Question 1

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 2

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 expected profit, we need to multiply the probability of success (1 - probability of default) by the expected profit and subtract the probability of default multiplied by the amount of the order.

Expected profit = (1 - 0.2) x ($1,000 x 0.2) - (0.2 x $1,000) = $144

Since the expected profit is positive, the decision is to accept the credit.

Question 3

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

Postdating the invoice by several months is known as Season dating. The other options (COD, EOM, CBD) do not fit the scenario described.

Question 4

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 5

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

Accepted Answer

The answer of Which of the following terms of sale...

Question 6

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 7

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 10^th 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 answer of Which statement is true about terms of...

Question 8

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 five attributes help lenders determine a borrower's creditworthiness and ability to repay a loan. The other options refer to specific tools or methods used in assessing credit, but not the overarching categories of creditworthiness.

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 expected revenues equal expected costs. In this case, the expected revenues are $100,000 and the expected costs are $87,000. Therefore, the expected profit is $13,000. The break-even probability of collection can be calculated by dividing the expected costs by the expected revenues plus the expected costs: $87,000/($87,000+$100,000) = 0.465. Therefore, the break-even probability of collection is approximately 0.87 (or 87%). The best choice is B, as it provides the correct answer and explanation.

Question 10

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

To calculate the due date, we need to first calculate the effective interest rate with the cash discount:

Effective Interest Rate = [(1 + Implied Interest Rate) / (1 - Cash Discount Rate x (365 / Number of Days)] - 1

= [(1 + 0.2489) / (1 - 0.03 x (365 / 30))] - 1

= 0.2828 or 28.28%

Next, we can use the following formula to find the number of days until maturity:

Number of Days = 365 / Effective Interest Rate

= 365 / 0.2828

= 1293.05 days or about 50 days

Therefore, the due date is 50 days.

Question 11

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 12

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 answer of At what point does a customer's unpaid...

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 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

A longer payment period may discourage purchasers from paying with a discount because they may prefer to hold onto their cash for a longer period of time before making the payment. Lowering the discount percentage for a longer payment period may also reduce the motivation for purchasers to pay early.

Question 15

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 are Character, Capital, Capacity, Collateral, and Conditions. Charges do not fall under any of these categories.

Question 16

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 age of receivables has no direct impact on accounts payable, as that relates to money owed by the company to its suppliers or vendors. Therefore, a higher average age of receivables would not be expected to affect accounts payable. The other options (A, B, and D) could be impacted by a higher average age of receivables.

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

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. It is a written order from a seller (drawer) to a buyer (drawee) to pay a certain amount of money at a specific date in the future. The drawee accepts the draft by signing it, making it a legally binding payment obligation. The seller can then sell the draft to a third party for immediate cash, or hold onto it until the maturity date to receive payment.

Question 19

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 would not be a customary source of credit information on customers as it is primarily responsible for administering tax laws and providing services related to customs, rather than gathering information about individuals' credit history. The other options - Dun & Bradstreet, Credit Bureau, and Customer's bank are all commonly used sources of credit information.

Question 20

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 can be calculated as:
Break-even probability = 1 - (Profit margin/100)
= 1 - 0.4
= 0.6
Therefore, the break-even probability of collection for a firm with a 40% profit margin is 60%. The correct answer is option C.

Quiz 22: Credit Management and Collection

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

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%?

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?

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

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?

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

The Five C's of Credit refer to the:

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?

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?

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

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

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

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?

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.

An accepted time draft is quite similar to:

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

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