Question 1

The primary reason to monitor aggregate accounts receivable is to see if customers, on average, are paying more slowly.

Accepted Answer

Monitoring aggregate accounts receivable allows you to see the overall trend in customer payment patterns, which can indicate if customers are paying more slowly on average.

Question 2

Suppose you borrow $2,000 from a bank for one year at a stated annual interest rate of 14 percent, with interest prepaid (a discounted loan). Also, assume that the bank requires you to maintain a compensating balance equal to 20 percent of the initial loan value. What effective annual interest rate are you being charged?
A) 14.00%
B) 8.57%
C) 16.28%
D) 21.21%
E) 28.00%

Accepted Answer

D

Question 3

A firm's credit policy consists of which of the following items?
A) Credit period, cash discounts, credit standards, receivables monitoring.
B) Credit period, cash discounts, credit standards, collection policy.
C) Credit period, cash discounts, receivables monitoring, collection policy.
D) Cash discounts, credit standards, receivables monitoring, collection policy.
E) Credit period, receivables monitoring, credit standards, collection policy.

Accepted Answer

The firm's credit policy should consist of credit period (length of time given to customers to pay), cash discounts (incentives for early payment), credit standards (requirements for customers to qualify for credit), and collection policy (procedures for collecting overdue payments). Receivables monitoring is also important, but it is not typically considered a separate item in the credit policy. Choice B includes all four essential components of a credit policy.

Question 4

XYZ Company needs to borrow $200,000 from its bank. The bank has offered the company a 12-month installment loan (monthly payments) with 9 percent add-on interest. What is the effective annual rate (EAR) of this loan?
A) 16.22%
B) 17.97%
C) 17.48%
D) 18.67%
E) 18.00%

Accepted Answer

The effective annual rate (EAR) can be calculated by first determining the monthly payments and then finding the equivalent annual rate. For a $200,000 loan with 9% add-on interest, the total interest for the year is $200,000 * 9% = $18,000. The total amount to be repaid is $200,000 + $18,000 = $218,000. Monthly payments are $218,000 / 12 = $18,166.67. Using the formula for EAR, which takes into account the compounding effect of the monthly payments, we find that the EAR is approximately 17.48%.

Question 5

What is the nominal annual add-on interest rate on this loan?
A) 10.00%
B) 16.47%
C) 18.83%
D) 20.00%
E) 24.00%

Accepted Answer

The answer of What is the nominal annual add-on interest...

Question 6

Wentworth Greenery harvests its crops four times annually and receives payment for its crop 90 days after it is picked and shipped. However, the firm must plant, irrigate, and harvest on a near continual schedule. The firm uses 90-day bank notes to finance its operations. The firm arranges an 11 percent discount interest loan with a 20 percent compensating balance four times annually. What is the effective annual interest rate of these discount loans?
A) 11.00%
B) 15.94%
C) 11.46%
D) 13.75%
E) 12.72%

Accepted Answer

To calculate the effective annual interest rate, we need to use the following formula:

Effective Annual Interest Rate = (1 - Discount Rate) x (365 / Net Days) x 100%

Where: 
- Discount Rate = (Discount / Amount Borrowed) x (360 / Net Days)
- Net Days = Days in a year - Days given for payment

For Wentworth Greenery: 
- Discount Rate = (11 / 89) x (360 / 90) = 4.94%
- Net Days = 365 - 90 = 275

Plugging in the values: 
Effective Annual Interest Rate = (1 - 0.11) x (365 / 275) x 100%
= 0.89 x 1.327 x 100% 
= 15.94%

Therefore, the effective annual interest rate of these discount loans is 15.94%. Option B is the best choice.

Question 7

Which of the following statements is most correct?
A) If credit sales as a percentage of a firm's total sales increases, and the volume of credit sales also increases, then the firm's accounts receivable will automatically increase.
B) It is possible for a firm to overstate profits by offering very lenient credit terms which encourage additional sales to financially "weak" firms. A major disadvantage of such a policy is that it is likely to increase uncollectible accounts.
C) A firm with excess production capacity and relatively low variable costs would not be inclined to extend more liberal credit terms to its customers than a firm with similar costs that is operating close to capacity.
D) Firms use seasonal dating primarily to decrease their DSO.
E) Seasonal dating with terms 2/15, net 30 days, with April 1 dating, means that if the original sale took place on February 1st, the customer can take the discount up until March 15th, but must pay the net invoice amount by April 1st.

Accepted Answer

Offering very lenient credit terms can encourage financially weak firms to buy more, but also increase the likelihood of uncollectible accounts, leading to an overstatement of profits.

Question 8

(The following information applies to the next two problems.)
You have just taken out a loan for $75,000. The stated (simple) interest rate on this loan is 10 percent, and the bank requires you to maintain a compensating balance equal to 15 percent of the initial face amount of the loan. You currently have $20,000 in your checking account, and you plan to maintain this balance. The loan is an add-on installment loan which you will repay in 12 equal monthly installments, beginning at the end of the first month.
-How large are your monthly payments?
A) $6,250
B) $7,000
C) $7,500
D) $5,250
E) $6,875

Accepted Answer

The answer of (The following information applies to the next...

Question 9

Which one of the following aspects of banks is considered most relevant to businesses when choosing a bank?
A) Convenience of location.
B) Competitive cost of services provided.
C) Size of the bank's deposits.
D) Experience of personnel.
E) Loyalty and willingness to assume lending risks

Accepted Answer

The answer of Which one of the following aspects of...

Question 10

Which of the following is not correct?
A) Collection policy is how a firm goes about collecting past-due accounts.
B) A more aggressive collection policy will reduce bad debt expenses, but may also decrease sales.
C) Collection policy usually has little impact on sales since collecting past-due accounts occurs only after the customer has already purchased.
D) Typically a firm will turn over an account to a collection agency only after it has tried several times on its own to collect the account.
E) A lax collection policy will frequently lead to an increase in accounts receivable.

