
listed as influences on credit period in the text.

Question 16

One effect of granting credit to customers is that a firm's cash cycle generally increases if credit is
granted, all else equal.

Question 17

The following statement pertains to credit policy: A seller must have a source of financing sufficient
to cover any accounts receivable balance created by introducing a credit policy.

Question 18

The total investment in receivables mainly depends on the amount of credit sales and the average
collection period.

Question 19

One effect of granting credit to customers is that a firm may have to increase its borrowing if it
decides to grant credit to its customers.

Question 20

When ABC Co. makes a sale of inventory on credit to XYZ Co., then cash is paid to ABC and a
payable is created for ABC.

Question 21

An increase in product perishability will tend to lead to longer credit periods.

Question 22

The terms of sale establish how the firm proposes to purchase its goods or services.

Question 23

A conditional sales contract passes title to the goods sold to the buyer at the time the contract is
signed.

Question 24

Bradley Mfg. changed its credit terms from 2/10 net 30 to 2/10 net 40. It is reasonable to assume
that the firm's ACP will be increased by this action.

Question 25

A conditional sales contract is payable immediately upon receipt.

Question 26

It would be common for a firm which has adhered to a cash sales policy to experience a sudden
and significant, but short-term, decrease in cash receipts immediately following the time the firm
converts to a credit policy.

Question 27

Default risk should be considered when deciding whether or not you should offer credit to
customers.

Question 28

Relatively expensive products tend to have relatively short credit periods.

Question 29

A cash discount should be considered when deciding whether or not you should offer credit to
customers.

Question 30

The delay in revenue collection should be considered when deciding whether or not you should
offer credit to customers.

Question 31

Bradley Mfg. changed its credit terms from 2/10 net 30 to 2/10 net 40. In doing so, the firm has
lowered the effective annual cost of credit for their customers.

Question 32

An increase in competition among sellers of the product will tend to lead to longer credit periods.

Question 33

Receivables period is a term that is used interchangeably to refer to the length of time it takes for
the firm to collect on a sale.

Question 34

Your own firm's short-term financing cost should be considered when deciding whether or not you
should offer credit to customers.

Question 35

Perishable products tend to have relatively short credit periods.

Question 36

High-demand products tend to have relatively short credit periods.

Question 37

Collection procedures to be followed is an element of the terms of sale.

Question 38

Relatively standardized products tend to have relatively short credit periods.

Question 39

An increase in consumer demand for the product will tend to lead to longer credit periods.

Question 40

An increase in product cost will tend to lead to longer credit periods.

Question 41

Taylor and Swanson currently sells on a cash basis only. The firm is considering switching to a 30-
day credit policy. When analyzing the cost benefit of this switching policy, the firm should consider
the credit price.

Question 42

The three basic types of inventory may be quite different in terms of their liquidity.

Question 43

A commonly used method of analyzing the creditworthiness of a potential customer is to review
their credit report.

Question 44

The percentage cost of credit varies length of the discount period.

Question 45

A firm currently has a cash only credit policy. The firm is considering adopting a credit policy which
will extend credit to customers for 45 days and grant the credit customers who pay in 15 days or
less a discount.
The discount period and credit price are variables used in the analysis of this proposal that are
outside of the control of the firm.

Question 46

A commonly used method of analyzing the creditworthiness of a potential customer is to ask your
bank for assistance in acquiring credit information on the potential customer if they are a business
firm.

Question 47

A commonly used method of analyzing the creditworthiness of a potential customer is to analyze
their financial statements.

Question 48

The percentage cost of credit varies with the price of the item purchased.

Question 49

A commonly used method of analyzing the creditworthiness of a potential customer is to review
their payment history with other firms.

Question 50

It would be common for a firm which has adhered to a cash sales policy to experience an increase
in accounts payable immediately following the time the firm converts to a credit policy.

Question 51

Inventory turnover is a term that is used interchangeably to refer to the length of time it takes for
the firm to collect on a sale.

Question 52

A firm currently has a cash only credit policy. The firm is considering adopting a credit policy which
will extend credit to customers for 45 days and grant the credit customers who pay in 15 days or
less a discount.
The default rate and increase in sales are variables used in the analysis of this proposal that are
outside of the control of the firm.

Question 53

Taylor and Swanson currently sells on a cash basis only. The firm is considering switching to a 30-
day credit policy. When analyzing the cost benefit of this switching policy, the firm should consider
the percentage discount to be given to cash customers

Question 54

Suppose your firm is offered terms of 2/10 net 30 on its purchases. Assuming that your firm intends
to buy on credit, good cash management practice suggests that a rational purchaser should pay
between 20 and 30 days days?

Question 55

One company's raw materials may be another's finished goods.

Question 56

Taylor and Swanson currently sells on a cash basis only. The firm is considering switching to a 30-
day credit policy. When analyzing the cost benefit of this switching policy, the firm should consider
the rate of default.

Question 57

It would be common for a firm which has adhered to a cash sales policy to experience an increase
in production output immediately following the time the firm converts to a credit policy.

