Question 1

DSO analysis of accounts receivable is the most robust way to see if customers are,on average,paying more slowly,because it is unaffected by seasonal changes in sales.

Accepted Answer

DSO (Days Sales Outstanding) analysis can be influenced by seasonal changes in sales, as it calculates the average number of days that receivables remain outstanding before being collected. Seasonal sales fluctuations can distort the DSO figure, making it appear that customers are paying more slowly or quickly depending on the season.

Question 2

The collection process,although sometimes difficult,is also expensive in terms of out-of-pocket expenses.

Accepted Answer

The text states that the collection process can be expensive in terms of out-of-pocket expenses, so the statement is true.

Question 3

When deciding whether to offer a discount for cash payment,a firm must balance the profits from additional sales with the lost revenues from the discount.

Accepted Answer

This statement is true. When a firm offers a discount for cash payment, they must weigh the potential increase in sales against the revenue lost from the discount in order to determine whether it is worthwhile financially.

Question 4

The percentage aging schedule of accounts receivable is the most robust way to see if customers are,on average,paying more slowly,because it is unaffected by seasonal changes in sales.

Accepted Answer

The percentage aging schedule of accounts receivable can be influenced by seasonal changes in sales, as these changes affect the total amount of receivables and their distribution across different aging categories, potentially skewing the perception of payment speed.

Question 5

Gladys Turner borrowed $12,000 from the bank using a 10.19 percent "add-on",one-year installment loan,payable in four equal quarterly payments.What is the effective annual rate of interest?
A) 9.50%
B) 10.19%
C) 15.99%
D) 16.98%
E) 20.38%

Accepted Answer

First,calculate the amount of "add-on" interest.Interest = 0.1019($12,000)= $1,222.80.The total amount to be repaid is $1,222.80 + $12,000 = $13,222.80.The quarterly payments are $13,222.80/4 = $3,305.70.Find the periodic rate,where N = 4,PV = 12,000,PMT = F1F1F1S1F1F1F103,305.70,FV = 0,so the quarterly rate = 3.9977%.Finally,enter the nominal rate into your calculator,4 F1F1F1S1F1F1F10 3.9977% = 15.99% = NOM%.Enter P/YR = 4.Now,solve for EFF% = 16.98%.

Question 6

The Arthos Group needs to borrow $200,000 from its bank.The bank has offered the company a 12-month installment loan (monthly payments)with 9 percent add-on interest.What is the effective annual rate (EAR)of this loan?
A) 16.22%
B) 17.97%
C) 17.48%
D) 18.67%
E) 18.00%

Accepted Answer

Interest is 9%($200,000)= $18,000.Thus,the face value of the loan is $200,000 + $18,000 = $218,000.Monthly payments are $218,000/12 = $18,166.67.Calculate the periodic rate as follows: N = 12,PV = 200,000,FV = 0,PMT = F1F1F1S1F1F1F1018,166.67,I/YR = ? = 1.3514%.Convert this to an annual rate: 1.3514% F1F1F1S1F1F1F10 12 = 16.2168%.Applying the EAR formula,solve for EAR = (1 + 0.162168/12)¹² F1F1F1S1F1F1F10 1 = 17.48%.

Question 7

The uncollected balances schedule is constructed at the end of a quarter by dividing the dollar amount of remaining receivables from each month in that quarter by that month's sales.

Accepted Answer

The uncollected balances schedule is indeed constructed at the end of a quarter by dividing the dollar amount of remaining receivables from each month in that quarter by that month's sales.

Question 8

Credit standards refer to the financial strength and importance of a potential customer to the firm required in order to qualify for credit.

Accepted Answer

Credit standards refer to the criteria a firm uses to determine whether a potential customer is eligible for credit, focusing on their creditworthiness and ability to repay, rather than their financial strength and importance to the firm.

