Question 1

In general, a firm's credit policy should grant the credit whenever the expected:
A)Loss from default is less than the cost of the product.
B)Profit from granting credit exceeds zero.
C)Profit exceeds the price of the product.
D)Probability of a loss is less than 50%.

Accepted Answer

The credit policy of a firm should aim to maximize profit, which means that the profit from granting credit should exceed zero. Option A is not suitable as the cost of the product is irrelevant; it is the profit that matters. Option C is incorrect as it compares profit to the price of the product, which may not be related. Option D factors in the probability of loss but does not take into account the potential profit from granting credit.

Question 2

Would it ever make financial sense to forgo cash discounts that are offered from suppliers? Can you provide an example?

Accepted Answer

The answer of Would it ever make financial sense to...

Question 3

Which of the following typically justifies the offering of season dating?
A)The firm earns interest on the receivables
B)Product demand is increased during the low-sales months of the year
C)The firm is experiencing cash flow difficulties
D)The firm develops repeat business

Accepted Answer

Season dating is typically offered to increase product demand during the low-sales months of the year, such as during the off-season for a specific product or service. This helps to keep inventory turnover high and maintain consistent revenue streams throughout the year. The other options (A, C, and D) are not typically justifications for offering season dating.

Question 4

Which of the following is the least expensive source of credit information?
A)Dun & Bradstreet
B)Moody's
C)Standard & Poor's
D)Bond ratings

Accepted Answer

Bond ratings are generally the least expensive source of credit information because they are often freely available to the public through various financial news outlets, websites, and the issuing entities themselves. In contrast, detailed reports from Dun & Bradstreet, Moody's, and Standard & Poor's typically require a subscription or purchase.

Question 5

A breakdown of accounts receivable according to the length of time outstanding is known as a(n):
A)Amortization schedule
B)Sources of cash flow statement
C)Receivables inventory
D)Aging schedule

Accepted Answer

An aging schedule or aging report is a breakdown of accounts receivable according to the length of time outstanding. It categorizes customers' balances into groups based on how long they have been outstanding. This allows businesses to monitor their cash flow and to take action on overdue accounts, such as sending reminders or pursuing collection efforts. Therefore, option D is the best choice.

Question 6

The purpose of credit analysis is to:
A)Reconcile the accounts receivable balance
B)Modify the terms of trade credit
C)Organize the right side of the balance sheet
D)Decide whether or not to grant credit to a customer

Accepted Answer

The purpose of credit analysis is to assess the creditworthiness of potential or existing customers and determine whether they are likely to pay back any credit extended to them. This is the decision-making process of whether or not to grant credit to a customer. Option A is incorrect because accounts receivable reconciliation is an accounting process to match the balance of accounts receivable with the actual amount of money owed by customers. Option B is incorrect because modifying the terms of trade credit is the negotiation process between the seller and the customer to determine the terms of payment. Option C is incorrect because organizing the right side of the balance sheet is a process of properly arranging liabilities and equity on the right side of the accounting equation.

Question 7

What credit decision is appropriate for a potential customer that offers an 80% chance of paying on a $10,000 (present value) sale that has an 80% (present value) cost?
A)Grant credit since expected profit is $3,200
B)Grant credit since expected profit is $800
C)Refuse credit since expected profit is zero
D)Refuse credit since expected loss is $3,000

Accepted Answer

The answer of What credit decision is appropriate for a...

Question 8

What happens to the implied interest rate on trade credit as the time interval between the discount period and payment period is decreased?
A)The rate declines
B)The rate increases
C)The rate remains constant
D)Impossible to predict without knowing length of discount period

Accepted Answer

The implied interest rate on trade credit increases as the time interval between the discount period and payment period is decreased. This is because there is less time for the buyer to make payment, which increases the risk for the seller. Therefore, the seller may offer less favorable discount terms or increase the interest rate to compensate for this increased risk.

Question 9

Which of the following statements is typically correct concerning the break-even probability of collection for repeat sale customers?
A)Break-even probability is higher than for single sale customers.
B)Break-even probability is lower than for single sale customers.
C)The break-even probability does not change between single sale and repeat sale customers.
D)Sales should never be refused for customers offering the potential of repeat sales.

