Question 1

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?

Accepted Answer

Good cash management practice suggests that a rational purchaser should pay within the discount period to take advantage of the discount offered. The terms of 2/10 net 30 mean that the purchaser can take a 2% discount if they pay within 10 days, or they can pay the full amount within 30 days. By paying within 20-30 days, the purchaser can take advantage of the discount while still maintaining good cash flow.

Question 2

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

Accepted Answer

Reviewing a potential customer's payment history with other firms is a standard practice in credit analysis, as it provides insights into the customer's reliability and timeliness in fulfilling financial obligations.

Question 3

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

Accepted Answer

Analyzing a potential customer's financial statements is a common method to assess their creditworthiness, as it provides insight into their financial health and ability to meet financial obligations.

Question 4

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

Accepted Answer

Raw materials for one company can be the finished goods of another if the latter's products are used as inputs in the former's production process.

Question 5

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.

Accepted Answer

The discount period and credit price are variables that are not under the control of the firm.

Question 6

The percentage cost of credit varies with the discount percent.

Accepted Answer

The percentage cost of credit increases as the discount percent offered for early payment increases, because the discount represents a higher cost for not taking advantage of the terms, thus affecting the overall cost of credit.

Question 7

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

Accepted Answer

Reviewing a credit report is a standard practice to assess the creditworthiness of a potential customer, as it provides detailed information on their credit history, including payment history, credit utilization, and any past defaults or bankruptcies.

Question 8

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

Accepted Answer

The answer of The percentage cost of credit varies with...

Question 9

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.

Accepted Answer

Switching to a credit policy can increase demand as more customers are able to purchase on credit, potentially leading to an increase in production to meet the higher demand.

Question 10

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

Accepted Answer

The percentage cost of credit increases as the length of the discount period decreases, because the opportunity cost of not taking the discount becomes greater over a shorter period.

Question 11

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.

Accepted Answer

Banks often have access to financial information and credit reports that can help in assessing the creditworthiness of a business firm, making it a common practice for businesses to seek their bank's assistance in this regard.

Question 12

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

Accepted Answer

The percentage discount to be given to cash customers is a relevant factor to consider when analyzing the cost-benefit of switching to a 30-day credit policy. This is because the discount will affect the amount of revenue that the firm generates from cash sales, which in turn will affect the overall profitability of the credit policy.

Question 13

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.

Accepted Answer

Inventory turnover refers to how often a company sells and replaces its stock of goods in a given period, not the time it takes to collect on a sale.

Question 14

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

Accepted Answer

The three basic types of inventory—raw materials, work-in-progress, and finished goods—vary in their liquidity, with finished goods being the most liquid as they are ready for sale, while raw materials and work-in-progress require further processing.

Question 15

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.

Accepted Answer

Switching to a 30-day credit policy could potentially increase sales by making purchases more accessible to customers who prefer or need to buy on credit, but it also introduces the risk of non-payment and additional administrative costs.

Question 16

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.

Accepted Answer

When a firm converts from a cash sales policy to a credit policy, it begins to offer credit to its customers. This means that the firm will now have accounts payable, as customers will be allowed to purchase goods or services on credit and pay for them at a later date.

Question 17

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.

Accepted Answer

When analyzing the cost-benefit of switching to a 30-day credit policy, the firm should consider the credit price because offering credit can potentially increase sales but also involves costs such as the risk of non-payment and the cost of financing the credit period.

Question 18

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.

Accepted Answer

When considering switching to a 30-day credit policy, a firm must account for the possibility of default, as not all customers may pay their dues within the credit period, impacting the firm's cash flow and profitability.

Question 19

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

Accepted Answer

The percentage cost of credit typically increases as the length of the credit period extends, since longer periods often involve higher risks and costs for the lender, which are then passed on to the borrower in the form of higher interest rates or fees.

Question 20

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.

Accepted Answer

The default rate and increase in sales are indeed variables outside of the firm's control when analyzing the proposal to extend credit terms. The default rate depends on the customers' ability and willingness to pay, while the increase in sales depends on customer response to the new credit terms, both of which cannot be directly controlled by the firm.

Quiz 20: Credit and Inventory Management