Question 1

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

The credit price is relevant because it affects the firm's revenue and cash flow, which are crucial for evaluating the cost-benefit of switching to a credit policy.

Question 2

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 - can vary in terms of liquidity. Raw materials may be more easily sold or used to create finished goods, while finished goods may be more difficult to sell quickly. Work-in-progress falls somewhere in between, as it represents partially completed products that may need additional processing before they can be sold or used.

Question 3

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

Accepted Answer

Reviewing a customer's credit report is a commonly used method of analyzing their creditworthiness.

Question 4

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

Accepted Answer

The percentage cost of credit is determined by the length of the discount period, as the longer the discount period (the period in which the full amount owed can be paid off without interest), the lower the cost of credit.

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 used in the analysis of this proposal that are outside of the control of the firm.

Question 6

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

Asking your bank for assistance in acquiring credit information on a potential business customer is a common method of analyzing their creditworthiness.

Question 7

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 commonly used method for assessing their creditworthiness. This allows lenders or creditors to evaluate a borrower's financial health, including their income, expenses, assets, liabilities, and cash flow. By analyzing the financial statements, lenders can determine whether the borrower is capable of repaying the loan or credit on time, and whether they are a good credit risk.

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

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

Accepted Answer

This is true. By reviewing the potential customer's payment history with other firms, a business can gain insight into their reliability and likelihood of paying debts on time. This information can be used to make decisions about extending credit to the customer.

Question 10

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

This is because with a credit policy, customers are allowed to defer their payments, resulting in an increase in accounts payable for the firm as it now has to pay its suppliers before receiving payment from customers.

Question 11

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 the number of times a company sells and replaces its inventory within a given period of time, usually a year. It is a measure of how efficiently a company is managing its inventory. The term used to refer to the length of time it takes for a firm to collect on a sale is called Days Sales Outstanding (DSO) or Accounts Receivable Turnover.

Question 12

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 external factors that are not under the control of the firm, and are therefore considered as variables in the analysis of the credit policy proposal.

Question 13

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 14

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

Purchasing on credit with terms of 2/10 net 30 means that the purchaser can take advantage of a 2% discount if payment is made within 10 days, but the full amount is due within 30 days. To maximize cash flow and take advantage of the discount, a rational purchaser should aim to pay within the discount period, which is within 10 days. However, if the firm cannot pay within 10 days, good cash management practice suggests paying within 20-30 days to avoid late fees or damaging the firm's credit score.

Question 15

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

Accepted Answer

This statement is true. Raw materials such as iron ore may be the finished goods for a steel manufacturer. Similarly, a company that manufactures furniture may purchase wood or fabric as raw materials while another company may use the same materials to produce finished clothes or home decor products.

Question 16

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

The rate of default is an important factor to consider when switching to a credit policy, as it can significantly impact the cost-benefit analysis. If the default rate is high, the cost of financing bad debts may outweigh the benefits of increased sales. Therefore, it is important to consider this factor when making the decision.

Question 17

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

When a firm converts to a credit policy, it allows customers to purchase goods on credit, which can increase sales and ultimately lead to an increase in production output to meet the demand.

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 change in the level of sales.

Accepted Answer

When analyzing the cost benefit of switching to a 30-day credit policy, the change in sales level should be considered because it will impact the firm's cash flow and revenue. A decrease in sales due to customers' inability to pay within 30 days may outweigh the benefits of offering credit. On the other hand, an increase in sales may justify the cost of offering credit.

Question 19

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

Accepted Answer

This statement is true. The longer the credit period, the higher the cost of credit is likely to be, as interest accrues over a longer period of time.

Question 20

The percentage cost of credit varies with the discount percent.

Accepted Answer

The cost of credit is dependent on many factors, including the discount rate. If the discount rate is higher, the cost of credit will be lower, and vice versa. Therefore, the percentage cost of credit varies with the discount percent.

Quiz 20: Credit and Inventory Management

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.

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

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

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

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.

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

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

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

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.

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.

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

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?

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

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.

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.

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.

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

The percentage cost of credit varies with the discount percent.