Question 9

Which of the following statements is most correct?
A) It is possible for a firm to overstate profits by offering very lenient credit terms which encourage additional sales to financially "weak" firms. A major disadvantage of such a policy is that it is likely to increase uncollectible accounts.
B) A firm with excess production capacity and relatively low variable costs would not be inclined to extend more liberal credit terms to its customers than a firm with similar costs that is operating close to capacity.
C) Firms use seasonal dating primarily to decrease their DSO.
D) Seasonal dating with terms 2/15, net 30 days, with April 1 dating, means that if the original sale took place on February 1st, the customer can take the discount up until March 15th, but must pay the net invoice amount by April 1st.
E) If credit sales as a percentage of a firm's total sales increases, and the volume of credit sales also increases, then the firm's accounts receivable will automatically increase.

Accepted Answer

Offering lenient credit terms can encourage additional sales, but it also increases the risk of uncollectible accounts.

Question 10

The primary reason to monitor aggregate accounts receivable is to see if customers,on average,are paying more slowly.

Accepted Answer

Monitoring aggregate accounts receivable allows a business to track the amount of outstanding debt from customers. By comparing this figure to previous periods, a business can determine if customers are paying more slowly on average. This information is important for managing cash flow and identifying potential collection issues.

Question 11

Which of the following is not correct for a firm with seasonal sales and customers who all pay promptly at the end of 30 days?
A) The quarterly uncollected balances schedule will be the same in each quarter.
B) The level of accounts receivable will be constant from month to month.
C) The ratio of accounts receivable to sales will vary from month to month.
D) The level of accounts receivable at the end of each quarter will be the same.
E) DSO will vary from month to month.

Accepted Answer

If a firm with seasonal sales has customers who pay promptly at the end of 30 days, then the level of accounts receivable will not be constant from month to month because sales will vary from month to month. Therefore, the correct choice is B.

Question 12

Which of the following is not correct?
A) A more aggressive collection policy will reduce bad debt expenses, but may also decrease sales.
B) Collection policy usually has little impact on sales since collecting past-due accounts occurs only after the customer has already purchased.
C) Typically a firm will turn over an account to a collection agency only after it has tried several times on its own to collect the account.
D) A lax collection policy will frequently lead to an increase in accounts receivable.
E) Collection policy is how a firm goes about collecting past-due accounts.

Accepted Answer

The answer of Which of the following is not correct?
A)...

Question 13

The credit period is the amount of time it takes to do a credit search on a potential customer.

Accepted Answer

The credit period refers to the amount of time that a customer has to pay for goods or services after receiving them.

Question 14

Suppose that you're planning a vacation and borrow $2,000 from a bank for one year at a stated annual interest rate of 14 percent,with interest prepaid (a discounted loan).Also,assume that the bank requires you to maintain a compensating balance equal to 20 percent of the initial loan value.What effective annual interest rate are you being charged?
A) 14.00%
B) 8.57%
C) 16.28%
D) 21.21%
E) 28.00%

Accepted Answer

Will receive $2,000.Face amount of loan = $2,000/(1 F1F1F1S1F1F1F10 0.14 F1F1F1S1F1F1F10 0.20)= $3,030.30.Discount interest = 0.14($3,030.30)= $424.24.Compensating balance = 0.20($3,030.30)= $606.06. 11ea42d0_c0af_353b_9abf_add1249c126e_TB2090_00 With a financial calculator,enter N = 1,PV = 2,000,PMT = 0,FV = and solve for I/YR = 21.21%.

Question 15

Which one of the following aspects of banks is considered most relevant to businesses when choosing a bank?
A) Competitive cost of services provided.
B) Size of the bank's deposits.
C) Experience of personnel.
D) Loyalty and willingness to assume lending risks.
E) Convenience of location.

Accepted Answer

The answer of Which one of the following aspects of...

Question 16

Cash discounts are mostly used to get new customers in the door since existing customers almost always use the delayed payment terms.

Accepted Answer

Cash discounts are actually more commonly used to incentivize existing customers to pay their invoices early, rather than to attract new customers. This allows businesses to improve their cash flow and reduce the amount of time they have to wait for payment.

Question 17

If sales are seasonal,the days sales outstanding will fluctuate from month to month,even if the amount of time customers take to pay remains unchanged.