Accepted Answer

Repeat sale customers have a higher probability of making additional purchases in the future, which lowers the break-even probability for the initial sale. This means that the seller can afford to offer a lower price or discount to repeat sale customers and still make a profit. Therefore, the break-even probability is typically lower for repeat sale customers compared to single sale customers. Option A and D are incorrect because break-even probability is actually lower for repeat sale customers, and it is not appropriate to accept all potential repeat sales if they do not meet the break-even probability. Option C is incorrect because the break-even probability is impacted by the likelihood of future sales from the same customer, which is greater for repeat sale customers.

Question 10

Which of the following credit agreements will provide the highest likelihood of cash payment to a seller of goods?
A)Banker's acceptance
B)Time draft
C)Open account
D)Conditional sale

Accepted Answer

Banker's acceptance is a legally binding agreement in which a bank guarantees payment to a seller of goods at a specific date in the future. Since the bank is involved in the transaction, it enhances the creditworthiness of the buyer and reduces the risk of non-payment for the seller. This makes banker's acceptance the most secure form of credit agreement for the seller, providing the highest likelihood of cash payment. Time drafts and open accounts also involve credit risk and may not be as secure as banker's acceptance. Conditional sales may involve financing agreements that could increase the buyer's financial risk and potentially delay payment to the seller.

Question 11

According to credit experts, a full credit analysis should be conducted:
A)On each customer of a firm
B)Only when payment is doubtful
C)Only on customers that are delinquent
D)On all repeat customers

Accepted Answer

The answer of According to credit experts, a full credit...

Question 12

Which of the following statements is correct about banker's acceptances?
A)They are equivalent to a sight draft
B)They represent the norm for installment sales
C)The bank guarantees payment of the invoice
D)The bank retains title to the merchandise

Accepted Answer

Banker's acceptances are a type of financial instrument used in international trade where the bank guarantees payment of an invoice. They are not equivalent to a sight draft, which requires immediate payment, and do not represent the norm for installment sales. The bank does not retain title to the merchandise, as this remains with the seller.

Question 13

When sales are made without the accompaniment of a formal debt contract, the sales are said to be on:
A)Conditional sale terms
B)Open account
C)Trade credit
D)Sight draft

Accepted Answer

Open account refers to a system in which a buyer can purchase goods or services from a seller and pay for them at a later date without a formal debt contract. This is commonly used in business-to-business transactions and is also known as "buying on credit." Choice A (conditional sale terms) refers to a type of sale where the transfer of ownership of goods depends on certain conditions being met, such as the buyer making a certain number of payments. Choice C (trade credit) is a generic term that can refer to any form of credit offered in a business transaction. Choice D (sight draft) is a type of financial instrument that is used in international trade to secure payment for goods or services.

Question 14

Calculate the implied cost of trade credit for firms that do not take advantage of cash discounts, based on terms of sale of: 5/15, net 60.By how much does this implied cost change if the discount is increased by 1% and the net payment period is increased to 90 days?

Accepted Answer

The answer of Calculate the implied cost of trade credit...

Question 15

Should credit be granted to a customer wishing to purchase a $2,000 item that has been marked-up 50% over cost if the probability of collection is only 65%? Assume all cash flows are discounted to present value.
A)No; the expected loss is $33.33
B)No; the expected loss is $150.00
C)Yes; the expected profit is $33.33
D)Yes; the expected profit is $150.00

Accepted Answer

To calculate the expected loss, we need to look at the potential outcomes and their probabilities:

- If the company grants credit and the customer pays: Revenue = $2,000 x 1.5 = $3,000; Probability = 65%; Cash flow = $1,950 (discounted to present value)
- If the company grants credit and the customer does not pay: Revenue = $0; Probability = 35%; Cash flow = -$2,000 (discounted to present value)

Expected cash flow = (0.65 x $1,950) + (0.35 x -$2,000) = -$33.33

Since the expected cash flow is negative, the company should not grant credit to the customer.

