Deck 28: Credit and Inventory Management

Question 1

On September 1, a firm grants credit with terms of 2/10 net 45.The creditor:

A)must pay a penalty of 2% when payment is made later than September 1^st.
B)must pay a penalty of 10% when payment is made later than 2 days after September 1^st.
C)receives a discount of 2% when payment is made at least 10 days before September 1^st.
D)receives a discount of 2% when payment is made before September 1^st and pays a penalty of 10% if payment is made after September 1^st.
E)receives a discount of 2% when payment is made within 10 days after the effective invoice date of September 1^st.

Answer 1

receives a discount of 2% when payment is made within 10 days after the effective invoice date of September 1^st.

Question 2

When analyzing the NPV of a decision to change cash discounts, the firm would probably not consider:

A)the size of the discount.
B)the expected change in the order size.
C)the firm's cost of debt.
D)the expected change in sales due to the cash discount policy change.
E)All of the above would probably be considered.

Answer 2

All of the above would probably be considered.

Question 3

A commercial draft is useful to a seller because:

A)a specific payment amount and time are set.
B)the customer's bank has the buyer sign the draft before releasing the invoices.
C)the seller gets a credit commitment from a customer before the goods are delivered.
D)All of the above.
E)None of the above.

Answer 3

All of the above.

Question 4

The credit period offered is influenced by:

A)the size of the account to receive credit.
B)the collateral value of the goods sold.
C)the probability that the customer will not pay.
D)All of the above.
E)None of the above.

Question 5

Which of the following is not one of the "five C's of Credit" for credit scoring?

A)Capability
B)Capacity
C)Capital
D)Character
E)Conditions

Question 6

Which of the following statements is not true?

A)Commercial drafts represent a way to obtain a credit commitment from a customer before the goods are delivered.
B)When a banker's acceptance is discounted in the secondary market it becomes a commercial note.
C)Sight drafts require immediate payment.
D)Banker's acceptances arise when a bank guarantees payment on a commercial draft.
E)Both A and C.

Question 7

Selling goods and services on credit is:

A)an investment in a customer.
B)never necessary unless customers cannot pay for the goods.
C)a decision independent of customers.
D)permissible if your bank lends the money.
E)None of the above.

Question 8

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

A)invoice account.
B)open account.
C)unsecured account.
D)unsecured note.
E)None of the above.

Question 9

The three components of credit policy are:

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.

Question 10

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

A)increases; increase
B)increases; decrease
C)decreases; decrease
D)decreases; increase
E)increases; have no effect on

Question 11

Cash discounts:

A)conveniently separate the pricing of credit and cash customers.
B)lower profit margins on sales.
C)speed the collection of receivables.
D)All of the above.
E)Both A and B.

Question 12

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

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.

Question 13

Seasonal dating of accounts receivable:

A)is used by all firms that grant credit.
B)brings the receivable immediately due during the season of the product.
C)makes the effective date of the invoice on a specific date in or around the relevant season of the product.
D)All of the above.
E)None of the above.

Question 14

Which of the following statements is true?

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 the above.
E)None of the above.

Question 15

The average collection period measures:

A)the average time necessary to collect a credit sale.
B)how long the companies money is invested in their customers.
C)the days sales outstanding.
D)All of the above.
E)None of the above.

Question 16

Captive finance companies are:

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

Question 17

Factoring refers to:

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 of the above.

Question 18

When a firm sells its accounts receivables to a financial institution, it is called:

A)captive financing.
B)collateralization.
C)securitization.
D)legalization.
E)None of the above.

Question 19

When credit is granted to another firm this gives rise to a(n):

A)accounts receivable and is called a consumer credit.
B)credit due and is called an installment note.
C)accounts receivable and is called trade credit.
D)trade receivable and is called an installment note.
E)None of the above.

Question 20

Which of the following is not true concerning considerations in setting a credit policy?

