Question 1

Which of the following would not be a customary source of credit information on customers?
A)Dun & Bradstreet
B)Canada Customs and Revenue Agency
C)Credit Bureau
D)Customer's bank

Accepted Answer

Canada Customs and Revenue Agency is a government agency responsible for administering tax laws and collecting taxes. They do not typically provide credit information on customers. Dun & Bradstreet, Credit Bureau, and Customer's bank are all common sources of credit information on customers.

Question 2

At what point does a customer's unpaid account become delinquent when the terms of sale are 2/10, net 60?
A)11 days after the sale
B)31 days after the sale
C)61 days after the sale
D)71 days after the sale

Accepted Answer

The terms 2/10, net 60 mean that the customer can take a 2% discount if they pay within 10 days, but the full amount is due within 60 days. Therefore, the account becomes delinquent after 60 days, making the correct answer 61 days after the sale.

Question 3

The Five C's of Credit refer to the:
A)Credit reports issued by Dun & Bradstreet
B)Interpretation of numerical credit scoring systems
C)Attributes that help determine creditworthiness
D)Financial ratios used to determine Altman's Z score

Accepted Answer

The Five C's of Credit are Character, Capacity, Capital, Collateral, and Conditions. These attributes help lenders determine the creditworthiness of potential borrowers. Dun & Bradstreet issues credit reports, but that is not what the Five C's refer to. Numerical credit scoring systems are a part of Capacity, but not the only factor. Altman's Z score uses financial ratios to determine a company's financial health, but that is not related to the Five C's.

Question 4

With terms of 4/15, net 60, what is the implied interest rate for forgoing a cash discount and paying at the end of the period?
A)25.63%
B)28.19%
C)39.25%
D)61.15%

Accepted Answer

To calculate the implied interest rate, we need to first find the effective annual interest rate.

Effective annual interest rate = (1 + discount % / (1 - discount %)) ^ (365 / number of days credit is extended) - 1

Here, discount % = 4/15, number of days credit is extended = 60

Plugging in the values, we get:

Effective annual interest rate = (1 + 4/15 / (1 - 4/15)) ^ (365 / 60) - 1
= (1.2667) ^ (6.0833) - 1
= 1.3921 - 1
= 0.3921

Now, we need to convert this to a percentage:

Implied interest rate = 0.3921 * 100
= 39.21%

Therefore, the answer is choice C.

Question 5

An accepted time draft is quite similar to:
A)Selling on open account
B)A conditional sale
C)A cheque dated in the future
D)An overdue account

Accepted Answer

An accepted time draft is a type of financial instrument that is similar to a cheque dated in the future. The difference is that the time draft becomes payable to the holder only at a specific future date, whereas a cheque can be payable immediately or at a future date.

Question 6

Which of the following credit decisions appears correct for a customer that intends to order $1,000 of goods annually that have a 20% profit margin if the probability of default is 20% and the discount rate is 10%?
A)Reject because expected loss equals $320
B)Reject because expected profit equals $0
C)Accept because expected profit equals $1,440
D)Accept because expected profit equals $3,200

Accepted Answer

To calculate the expected profit, we need to consider the profit margin of 20% on $1,000 worth of goods, which is $200.

Expected profit = (1 - Probability of default) x Profit margin x Annual order value - (Discount rate x Annual order value)

Therefore, Expected profit = (1 - 0.2) x $200 x $1,000 - (0.1 x $1,000) = $1,440

Since the expected profit is positive, it is advisable to accept the credit application.

Question 7

What is the effective annual rate of trade credit if the trade credit terms are 1/10, net 30?
A)13.01%
B)18.00%
C)18.43%
D)20.13%

Accepted Answer

The answer of What is the effective annual rate of...

Question 8

Before spilling coffee on an invoice and obliterating the final due date, you calculate the implied interest cost of trade credit at 24.89% and remember there is a 3% cash discount if paid within 10 days.When is the due date?
A)30 days
B)45 days
C)50 days
D)90 days

Accepted Answer

The answer of Before spilling coffee on an invoice and...

Question 9

What is the break-even probability of collection when the present value of revenues from a sale is $100,000 and the present value of cost is $87,000?
A)1.00
B)0.87
C)0.74
D)0.13

Accepted Answer

The break-even probability of collection is the probability at which the present value of expected cash inflows equals the present value of cost. Therefore, we need to find the probability at which the expected revenues equal the cost of $87,000.

Let P be the probability of collection. Then the expected cash inflows from the sale are:

$100,000 x P

The present value of this amount is still $100,000 x P because we assume that the time value of money is negligible.

Therefore, we can set up the equation:

$100,000 x P = $87,000

Solving for P, we get:

P = $87,000 / $100,000

P = 0.87 or 87%

Thus, the break-even probability of collection is 87%, which means that if the probability of collecting payment from the customer is less than 87%, the company will lose money on the sale. Therefore, the best choice is B.

Question 10

Determine the annual effective rate of a customer that does not take advantage of credit terms of 2/10, n/30.
A)38.59%
B)40.59%
C)42.59%
D)44.59%

Accepted Answer

The answer of Determine the annual effective rate of a...

Question 11

Which of the following would not be included in the five C's of credit?
A)Character
B)Condition
C)Charges
D)Capital

Accepted Answer

The five C's of credit include Character, Capacity, Capital, Collateral, and Conditions. Charges are not included in the five C's of credit.

Question 12

Which of the following would be least expected to change as a result of a higher average age of receivables?
A)Current ratio
B)Total collection costs
C)Accounts payable
D)Bad debt expense

Accepted Answer

The aging of accounts receivable would not typically have an impact on accounts payable. Therefore, choice C would be the least expected to change. A higher average age of receivables may result in an increase in bad debt expense, total collection costs, and a decrease in the current ratio.