Question 16

It may be possible for firms to reduce the time and expense necessary to collect delinquent debts under a(n):
A)Promissory note
B)Conditional sale
C)Open account
D)EOM billing

Accepted Answer

The answer of It may be possible for firms to...

Question 17

Which of the following credit agreements provides the least protection to the seller?
A)Banker's acceptance
B)Conditional sale
C)Open account
D)Commercial draft

Accepted Answer

An open account is a credit agreement that provides the least protection to the seller as it involves extending credit to a buyer without any collateral or security. The seller relies on the buyer's promise to pay at a later date, making it a high-risk option. The other options mentioned provide more protection to the seller by either involving a third-party guarantor or retaining ownership of the goods until payment is made.

Question 18

Which of the following is correct concerning terms of trade credit of 4/10, EOM, net 90?
A)The discount period expires on the last day of the month.
B)The invoice becomes delinquent 90 days after the last day of the month.
C)The discount period ends on the tenth day of the month following the invoice.
D)The discount period ends either 10 days after invoicing or at the end of the month, whichever is earlier.

Accepted Answer

The terms "4/10, EOM, net 90" mean that a 4% discount is available if the invoice is paid within 10 days after the end of the month in which the invoice was issued, and the full (net) amount is due 90 days after the invoice date. Therefore, the discount period ends on the tenth day of the month following the invoice.

Question 19

Which of the following assumptions is made when declaring that the break-even probability of collection is lower for customers with repeat orders?
A)The discount rate is fairly high
B)The cost of the item will continually decline
C)The sales price of the item will continually increase
D)Payment on the first order insures payments on subsequent orders

Accepted Answer

Customers who have already made repeat orders are more likely to have established a positive credit history with the company and a trust in the quality of the products or services. This reduces the risk of defaulting on payments and thus the break-even probability of collection is lower for them. Discount rates, cost of item and sales price do not necessarily affect this assumption.

Question 20

An aging schedule illustrates the relationship between:
A)Customers and repeat sales
B)Sales and profitability
C)The ratio of accounts receivable to sales
D)Accounts receivable and their average time outstanding

Accepted Answer

An aging schedule is a tool used in accounting to track the amount of time that accounts receivable have been outstanding. It categorizes receivables based on the length of time they have been due and unpaid, and helps to identify any problem areas where collections may need to be made. Therefore, the aging schedule illustrates the relationship between accounts receivable and their average time outstanding.

Quiz 22: Credit Management and Collection

In general, a firm's credit policy should grant the credit whenever the expected:

Would it ever make financial sense to forgo cash discounts that are offered from suppliers? Can you provide an example?

Which of the following typically justifies the offering of season dating?

Which of the following is the least expensive source of credit information?

A breakdown of accounts receivable according to the length of time outstanding is known as a(n) :

The purpose of credit analysis is to:

What credit decision is appropriate for a potential customer that offers an 80% chance of paying on a $10,000 (present value) sale that has an 80% (present value) cost?

What happens to the implied interest rate on trade credit as the time interval between the discount period and payment period is decreased?

Which of the following statements is typically correct concerning the break-even probability of collection for repeat sale customers?

Which of the following credit agreements will provide the highest likelihood of cash payment to a seller of goods?

According to credit experts, a full credit analysis should be conducted:

Which of the following statements is correct about banker's acceptances?

When sales are made without the accompaniment of a formal debt contract, the sales are said to be on:

Calculate the implied cost of trade credit for firms that do not take advantage of cash discounts, based on terms of sale of: 5/15, net 60.By how much does this implied cost change if the discount is increased by 1% and the net payment period is increased to 90 days?

Should credit be granted to a customer wishing to purchase a $2,000 item that has been marked-up 50% over cost if the probability of collection is only 65%? Assume all cash flows are discounted to present value.

It may be possible for firms to reduce the time and expense necessary to collect delinquent debts under a(n) :

Which of the following credit agreements provides the least protection to the seller?

Which of the following is correct concerning terms of trade credit of 4/10, EOM, net 90?

Which of the following assumptions is made when declaring that the break-even probability of collection is lower for customers with repeat orders?

An aging schedule illustrates the relationship between: