Question 1

You are an accounting intern and today you are compiling a spreadsheet with column headings of: Invoice number; Customer number; < 30 days; 31-60 days; 61-90 days; > 90 days. You will list every unpaid invoice with the amount owed entered into the appropriate column based on the number of days between the sale date and today. Once you have completed that, you will sort the report by customer number and total the amounts listed in each column. What is this report called?

Accepted Answer

The report described is an aging schedule, which tracks how long invoices have gone unpaid and categorizes them based on time periods. This allows for a better understanding of the company's accounts receivable and helps identify any potential cash flow issues. The other options listed (credit report, risk assessment report, turnover delineation, and receivables consolidation report) are not accurate descriptions of this specific report.

Question 2

The basic factors to be evaluated in the credit evaluation process, the five Cs of credit, are:

Accepted Answer

The five Cs of credit are capacity, character, collateral, capital, and conditions. These factors are used by lenders to evaluate the creditworthiness of a borrower.

Question 3

If you extend credit for a one-time sale to a new customer, you risk an amount equal to the:

Accepted Answer

The answer of If you extend credit for a one-time...

Question 4

The optimal amount of credit equates the incremental costs of carrying the increase in accounts receivable to the incremental:

Accepted Answer

The optimal amount of credit should be set at the point where the incremental benefits from increased sales due to expanded credit is equal to the incremental costs of carrying the increase in accounts receivable. Therefore, the correct choice is C - cash flows from increased sales.

Question 5

When credit policy is at the optimal point, the:

Accepted Answer

When credit policy is at the optimal point, the carrying costs (costs of financing the inventory) will be balanced with the opportunity costs (costs of missed sales due to strict credit policies), resulting in carrying costs equaling the opportunity costs. The total costs will not necessarily be equal to the opportunity costs, nor will the carrying costs be equal to zero.

Question 6

Assume you are viewing a graph that compares costs with the amount of credit extended. Both the carrying costs and the opportunity costs of credit are depicted. What is the function called that represents the summation of these carrying and opportunity costs?

Accepted Answer

The function that represents the summation of carrying costs and opportunity costs of credit is called the credit cost curve.

Question 7

Which one of the following credit instruments is commonly used in international commerce?

Accepted Answer

Banker's acceptance is commonly used in international commerce because it is a time draft that is guaranteed by a bank, providing assurance to the seller that they will receive payment. Open account and promissory notes may not provide sufficient security for international transactions, while sight drafts may require the buyer to pay before receiving the goods, which can create cash flow issues.

Question 8

Assume that RSF is a wholly owned subsidiary of the Rolled Steel Company. RSF provides credit financing solely for large ticket items purchased from the Rolled Steel Company. Which one of the following terms describes RSF?

Accepted Answer

The given scenario describes a captive finance company, which is a subsidiary of a larger company that provides financing exclusively for the products or services of the parent company. RSF is providing credit financing for large ticket items purchased from its parent company, Rolled Steel Company. Therefore, choice C, captive finance company, is the correct answer. Option A, credit department, is not a suitable choice as RSF operates as a subsidiary and not simply as a department within Rolled Steel Company. Option B, parent company, is incorrect as it refers to Rolled Steel Company, which is the parent company of RSF. Option D, credit union, is not the correct choice as they are member-owned and not usually affiliated with a specific parent company. Option E, service unit, is not appropriate as RSF is providing credit financing and not a specific service.

Question 9

A 2/10, net 30 credit policy:

Accepted Answer

The 2/10, net 30 credit policy means that the buyer can get a 2% discount if the invoice is paid within 10 days, or the full amount is due in 30 days. If the buyer chooses to forgo the discount and pays within 30 days, it is an expensive form of short-term credit as they will be paying the full amount.

Question 10

A conditional sales contract:

Accepted Answer

A conditional sales contract allows the seller to retain ownership of the goods sold until the customer has fully paid for the purchase. This means that the buyer does not receive title to the goods until they have paid in full.

Question 11

When considering a switch from an all-cash credit policy to a net 30 credit policy all of the following should be considered except the:

Accepted Answer

When considering a switch from an all-cash credit policy to a net 30 credit policy, it is important to consider the revenue effects, effects on the variable costs, cost of the discount, and probability of default. However, the change in fixed costs is not relevant to this decision. Thus, option E should be excluded.

Question 12

When evaluating the creditworthiness of a customer, the term capital refers to the:

Accepted Answer

Capital refers to the customer's financial reserves, which are used to assess their ability to repay debt. It is a measure of the customer's assets minus any liabilities or debts.

Question 13

Which one of these statements is correct?

Accepted Answer

Granting credit to customers increases the firm's accounts receivable, which is an asset. This increase in assets must be financed, and the firm may have to borrow more money, increasing its long-term borrowing. Therefore, option E is the only correct statement. Option A is incorrect because switching to a credit policy will increase the firm's cash cycle. Option B is incorrect because most customers take advantage of the credit period and delay payment. Option C is incorrect because higher quantities sold and higher prices will result in higher revenues. Option D is incorrect because the cost of default is only one of the many factors to consider when granting credit.

Question 14

Which of the following characteristics are most associated with a firm that adopts a liberal credit policy?

Accepted Answer

A liberal credit policy is one in which a company extends credit to its customers that is relatively easy to obtain and allows for longer payment periods. This type of policy is most commonly associated with predominately repeat customers, as they have already established a relationship with the company and are more likely to have a reliable payment history. Additionally, a liberal credit policy is typically implemented when a company has low variable costs, as this allows them to absorb the risk of late or non-payment without significantly impacting their profitability.

Question 15

Under credit terms of 1/5, net 15, customers should:

Accepted Answer

Customers have the option to either take the discount (1%) and pay within 5 days of the sale date or pay the full amount within 15 days of the sale date. Therefore, the best choice is D, which states that customers can either take the discount or pay on the 15th day without penalty.

Question 16

The Painted House offers credit terms of 2/10ᵗʰ, EOM. Assume you purchase an item on credit from this store on Monday, November 3. When is payment due for this purchase if you do not take the discount?

Accepted Answer

The answer of The Painted House offers credit terms of...

Question 17

Which one of the five Cs of credit refers to the general economic situation in the customer's line of business?

Accepted Answer

Conditions refer to the general economic situation in the customer's line of business, as well as any specific conditions that may affect the customer's ability to repay their debt. The other Cs refer to the customer's ability to repay (Capacity), their reputation and past behavior (Character), their assets (Capital and Collateral).

Question 18

Roger's Home Appliances offers credit to customers it deems qualified based on a numerical value that estimates the probability that the customer will default if credit is granted to them. The process of computing this numerical value is referred to as:

Accepted Answer

The process of computing a numerical value to estimate the probability of a customer defaulting is known as credit scoring.

Question 19

Which one of the five Cs of credit refers to a customer's willingness to pay its bills?

Accepted Answer

Character refers to the customer's reputation and credit history. This includes their willingness to pay bills on time and past behavior with credit.

Question 20

Which one of the following statements is correct?

Accepted Answer

Limiting the amount of initial credit purchase can help reduce the risk of extending credit to new customers who may not have a proven payment history. The other options are incorrect - A is incorrect because a strong repeat customer base can support extending credit; B is incorrect because past payment history can indicate future payment patterns; D is incorrect because the risk of default is typically higher for new customers; and E is incorrect because extending a high credit limit without assessing creditworthiness can increase the risk of default.

Quiz 20: Credit and Inventory Management