Question 13

Determine the annual effective rate of a customer that does not take advantage of credit terms of 3/15, n/30.
A)109.84%
B)69.84%
C)29.84%
D)9.84%

Accepted Answer

The terms 3/15, n/30 mean that a customer can take a 3% discount if they pay within 15 days; otherwise, the full amount is due in 30 days. If the customer does not take advantage of the discount, effectively, they are choosing to pay a premium for the extra 15 days of credit. The equivalent interest rate for this 15-day period can be calculated as $ \frac{3\%}{97\%} $, which annualizes to $ \left(1 + \frac{3\%}{97\%}\right)^{24} - 1 $ (since there are 24 15-day periods in a year), resulting in approximately 109.84%.

Question 14

Which of the following terms of sale is the most restrictive?
A)Net 30
B)Seasonal dating
C)CBD
D)COD

Accepted Answer

CBD (Cash Before Delivery) is the most restrictive term of sale as it requires payment before the goods are shipped or delivered, offering the seller the highest level of security.

Question 15

When sellers deliberately postdate an invoice by several months, their terms of sale include:
A)COD
B)EOM
C)CBD
D)Season dating

Accepted Answer

Sellers who postdate an invoice by several months are using season dating. This is a common practice in industries where sales are highly seasonal, such as clothing or sports equipment. It allows the seller to extend credit to the buyer during the off-season, when their cash flow may be tighter, while still ensuring payment before the busy season begins. COD (cash on delivery) and EOM (end of month) are other types of terms of sale, but they do not refer specifically to postdating invoices. CBD is not a commonly used term in relation to sales.

Question 16

What effective interest rate is charged to a purchaser receiving terms of 5/10, net 90 if the purchaser avoids the discount and pays in 90 days?
A)20.00%
B)22.81%
C)24.93%
D)26.37%

Accepted Answer

EAR = [1 + (0.05/(1 - 0.05))]^{365/(90 - 10)} - 1 = 0.2637, or 26.37%

Question 17

What is the minimum probability of collection that should be accepted by firms that have a 25% profit margin? Ignore the time value of money.
A)20%
B)25%
C)50%
D)75%

Accepted Answer

p = ($1 - 0.25)/$1 = 0.75, or 75%

Question 18

What is the break-even probability of collection for a firm that has a 40% profit margin (ignore present value)?
A)24%
B)40%
C)60%
D)80%

Accepted Answer

Break-even probability of collection is defined as the minimum probability that a firm needs to collect on its accounts receivable in order to break-even on a sale.

Profit margin = Revenue - Cost / Revenue
Since the firm has a 40% profit margin, its cost is 60% of its revenue.

Break-even probability of collection = Cost / Revenue
= 60% / (100%)
= 60%

Therefore, the choice is C) 60%.

Question 19

Which statement is true about terms of trade credit of 2/10, net 30?
A)A 10% cash discount is offered for payment before 30 days
B)A 2% cash discount can be taken for payment before the 10th of the following month
C)A 10% cash discount can be taken if paid by the second day after invoicing
D)No cash discount is offered after the eleventh day

Accepted Answer

The terms "2/10, net 30" mean a 2% discount is available if payment is made within 10 days; otherwise, the full invoice amount is due in 30 days. After the 10th day, no discount is available.

Question 20

Which of the following elements of credit terms might discourage purchasers from paying with a discount?
A)A higher discount percentage with shorter payment period.
B)A shorter payment period with longer discount period.
C)A longer discount period with higher discount percentage
D)A longer payment period with lower discount period.

Accepted Answer

Option D offers a longer payment period with a lower discount period. This element of credit terms may discourage purchasers from paying with a discount because they would have to wait longer to pay and the discount may not be significant enough to make it worth the wait.

Quiz 22: Credit Management and Collection

Which of the following would not be a customary source of credit information on customers?

At what point does a customer's unpaid account become delinquent when the terms of sale are 2/10, net 60?

The Five C's of Credit refer to the:

With terms of 4/15, net 60, what is the implied interest rate for forgoing a cash discount and paying at the end of the period?

An accepted time draft is quite similar to:

Which of the following credit decisions appears correct for a customer that intends to order $1,000 of goods annually that have a 20% profit margin if the probability of default is 20% and the discount rate is 10%?

What is the effective annual rate of trade credit if the trade credit terms are 1/10, net 30?

Before spilling coffee on an invoice and obliterating the final due date, you calculate the implied interest cost of trade credit at 24.89% and remember there is a 3% cash discount if paid within 10 days.When is the due date?

What is the break-even probability of collection when the present value of revenues from a sale is $100,000 and the present value of cost is $87,000?

Determine the annual effective rate of a customer that does not take advantage of credit terms of 2/10, n/30.

Which of the following would not be included in the five C's of credit?

Which of the following would be least expected to change as a result of a higher average age of receivables?

Determine the annual effective rate of a customer that does not take advantage of credit terms of 3/15, n/30.

Which of the following terms of sale is the most restrictive?

When sellers deliberately postdate an invoice by several months, their terms of sale include:

What effective interest rate is charged to a purchaser receiving terms of 5/10, net 90 if the purchaser avoids the discount and pays in 90 days?

What is the minimum probability of collection that should be accepted by firms that have a 25% profit margin? Ignore the time value of money.

What is the break-even probability of collection for a firm that has a 40% profit margin (ignore present value) ?

Which statement is true about terms of trade credit of 2/10, net 30?

Which of the following elements of credit terms might discourage purchasers from paying with a discount?