Deck 5: Accounts Receivable Management

Question 1

The financial motive for extending trade credit posits that credit sellers:

A)have a non-price marketing advantage
B)charge a higher selling price
C)charge higher service charges applied to credit customers
D)have lower operating costs

Answer 1

B

Question 2

Unpublished changes in a seller's credit terms serve as a substitute for price changes in an oligopolistic industry according to the _______________ motive for credit extension.

A)operating
B)contracting cost
C)pricing
D)marketing

Answer 2

C

Question 3

Weakness of the "Five C's" framework of credit include all of the following EXCEPT:

A)does not specify a framework for the development of credit standards
B)does not specify how much information to gather
C)does not specify how to set credit standards in order to maximize shareholder wealth
D)does not specify when to reject applicants

Answer 3

A

Question 4

Recent evidence shows that credit professionals work with

A)Marketing and sales personnel
B)Other finance personnel
C)Production personnel
D)'a' and 'b'
E)'b' and 'c'

Question 5

Which of the following are advantages that credit sellers have over banks

A)Information advantage
B)Control advantage
C)Salvage value advantage
D)'a' and 'b'
E)all of the above

Question 6

The major motives for trade credit extension include all of the following except:

A)pricing motive
B)operating motive
C)contracting cost motive
D)production motive

Question 7

A credit analyst is going over a Dun & Bradstreet report on a potential new customer.The credit history shows that the company paid two of its many suppliers late within the last six months.The least likely conclusion to be drawn is

A)that the company would be a poor credit risk.
B)that the company is a good credit risk.
C)that the company may have disputes with its supplier(s).
D)that the company is experiencing a cash crisis.

Question 8

Credit scoring models are used to discriminate between good and bad credit applicants.Which of the following items is a major weakness of this approach?

A)they cannot be applied to a company receiving numerous consumer credit applications
B)they are too time consuming to apply
C)they can only take one customer attribute into account at a time
D)they do not look at collateral

Question 9

Regarding credit limits,most credit executives

A)employ limits for a minority of their customers
B)employ limits for a majority of their customers
C)employ limits for marginal customers
D)employ limits for all of their customers
E)do not employ limits for any of their customers

Question 10

A credit policy includes each of the following except:

A)credit standards
B)the company's approach to credit investigation and corrections
C)whether a "just in time" system will be used
D)credit terms

Question 11

Departments of local credit associations that provide information in the form of "Business Credit Reports" and other reports are called

A)credit reporting agencies
B)credit analysis agencies
C)credit information exchange bureaus
D)credit interchange bureaus
E)none of the above

Question 12

Rule-based computerized applications of artificial intelligence to credit decision making are known as:

A)expert systems
B)just in time systems
C)portfolio analysis systems
D)credit extension systems

Question 13

The PRIMARY reason given by those companies that impose credit limits is:

A)to control risk exposure
B)because of customer's financial position
C)because of experience with customer
D)to improve the supplier's perceived status by signaling selectivity

Question 14

Credit analyst John Adams is considering a $1,000 order from a new customer.The cost of filling the order is $950.John estimates collection costs are $20.The customer will pay in 60 days.If the appropriate cost of capital is 18%,what is the NPV of extending credit to the new customer?

A)$30.00
B)$26.87
C)$4.31
D)$1.84

Question 15

"Estimated Financial Strength" in the Dun & Bradstreet ratings system refers to

A)net worth
B)total assets
C)total debt
D)total debt less cash and marketable securities
E)none of the above

Question 16

The primary determinants of credit limits include the following:

A)Customer's requirements for the firm's products
B)Customer's recent payment history
C)Customer's ability to pay its debts
D)'b' and 'c'
E)all of the above

Question 17

The operating motive for offering trade credit suggests that the amount of credit extended by a business is an alternative to

A)increasing or decreasing the level of inventories
B)closing down a business
C)defaulting on a short-term bank loan
D)billing more aggressively on contracts with suppliers

Question 18

Cash application should be done as quickly as possible by a seller because

A)it may prevent the bankruptcy of a customer
B)it involves shipping to the most profitable customer accounts
C)it enables customers to order more merchandise
D)it usually results in the seller being given a higher Dun & Bradstreet rating
E)none of the above