Question 1

An increase in product perishability will tend to lead to longer credit periods.

Accepted Answer

An increase in product perishability will increase the risk of inventory spoilage, which may lead to shorter credit periods to encourage prompt payment and reduce the risk of bad debt.

Question 2

The terms of sale establish how the ﬁrm proposes to purchase its goods or services.

Accepted Answer

The terms of sale establish how the firm proposes to sell its goods or services, not purchase them.

Question 3

A conditional sales contract passes title to the goods sold to the buyer at the time the contract is
signed.

Accepted Answer

This statement is false. A conditional sales contract means that title passes to the buyer only after certain conditions, such as full payment, are met.

Question 4

Bradley Mfg. changed its credit terms from 2/10 net 30 to 2/10 net 40. It is reasonable to assume
that the ﬁrm's ACP will be increased by this action.

Accepted Answer

By extending the credit period, customers will have more time to pay their bills, which could increase the average collection period (ACP) for Bradley Mfg. Therefore, it is reasonable to assume that the firm's ACP will be increased by this action.

Question 5

A conditional sales contract is payable immediately upon receipt.

Accepted Answer

A conditional sales contract is a type of agreement where ownership of the product is transferred to the buyer only when certain conditions are met, such as the full payment of the purchase price. Therefore, the payment term is not immediately upon receipt, but rather upon the fulfillment of the agreed-upon conditions.

Question 6

It would be common for a ﬁrm which has adhered to a cash sales policy to experience a sudden
and signiﬁcant, but short-term, decrease in cash receipts immediately following the time the ﬁrm
converts to a credit policy.

Accepted Answer

This is true because when a firm switches from a cash sales policy to a credit policy, customers may take advantage of the opportunity to delay payment, resulting in a decrease in cash receipts in the short-term. However, over time, the firm may see an overall increase in sales due to the availability of credit for customers.

Question 7

Default risk should be considered when deciding whether or not you should offer credit to
customers.

Accepted Answer

Default risk refers to the likelihood that a customer will fail to pay their debts on time or at all. This risk should be factored in when deciding whether or not to offer credit to customers, as it can impact the profitability and financial stability of a business.

Question 8

Relatively expensive products tend to have relatively short credit periods.

Accepted Answer

Relatively expensive products often have longer credit periods to make them more affordable to consumers by spreading the cost over time, encouraging sales.

Question 9

A cash discount should be considered when deciding whether or not you should offer credit to
customers.

Accepted Answer

A cash discount can incentivize customers to pay their invoices early, reducing the amount of time the business has to wait for payment and potentially improving cash flow. This can help offset some of the costs and risks associated with offering credit.

Question 10

The delay in revenue collection should be considered when deciding whether or not you should
offer credit to customers.

Accepted Answer

Offering credit to customers means delay in revenue collection as you have to wait for the customer to make payment at a later date. Therefore, it is important to consider this delay before making a decision to offer credit.

Question 11

Bradley Mfg. changed its credit terms from 2/10 net 30 to 2/10 net 40. In doing so, the ﬁrm has
lowered the effective annual cost of credit for their customers.

Accepted Answer

By extending the payment period from 30 days to 40 days, customers now have more time to pay and can take advantage of the 2% discount offered for early payment. This effectively reduces the cost of credit for customers who take advantage of the discount, making it a more attractive option.

Question 12

An increase in competition among sellers of the product will tend to lead to longer credit periods.

Accepted Answer

When competition increases, sellers may offer lengthier credit periods to attract more customers and sales, which can give them a competitive advantage.

Question 13

Receivables period 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

The statement is true.

Question 14

Your own ﬁrm's short-term ﬁnancing cost should be considered when deciding whether or not you
should offer credit to customers.

Accepted Answer

The firm's short-term financing cost is an important factor that should be considered when deciding whether or not to offer credit to customers. If the cost of financing the credit is higher than the potential profit from the sale, it may not be financially viable for the firm. Additionally, if a large number of customers are given credit and fail to make timely payments, it could negatively impact the firm's cash flow and increase its financing costs.

Question 15

Perishable products tend to have relatively short credit periods.

Accepted Answer

Perishable products such as fresh produce or dairy products have a limited shelf life and can quickly spoil or become unusable, so suppliers typically offer shorter credit periods to minimize their risk of non-payment.

Question 16

High-demand products tend to have relatively short credit periods.

Accepted Answer

High-demand products are likely to sell quickly, so suppliers may offer shorter credit periods to avoid tying up their inventory and cash flow for too long. This also allows them to have more frequent turnover and sell to more customers.

Question 17

Collection procedures to be followed is an element of the terms of sale.

Accepted Answer

The answer of Collection procedures to be followed is an...

Question 18

Relatively standardized products tend to have relatively short credit periods.

Accepted Answer

Relatively standardized products are easily available in the market and have low differentiation, which results in more competition. To remain competitive, suppliers tend to offer shorter credit periods, which helps them to keep their inventory moving and generate revenue.

Question 19

An increase in consumer demand for the product will tend to lead to longer credit periods.

Accepted Answer

An increase in consumer demand for a product typically leads to shorter credit periods, as sellers have less need to incentivize purchases through extended credit terms.

Question 20

An increase in product cost will tend to lead to longer credit periods.

Accepted Answer

The answer of An increase in product cost will tend...

Quiz 20: Credit and Inventory Management

An increase in product perishability will tend to lead to longer credit periods.

The terms of sale establish how the ﬁrm proposes to purchase its goods or services.

A conditional sales contract passes title to the goods sold to the buyer at the time the contract is signed.

Bradley Mfg. changed its credit terms from 2/10 net 30 to 2/10 net 40. It is reasonable to assume that the ﬁrm's ACP will be increased by this action.

A conditional sales contract is payable immediately upon receipt.

It would be common for a ﬁrm which has adhered to a cash sales policy to experience a sudden and signiﬁcant, but short-term, decrease in cash receipts immediately following the time the ﬁrm converts to a credit policy.

Default risk should be considered when deciding whether or not you should offer credit to customers.

Relatively expensive products tend to have relatively short credit periods.

A cash discount should be considered when deciding whether or not you should offer credit to customers.

The delay in revenue collection should be considered when deciding whether or not you should offer credit to customers.

Bradley Mfg. changed its credit terms from 2/10 net 30 to 2/10 net 40. In doing so, the ﬁrm has lowered the effective annual cost of credit for their customers.