A)A firm that supplies a perishable product will tend to offer restrictive credit terms.
B)A firm whose customers are in a high-risk business will tend to offer restrictive credit terms.
C)Lengthening the credit period effectively reduces the price paid by the customer.
D)Small accounts, associated with firms that find it difficult to acquire a line of credit, tend to receive longer credit periods.
E)None of the above.

Question 21

The Ault Company made a credit sale of $15,000.The invoice was sent today with the terms, 3/15 net 60.This customer normally pays at the net date.If your opportunity cost of funds is 9% the expected payment is worth how much today?

A)$13,761
B)$14,789
C)$15,000
D)$15,214
E)None of the above.

Question 22

Delta Distributors has an investment in accounts receivable of $2,750,000.Daily credit sales are $118,280.If 30% of Delta's credit customers receive a discount by paying within 10 days, what is the net period that Delta maintains?

A)10 days
B)23 days
C)38 days
D)45 days
E)There is not enough information to tell.

Question 23

Risk should be incorporated into the decision to grant credit by:

A)decreasing the discount rate.
B)increasing the credit period to allow for customers in financial distress to reorganize.
C)decreasing the cash inflows, or the numerator of the NPV formula.
D)increasing the cash inflows, or the numerator of the NPV formula.
E)increasing costs per unit.

Question 24

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?

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.

Question 25

Which of the following statements is true?

A)Customers in high tax brackets would be more likely to take cash discounts and corporations in high tax brackets would be more likely to offer credit.
B)Customers in high tax brackets would be more likely to take cash discounts and corporations in low tax brackets would be more likely to offer credit.
C)Customers in low tax brackets would be more likely to take cash discounts and corporations in high tax brackets would be more likely to offer credit.
D)Customers in low tax brackets would be more likely to take cash discounts and corporations in low tax brackets would be more likely to offer credit.
E)Taxes have an effect on the propensity to grant credit, but no effect on the propensity to use credit.

Question 26

The decision to grant credit does not depend on:

A)delayed revenues from granting credit.
B)the immediate costs of granting credit.
C)the probability of payment.
D)the appropriate required rate of return for delayed cash flows.
E)All of the above are considered in the decision to grant credit.

Question 27

The optimal credit amount is determined by:

A)the point which minimizes the total credit cost curve.
B)the point which maximizes the carrying costs associated with granting credit.
C)the point which maximizes opportunity costs associated with granting credit.
D)the point where the additional net cash flow from new customers equals the additional carrying costs of the investment in receivables.
E)Both A and D

Question 28

Determining the optimal credit policy is based on a trade-off of:

A)carrying costs of granting credit and making an investment in receivables.
B)stock out costs of losing sales from not offering credit.
C)the opportunity cost of lost sales from not offering credit.
D)Both A and C.
E)Both B and C.

Question 29

Collegiate Tuxedo rents apparel throughout the year.They have experienced non-payment by about 15% of their customers with an average loss of $200.Collegiate wants to stem their losses by using an instant electronic credit check on the customer.These checks will cost them $7 on each of the 1,000 customers.The opportunity cost is 1.5% for the credit period.Should they pursue the credit check?

A)No, because the $7000 cost is too high.
B)No, because a $200 loss is minor.
C)Yes, because the net gain is $30,000.
D)Yes, because the net gain is $23,000.
E)Yes, because the net gain is $193,000.

Question 30

The carrying value of a firm's account receivable is $700,000 and the average collection period is 45 days.The firm's credit sales per day are:

A)$15,555.56
B)$23,333.33
C)$700,000.00
D)$4,666,666.67
E)None of the above.

Question 31

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

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 the above.
E)always equal to zero.

Question 32

Companies will frequently use information from which of the following sources when conducting their credit analysis?

A)Financial statements supplied by the customer.
B)Payment history supplied by other firms.
C)Payment history supplied by banks.
D)All of the above.
E)None of the above.

Question 33

Which of the following statements is not true?

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.

Question 34

A conditional sales contract is useful to the seller because:

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 the above.
E)None of the above.

Question 35

Delta Distributors has an investment in accounts receivable of $2,750,000.Daily credit sales are $118,280.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?

