Question 1

_______________ is the process of quantifying the likelihood of default when granting consumer credit based on objective characteristics of the buyer.

Accepted Answer

Credit scoring is the process of using statistical models to evaluate the creditworthiness of potential borrowers based on factors such as credit history, income, and debt-to-income ratio. This helps lenders determine the likelihood of default and make informed decisions about whether to grant credit and at what interest rate.

Question 2

A discount on the purchase price given to buyers as an inducement for prompt payment is called a(n) _______________.

Accepted Answer

A discount on the purchase price given to buyers as an inducement for prompt payment is called a cash discount.

Question 3

The incremental investment in receivables under the accounts receivable approach is equal to:

Accepted Answer

The answer of The incremental investment in receivables under the...

Question 4

A ___________ factor of credit policy effects occurs when a ﬁrm institutes a credit policy and ﬁnds it must arrange ﬁnancing for its increased receivables.

Accepted Answer

The answer of A ___________ factor of credit policy effects...

Question 5

A ______________ factor of credit policy effects occurs when a ﬁrm that institutes changes in its existing credit policy ﬁnds that, as a result, some of its customers choose to pay early to take
Advantage of the new terms.

Accepted Answer

The scenario described in the question is known as a "cash discount" factor of credit policy effects. A cash discount is a reduction in the amount owed by customers who pay their bills within a specified time frame. When a firm changes its credit policy to offer a cash discount, some customers may choose to take advantage of the discount by paying early. This can be a positive outcome for the firm, as it can improve cash flow and reduce the risk of late or non-payment.

Question 6

Which of the following is a type of inventory shortage cost?

Accepted Answer

Restocking costs are associated with inventory shortages, which occur when a company runs out of stock and must purchase new inventory to meet demand. These costs can include the price of the new inventory, as well as any associated shipping or handling fees.

Question 7

All else the same, ________ costs are greatest when the ﬁrm holds a small quantity of inventory, and ___________ costs are greatest when there is a large quantity of inventory on hand.

Accepted Answer

Restocking costs are high when inventory is low because frequent orders are needed, while carrying costs are high when inventory is large due to storage and maintenance expenses.

Question 8

Credit analysis is the process of determining the:

Accepted Answer

Credit analysis is the process of evaluating the creditworthiness of a customer, which involves assessing the risk of default on their account. The other options listed are more specific actions that may be taken based on the results of credit analysis, but credit analysis itself is focused on determining the probability of default.

Question 9

Which of the following is NOT considered to be a carrying cost?

Accepted Answer

Restocking costs would fall under ordering costs rather than carrying costs, as they are incurred when placing an order to replenish inventory rather than while holding onto existing stock. The other options listed are all examples of carrying costs.

Question 10

Using the EOQ model, a manager can determine _____________. This allows the ﬁrm to place orders before inventories reach a critical level, allowing for suﬃcient delivery time.

Accepted Answer

The EOQ model allows a manager to determine the optimal order quantity to minimize total inventory costs, and also calculates the reorder point, which is the inventory level at which a new order should be placed to avoid stockouts. Therefore, D is the correct choice as it directly relates to the benefits of using the EOQ model.

Question 11

A ______________ factor of credit policy effects occurs when a ﬁrm which institutes a credit policy ﬁnds it must bear the cost of some of its customers defaulting on their obligations.

Accepted Answer

The answer of A ______________ factor of credit policy effects...

Question 12

Gnome, Inc. institutes a policy of selling on credit for the ﬁrst time in the ﬁrm's history. Gnome ﬁnds, much to its dismay, that it must pay to produce the merchandise but it now experiences a delay in
Collection of revenues. Gnome's problem describes the ____________ factor of credit policy
Effects.

Accepted Answer

The answer of Gnome, Inc. institutes a policy of selling...

Question 13

JJJ, Inc. recently extended its credit period from net 30 days to net 40 days. This represents a change in the ﬁrm's ______________.

Accepted Answer

The answer of JJJ, Inc. recently extended its credit period...

Question 14

A statistical technique for distinguishing between two samples on the basis of their observed characteristics is called a(n):

Accepted Answer

The answer of A statistical technique for distinguishing between two...

Question 15

If you quit your job as a carpenter and open a fruit stand, you will likely ﬁnd the length of the credit period you get from suppliers to be:

Accepted Answer

The answer of If you quit your job as a...

Question 16

If a seller requires a credit commitment from a customer before goods are delivered, a(n) ________________ is in order.

Accepted Answer

The answer of If a seller requires a credit commitment...

Question 17

At the optimal order quantity size, the:

Accepted Answer

The answer of At the optimal order quantity size, the:
...

Question 18

Safety stock is deﬁned as the:

Accepted Answer

The answer of Safety stock is deﬁned as the:
...

Question 19

A ﬁrm revises its credit policy and begins selling all goods for cash only, no credit. It will likely experience an acceleration in collection of revenues due to the __________ effects of its credit
Policy.

Accepted Answer

The answer of A ﬁrm revises its credit policy and...

Question 20

A wholly-owned subsidiary that handles the credit function for the parent ﬁrm is called a(n):

Accepted Answer

The answer of A wholly-owned subsidiary that handles the credit...

Quiz 20: Credit and Inventory Management