Accepted Answer

Days sales outstanding (DSO) is a measure of the average number of days a company takes to collect payment after a sale has been made. If sales are seasonal, there will be fluctuations in the amount of sales made each month. This will impact the DSO even if the amount of time customers take to pay remains constant. For example, if a company has a busy season with high sales in one month, their DSO will increase even if the time it takes customers to pay remains unchanged. Conversely, during a slow season with lower sales, the DSO may decrease even if the time customers take to pay remains constant.

Question 18

Faircross Farms harvests its crops four times annually and receives payment for its crop 90 days after it is picked and shipped.However,planting,irrigating,and harvesting must be done on a nearly continual schedule.The firm uses 90-day bank notes to finance its operations.The firm arranges an 11 percent discount interest loan with a 20 percent compensating balance four times annually.What is the effective annual interest rate of these discount loans?
A) 11.00%
B) 15.94%
C) 11.46%
D) 13.75%
E) 12.72%

Accepted Answer

Assume firm needs $10,000.Face amount of loan = $10,000/(1 F1F1F1S1F1F1F10 0.11 F1F1F1S1F1F1F10 0.20)= $14,492.75.Discount interest = 0.11($14,492.75)= $1,594.20.Compensating balance = 0.20($14,492.75)= $2,898.55. 11ea42d0_c0af_5c4c_9abf_936851858dda_TB2090_00 With a financial calculator,enter N = 1,PV = 10,000,PMT = 0,FV = F1F1F1S1F1F1F1011,594.20,and solve for I/YR = 15.94%.

Question 19

A firm's credit policy consists of which of the following items?
A) Credit period, cash discounts, credit standards, collection policy.
B) Credit period, cash discounts, receivables monitoring, collection policy.
C) Cash discounts, credit standards, receivables monitoring, collection policy.
D) Credit period, receivables monitoring, credit standards, collection policy.
E) Credit period, cash discounts, credit standards, receivables monitoring.

Accepted Answer

A firm's credit policy typically includes the credit period (the length of time customers are given to pay their bills), cash discounts (reductions in price to encourage early payment), credit standards (criteria used to determine which customers are offered credit), and collection policy (procedures for collecting overdue accounts).

Question 20

The collection process,although sometimes difficult,is a fairly inexpensive component of doing business.

Accepted Answer

The collection process can actually be a significant cost to businesses, especially if they have to hire outside collection agencies or take legal action to collect unpaid debts.

Quiz 27: Providing and Obtaining Credit

DSO analysis of accounts receivable is the most robust way to see if customers are,on average,paying more slowly,because it is unaffected by seasonal changes in sales.

The collection process,although sometimes difficult,is also expensive in terms of out-of-pocket expenses.

When deciding whether to offer a discount for cash payment,a firm must balance the profits from additional sales with the lost revenues from the discount.

The percentage aging schedule of accounts receivable is the most robust way to see if customers are,on average,paying more slowly,because it is unaffected by seasonal changes in sales.

Gladys Turner borrowed $12,000 from the bank using a 10.19 percent "add-on",one-year installment loan,payable in four equal quarterly payments.What is the effective annual rate of interest?

The Arthos Group needs to borrow $200,000 from its bank.The bank has offered the company a 12-month installment loan (monthly payments) with 9 percent add-on interest.What is the effective annual rate (EAR) of this loan?

The uncollected balances schedule is constructed at the end of a quarter by dividing the dollar amount of remaining receivables from each month in that quarter by that month's sales.

Credit standards refer to the financial strength and importance of a potential customer to the firm required in order to qualify for credit.

Which of the following statements is most correct?

The primary reason to monitor aggregate accounts receivable is to see if customers,on average,are paying more slowly.

Which of the following is not correct for a firm with seasonal sales and customers who all pay promptly at the end of 30 days?

Which of the following is not correct?

The credit period is the amount of time it takes to do a credit search on a potential customer.

Which one of the following aspects of banks is considered most relevant to businesses when choosing a bank?

Cash discounts are mostly used to get new customers in the door since existing customers almost always use the delayed payment terms.

If sales are seasonal,the days sales outstanding will fluctuate from month to month,even if the amount of time customers take to pay remains unchanged.

A firm's credit policy consists of which of the following items?

The collection process,although sometimes difficult,is a fairly inexpensive component of doing business.