Question 1

What is the primary purpose of credit analysis?

Accepted Answer

The primary purpose of credit analysis is to evaluate whether or not a customer will pay. While determining optimal credit and discount periods and assessing sales frequency and amount are important factors in credit analysis, the ultimate goal is to assess the creditworthiness of a customer and determine the likelihood of them paying back debt.

Question 2

Jillian was recently hired by a major retail store.Her job is to determine the probability that individual customers will fail to pay for their charge sales.Jillian's job best relates to which one of the following?

Accepted Answer

Jillian's job is to determine the probability that individual customers will fail to pay for their charge sales, which is related to credit analysis. Credit analysis involves evaluating the creditworthiness of potential customers and assessing the risk they pose to the company's finances. In Jillian's case, she is specifically tasked with assessing the risk of customers failing to pay, which falls under the purview of credit analysis. The other options are not directly related to Jillian's job duties. Terms of sale refer to the conditions under which a sale is made, collection policy refers to the process of collecting unpaid debts, payable policy refers to the policies for paying bills and suppliers, and customer service refers to providing assistance and support to customers.

Question 3

Town Hardware sells goods on credit with payment due 30 days after purchase.If payment is not received by the 30^th day, the store mails a friendly reminder to the customer.If payment is not received by the 45^th day, the store calls the customer and requests payment and also stops offering credit to that customer.These procedures are referred to as the store's:

Accepted Answer

The procedures described in the scenario involve the collection of payments from customers who have purchased goods on credit. Therefore, the store's policies in this regard would be its collection policy.

Question 4

You have recently been hired as an accounting intern for Jefferson Mills.The job that you have been assigned for today is to compile a spreadsheet that has six columns.The column headings are: Invoice #; Customer name; < 30 days; 31-60 days; 61-90 days; > 90 days.You are to list every unpaid invoice by customer name with the amount owed entered into the appropriate column for the number of days between the sale date and today.Once you have completed that, you are to sort the report by customer name and then total the amounts listed in each column.What is this report called?

Accepted Answer

This report is called an aging schedule, which lists unpaid invoices by customer and categorizes them by the number of days since the sale date. It is used to track accounts receivable and identify any potential collection issues. The report is then sorted and the totals for each column are calculated to determine the overall aging of the accounts receivable.

Question 5

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

RSF is a captive finance company, meaning it is a subsidiary that provides financing exclusively for its parent company's sales, in this case large ticket items sold by the Rolled Steel Company.

Question 6

Scott purchased a shovel, a rake, and a wheelbarrow from The Local Hardware Store yesterday.Today, the store issued a bill for these items and mailed it to Scott.What is the name given to this bill?

Accepted Answer

A bill that is issued by a store to a customer is referred to as an invoice.

Question 7

A firm's total investment in receivables depends primarily on the firm's:

Accepted Answer

The total investment in receivables is influenced by the average collection period (which determines the length of time receivables are outstanding) and the amount of credit sales. The longer the average collection period and the higher the amount of credit sales, the higher the investment in receivables. Cash discount period, cash to credit sales ratio, and bad debt ratio are important factors in managing receivables, but they do not directly determine the total investment in receivables.

Question 8

The period of time that extends from the day a credit sale is made until the day the bank credits a firm's account with the payment for that sale is known as the _____ period.

Accepted Answer

The answer of The period of time that extends from...

Question 9

Blackwell Brothers sells men's suits.The store offers a 1 percent discount if payment is received within 10 days.Otherwise, payment is due within 30 days.This credit offering is referred to as the:

Accepted Answer

The credit offering described in the scenario is referred to as the "terms of sale."

Question 10

The terms of sale generally include which of the following?
I.type of credit instrument
II.cash discount
III.credit period
IV.discount period

Accepted Answer

The terms of sale typically encompass all of these elements: the type of credit instrument to be used (e.g., promissory note, trade acceptance), cash discount options for early payment, the credit period over which payment can be made, and the discount period during which a cash discount is available for early payment.