Accepted Answer

The answer of Which of the following is not correct?
A)...

Question 11

Assume you borrow $12,000 from the bank using a 10.19 percent "add-on", one-year installment loan, payable in four equal quarterly payments. What is the effective annual rate of interest?
A) 9.50%
B) 10.19%
C) 15.99%
D) 16.98%
E) 20.38%

Accepted Answer

The effective annual rate (EAR) for an add-on interest loan is higher than the stated interest rate because interest is charged on the full amount of the loan for the entire term, regardless of the decreasing balance as payments are made. To calculate the EAR for this loan, first, calculate the total interest paid over the year, which is $12,000 * 10.19% = $1,222.80. The total amount paid back is $12,000 + $1,222.80 = $13,222.80, divided into four quarterly payments of $3,305.70 each. To find the EAR, we need to equate the present value of these payments to the loan amount using the formula for the present value of an annuity. Solving for the interest rate in this context requires iteration and typically the use of a financial calculator or spreadsheet. The calculation reveals that the EAR is significantly higher than the nominal rate of 10.19%, and among the provided options, 16.98% is the correct choice, indicating the true cost of borrowing is much higher than the stated add-on rate.

Question 12

When deciding whether to offer a discount for cash payment, a firm must balance the profits from additional sales with the lost revenues from the discount.

Accepted Answer

When a firm offers a discount for cash payment, it may attract more customers and increase sales. However, the discount cuts into the firm's revenue, hence the need to balance the profits from additional sales against the lost revenue. Therefore, the statement is true.

Question 13

Cash discounts are mostly used to get new customers in the door since existing customers almost always use the delayed payment terms.

Accepted Answer

Cash discounts can be used for both new and existing customers to incentivize timely payment. Existing customers may choose to take advantage of the discount rather than the delayed payment terms if it makes financial sense for them.

Question 14

The uncollected balances schedule is constructed at the end of a quarter by dividing the dollar amount of remaining receivables from each month in that quarter by that month's sales.

Accepted Answer

The uncollected balances schedule is constructed at the end of a quarter by dividing the dollar amount of remaining receivables from each month in that quarter by that month's sales.

Question 15

The collection process, although sometimes difficult, is also expensive in terms of out-of-pocket expenses.

Accepted Answer

Collecting payments from customers can involve expenses such as hiring debt collectors, legal fees, and technology costs, making it an expensive process.

Question 16

If sales are seasonal, the days sales outstanding will fluctuate from month to month, even if the amount of time customers take to pay remains unchanged.

Accepted Answer

Days sales outstanding (DSO) is the measure of the average number of days it takes for a company to collect payment after a sale has been made. If sales are seasonal, then the total sales in a given month will vary, which will affect the DSO calculation. Even if the amount of time customers take to pay remains unchanged, the DSO will fluctuate due to the seasonal variation in sales.

Question 17

The credit period is the amount of time it takes to do a credit search on a potential customer.

Accepted Answer

The credit period refers to the time frame during which a customer is expected to pay their outstanding debts, and does not relate to the process of conducting a credit search on a customer.

Question 18

The collection process, although sometimes difficult, is a fairly inexpensive component of doing business.

Accepted Answer

The collection process can involve staffing, technology, and time costs, all of which can add up and become expensive for a business.

Question 19

The percentage aging schedule of accounts receivable is the most robust way to see if customers are, on average, paying more slowly, because it is unaffected by seasonal changes in sales.

Accepted Answer

The percentage aging schedule of accounts receivable can be influenced by seasonal changes in sales, as these changes affect the total amount of receivables and can distort the perception of how quickly customers are paying if not adjusted for seasonality.

Question 20

Credit standards refer to the financial strength and importance of a potential customer to the firm required in order to qualify for credit.

Accepted Answer

Credit standards refer to the criteria a firm uses to determine whether a potential customer is eligible for credit, focusing on the customer's creditworthiness and ability to repay, rather than their financial strength and importance to the firm.

Quiz 27: Providing and Obtaining Credit

The primary reason to monitor aggregate accounts receivable is to see if customers, on average, are paying more slowly.

A firm's credit policy consists of which of the following items?

XYZ Company needs to borrow $200,000 from its bank. The bank has offered the company a 12-month installment loan (monthly payments) with 9 percent add-on interest. What is the effective annual rate (EAR) of this loan?

What is the nominal annual add-on interest rate on this loan?

Which of the following statements is most correct?

Which one of the following aspects of banks is considered most relevant to businesses when choosing a bank?

Which of the following is not correct?

Assume you borrow $12,000 from the bank using a 10.19 percent "add-on", one-year installment loan, payable in four equal quarterly payments. What is the effective annual rate of interest?

When deciding whether to offer a discount for cash payment, a firm must balance the profits from additional sales with the lost revenues from the discount.

Cash discounts are mostly used to get new customers in the door since existing customers almost always use the delayed payment terms.

The uncollected balances schedule is constructed at the end of a quarter by dividing the dollar amount of remaining receivables from each month in that quarter by that month's sales.

The collection process, although sometimes difficult, is also expensive in terms of out-of-pocket expenses.

If sales are seasonal, the days sales outstanding will fluctuate from month to month, even if the amount of time customers take to pay remains unchanged.

The credit period is the amount of time it takes to do a credit search on a potential customer.

The collection process, although sometimes difficult, is a fairly inexpensive component of doing business.

The percentage aging schedule of accounts receivable is the most robust way to see if customers are, on average, paying more slowly, because it is unaffected by seasonal changes in sales.

Credit standards refer to the financial strength and importance of a potential customer to the firm required in order to qualify for credit.