A)19 days
B)31 days
C)37 days
D)40 days
E)None of the above.

Question 36

Businesses, in deciding to extend credit to new customers, try to reduce defaults by:

A)determining the probability of non-payment.
B)gathering independent credit checks.
C)determining if it is profitable to extend credit.
D)All of the above.
E)None of the above.

Question 37

In credit analysis of a customer, commonly used information includes the customer's:

A)financial statements.
B)credit report.
C)payment history with the firm.
D)All of the above.
E)Both B and C.

Question 38

The credit decision usually includes riskier customers.The credit decision should adjust for this by:

A)determining the probability that customers will pay and reducing the expected cash flow.
B)discounting the net cash flows at a lower discount rate.
C)discounting the cash inflow at a higher discount rate.
D)delaying collections on these customers.
E)speeding up deliveries to riskier customers.

Question 39

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

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 of the above.

Question 40

Aging schedules are flawed because they:

A)do not identify specific customers.
B)show the percent of accounts that are past due.
C)only give the yearly or periodic average of account age.
D)All of the above.
E)None of the above.

Question 41

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

Question 42

United Distributors has an investment in accounts receivable of $2,750,000.Costs of goods sold represent 75% of the sales price.Daily credit sales are $118,280.Thirty percent of United's credit customers receive a discount by paying within 10 days.The firm's terms are net 30.How are the other 70% of customers paying; are they meeting the terms?

Question 43

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:

A)$33,333.33
B)$18,181.82
C)$1,000,000.00
D)$1,333,333.33
E)None of the above.

Question 44

The Lemon Company made a credit sale of $20,000.The invoice was sent today with the terms, 3/10 net 30.This customer normally pays at the net date.If your opportunity cost of funds is 10% the expected payment is worth how much today?

A)$15,000
B)$15,657
C)$19,843
D)$20,000
E)None of the above.

Question 45

If 25% of the customers pay on day 10 and 75% pay on day 30, the average collection period is:

A)15 days.
B)20 days.
C)25 days.
D)30 days.
E)40 days.

Question 46

Delta Distributors has total credit sales of $2,750,000 for the year.Delta's credit sales represent 75% of total sales.What are total sales?

A)$1,925,000
B)$2,062,500
C)$2,750,000
D)$3,666,667
E)None of the above.

Question 47

Ali Storage Company projects 800 customers next year.Of these, 600 have been profitable and have never defaulted on past obligations, while 200 have not been profitable.All of the unprofitable accounts are expected to default if given credit.Ali can pay $0.40 to an agency that will tell them whether a customer has been profitable.If Ali's price per unit is $10, and its cost per unit is $6, should they allow the credit check to be performed? Assume a discount rate of 1%.

Question 48

Lory Corporation has variable costs per unit of $.35 per $1 of sales.The firm offers a 2% discount for orders paid within 15 days if the customer increases their order size by 5%.A customer normally orders $75,000, and is considering the discount.Normally, the customer pays within 30 days with no discount.Lory 's cost of debt capital is 12%.Would Lory be wise to offer the discount? Calculate the NPV of the decision.

Question 49

The net credit period for a company with terms of 3/10, net 60 is:

A)10 days
B)50 days
C)57 days
D)60 days
E)None of the above.

Question 50

Aggie Corporation has been asked by its customers to grant them a 2% discount if they pay their bill within 15 days.The purchase size of the average order is $75,000.Normally, the customer pays within 30 days with no discount.Aggie's cost of debt capital is 12%.Should the request be granted?

Question 51

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

A)10 days.
B)15 days.
C)22.5 days.
D)24 days.
E)26 days.

Question 52

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?

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.

Question 53

Quattro Incorporated has an investment in accounts receivable of $3,500,000.Daily credit sales are $120,000.If 20% of Quattro's credit customers receive a discount by paying within 10 days, what is the net period that Quattro maintains?

A)10 days
B)23 days
C)38 days
D)45 days
E)There is not enough information to tell.