Question 11

Allison has developed a set of procedures for determining the amount of each raw material that she needs to have in inventory if she is to keep her firm's assembly lines operating efficiently.These procedures are commonly referred to by which one of the following terms?

Accepted Answer

The set of procedures developed by Allison for determining the amount of each raw material she needs to have in inventory is known as materials requirements planning (MRP). MRP helps to ensure that the right amount of materials are available at the right time to keep the assembly lines operating efficiently. Options A, B, C, and D are not relevant to this scenario.

Question 12

Bill is in charge of the inventory for Home Builder's Supply.As an inventory item gets low, he is to restock the item by a quantity that minimizes the total inventory costs for that item.What is this restocking quantity called?

Accepted Answer

The restocking quantity that minimizes total inventory costs is called the economic order quantity (EOQ). The EOQ takes into account the costs of ordering, holding, and stockout (shortage) costs, and determines the optimal quantity to order each time inventory needs to be restocked. Therefore, the correct choice is C, economic order quantity.

Question 13

Any written proof that a customer owes you money for goods or services provided is referred to as a(n):

Accepted Answer

The answer of Any written proof that a customer owes...

Question 14

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 character, capacity, capital, collateral, and conditions. These are the key factors evaluated in the credit evaluation process to determine the borrower's creditworthiness. A borrower's character is evaluated based on their credit history and behavioral patterns when it comes to credit management. Capacity is evaluated based on the borrower's ability to repay the loan. Capital refers to the borrower's current assets and financial strength. Collateral refers to assets that can be pledged as security for the loan. Conditions refer to the broader economic and industry-specific conditions that can impact the borrower's ability to repay the loan.

Question 15

Phil's Print Shop grants its customers the right to pay for their print jobs within 30 days of the date of service.This 30-day period is referred to as the:

Accepted Answer

The 30-day period granted to customers by Phil's Print Shop is referred to as the credit period, as it allows customers to pay for the print jobs after the date of service on credit terms. The other options (A) payables period, (B) cash cycle, (C) transactions period, and (E) disbursement period do not accurately describe the timeframe in which customers are allowed to pay for their print jobs.

Question 16

Geoff Industries offers its credit customers a 2 percent discount if they pay within 10 days.This discount is referred to as a:

Accepted Answer

The 2 percent discount offered by Geoff Industries to its credit customers for paying within 10 days is a cash discount. This is because the discount is applied to the amount owed by the customer and reduces the overall cash payment required.

Question 17

Which one of the following is a system for managing demand-dependent inventories that minimizes the inventory levels of a firm?

Accepted Answer

Just-in-time inventory (JIT) is a system for managing demand-dependent inventories that minimizes the inventory levels of a firm. JIT involves scheduling materials to arrive exactly when needed in the production process, reducing the need for inventory holding and associated storage costs, while increasing efficiency and responsiveness to customer demand. Turnover planning, net working capital planning, inventory scoring, and inventory ranking are all related to inventory management, but do not specifically address demand-dependent inventories or the minimizing of inventory levels.

Question 18

Roger's Home Appliances offers credit to customers it deems worthy of this privilege.To determine if a customer is worthy, the firm computes a numerical value which is used to estimate 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 described in the scenario is credit scoring, which involves using a numerical value or score to assess a customer's creditworthiness and potential risk of default.

Question 19

Which one of the following will increase a firm's investment in accounts receivables?

Accepted Answer

An increase in average daily credit sales implies an increase in credit sales, which in turn will increase the firm's investment in accounts receivables.

Question 20

You are viewing a graph which 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 and opportunity costs of credit is called the credit cost curve. Option A is incorrect because opportunity cost is already included in the credit cost curve. Option B is incorrect because it only represents the amount of credit extended, not the costs associated with it. Option D and E are unrelated to the graph and the concept of carrying and opportunity costs of credit.

Quiz 20: Financial Risk Management