Question 58

Taylor and Swanson currently sells on a cash basis only. The firm is considering switching to a 30-
day credit policy. When analyzing the cost benefit of this switching policy, the firm should consider
the change in the level of sales.

Question 59

The percentage cost of credit varies with length of the credit period.

Question 60

The percentage cost of credit varies with the discount percent.

Question 61

An inventory item that becomes a part of another item is called derived demand inventory.

Question 62

On average your firm sells $26,500 of items on credit each day. Your average operating cycle is 51 days and your firm acquires and sells inventory on average every 19 days. What is your average
Accounts receivable balance?

A) $503,500
B) $848,000
C) $1,012,500
D) $1,315,500
E) $1,855,000

Question 63

Also assume that the customer will either pay in 30 days or will default. What is the NPV of switching?

A) $8,193
B) $10,134
C) $13,375
D) $14,700
E) $16,537

Question 64

On average, manufacturing firms hold a greater proportion of total assets in the form of inventories
than retailers.

Question 65

All else equal, a firm that holds safety stocks of inventory will have a lower economic order quantity
(EOQ) than a firm that does not.

Question 66

On average your firm sells $43,209 of items on credit each day. Your average inventory period is 32 days and your operating cycle is 57 days. What is your average accounts receivable balance?

A) $432,090
B) $878,406
C) $1,080,225
D) $1,382,688
E) $2,462,913

Question 67

Your company is considering granting credit to a new customer. The price per unit is $165 and the variable cost per unit is $150. The chance of default is 8% and the monthly interest rate is 0.8%. The
Customer will pay in 30 days if they do not default. If the customer does not default, they will buy
One unit every month forever. What is the NPV of granting credit?

A) -$17,025
B) -$133
C) $1,147
D) $1,575
E) $1,725

Question 68

Lemius Industries is considering a net 30-day credit policy, which it believes will increase sales by 25%. Currently Lemius sells 800 units a month at a retail price of $45 a unit and a variable cost of
$32 each. Lemius has a required monthly rate of return of 1.75%. What is the net present value of
This possible switch in credit policies?

A) $99,839
B) $103,897
C) $106,171
D) $118,971
E) $120,008

Question 69

Under your current cash sales only policy you sell 280 units a month at a price of $35. Your variable cost per unit is $21 and your monthly interest rate is 1 percent. Based on a recent survey, you
Believe that you can sell an additional 85 units per month if you offer a net 30 credit policy. What is
The net present value of the switch using the one-shot approach?

A) $107,415
B) $108,236
C) $110,050
D) $113,333
E) $115,647

Question 70

Green Enterprises builds custom cabinets for new homes. The demand for these cabinets is an
independent demand.

Question 71

Currently, your firm sells 440 units a month at a price of $90 a unit. You think you can increase your sales by an additional 200 units if you switch to a net 30 credit policy. The monthly interest rate is .7
Percent and your variable cost per unit is $55. What is the incremental cash inflow of the proposed
Credit policy switch?

A) $7,000
B) $9,000
C) $11,000
D) $16,000
E) $18,000

Question 72

Your firm currently sells 320 units a month at a price of $175 a unit. You think you can increase your sales by an additional 125 units if you switch to a net 30 credit policy. The monthly interest rate is .5
Percent and your variable cost per unit is $94. What is the net present value of the proposed credit
Policy switch?

A) $1,506,500
B) $1,625,750
C) $1,875,000
D) $1,957,250
E) $2,092,750

Question 73

Green Enterprises builds custom cabinets for new homes. The demand for these cabinets is
contingent upon the sale of new homes.

Question 74

Green Enterprises builds custom cabinets for new homes. The demand for these cabinets is based
upon the production capability of Green Enterprises.

Question 75

You are trying to attract new customers that you feel could become repeat customers. The average price of the items you sell is $49 with a $35 variable cost. Your monthly interest rate is 1.2 percent.
Your experience tells you that 5 percent of these customers will never pay their bill. What would be
The net present value of this decision?

A) $979
B) $989
C) $1,023
D) $1,073
E) $1,108

Question 76

You just purchased $13,400 of goods from your supplier with credit terms of 2/5, net 20. What is the discounted price?

A) $10,720
B) $12,475
C) $12,730
D) $13,065
E) $13,132

Question 77

Under your current cash sales only policy you sell 680 units a month for a total sales value of $101,320. Your variable cost per unit is $77 and your monthly interest rate is 1 percent. Based on a
Recent survey, you believe that you can sell an additional 275 units per month if you offer a net 30
Credit policy. What is the net present value of the proposed switch using the accounts receivable
Approach?

A) $987,406
B) $1,006,203
C) $1,413,281
D) $1,605,997
E) $1,857,505

Question 78

Assume the customer will either pay in 30 days or will default. What is the incremental cash flow per month from switching the credit policy?

A) $30
B) $60
C) $120
D) $180
E) $240

Question 79

Green Enterprises builds custom cabinets for new homes. The demand for these cabinets is a
derived demand.

Question 80

All else equal, a firm that holds safety stocks of inventory will have a lower level of average
inventory than a firm that does not.