Question 1

At the optimal order quantity size,the:
A)total cost of holding inventory is fully offset by the restocking costs.
B)carrying costs are equal to zero.
C)restocking costs are equal to zero.
D)total costs equal the carrying costs.
E)carrying costs equal the restocking costs.

Accepted Answer

At the optimal order quantity size, the carrying costs (costs of holding inventory) are equal to the restocking costs (costs associated with ordering or producing more inventory). This balance minimizes the total inventory cost.

Question 2

Which one of the following inventory-related costs is considered a shortage cost?
A)storage costs
B)insurance cost
C)cost of safety reserves
D)obsolescence cost
E)opportunity cost of capital used for inventory purchases

Accepted Answer

The cost of safety reserves is considered a shortage cost as it is incurred to prevent stockouts and ensure that enough inventory is available for customers. When demand exceeds supply, a shortage cost is incurred as potential sales are lost and reputation may be damaged. Therefore, safety reserves are considered a necessary cost to prevent such shortages.

Question 3

The ABC approach to inventory management is based on the concept that:
A)inventory should arrive just in time to be used.
B)the inventory period should be constant for all inventory items.
C)basic inventory items that are essential to production and also inexpensive should be ordered in small quantities only.
D)a small percentage of the inventory items probably represents a large percentage of the inventory cost.
E)one-third of a year's inventory need should be on hand, another third should be on order, and the last third should not be ordered yet.

Accepted Answer

The ABC approach to inventory management assumes that a small percentage of inventory items probably represents a large percentage of the inventory cost. This is why the inventory items are categorized into three groups: A, B, and C based on their contribution to the overall cost of inventory. The A items are the most important and costliest, so they need to be closely monitored and managed. The B items are of medium importance and cost, while the C items are of low importance and cost. This allows the business to focus on the most critical inventory items and optimize their inventory management strategies accordingly.

Question 4

Which one of the following inventory items is probably the most liquid?
A)a custom made set of kitchen cabinets
B)metal cabinets for dishwashers
C)wheat stored in a grain silo
D)a customized drilling press
E)a partially built modular home

Accepted Answer

Wheat stored in a grain silo is the most liquid inventory item because it can be quickly and easily converted into cash on the commodity market. The other inventory items are more specialized and would only appeal to specific buyers, making them less liquid.

Question 5

Inventory needs under a derived-demand inventory system are:
A)primarily dependent upon the competitive demands placed on a firm's suppliers.
B)based on the anticipated demand for the finished product.
C)based on minimizing the cost of restocking inventory.
D)held constant over time.
E)determined by a kanban system.

Accepted Answer

Derived-demand inventory system relies on the anticipated demand for the finished product, meaning inventory needs are based on the demand for the product in the market. The demand for the product drives the demand for the parts and materials needed to produce it. Therefore, inventory needs are not primarily dependent upon the competitive demands placed on a firm's suppliers (A) and are not based on minimizing the cost of restocking inventory (C). Inventory needs under a derived-demand inventory system are not held constant over time (D) and are not determined by a kanban system (E).

Question 6

Which one of the five Cs of credit refers to a firm's financial reserves?
A)character
B)capacity
C)collateral
D)conditions
E)capital

Accepted Answer

The "capital" refers to a firm's financial reserves, which includes assets such as cash, equipment, and investments. These reserves act as a cushion against financial losses and demonstrate a firm's ability to repay its debts.

Question 7

Which one of the following statements is correct?
A)An aging schedule helps identify those customers who are the most delinquent.
B)The percentage of total receivables that falls within a certain time period on an aging schedule will remain constant over time even if the firm has seasonal sales.
C)Normally firms call their delinquent customers prior to sending them a past due letter.
D)A constant average collection period over a period of time is cause for concern.
E)It is common practice when a customer files for bankruptcy to sell that customer's receivable at face value.

Accepted Answer

An aging schedule is used to classify accounts receivable based on the length of time they have been outstanding. This helps identify the customers who are most delinquent and require immediate attention from the firm. Option B is incorrect because the percentage of total receivables that falls within a certain time period on an aging schedule can vary over time due to seasonal sales. Option C is incorrect because it is not always necessary for firms to call delinquent customers before sending a past due letter. Option D is incorrect because a constant average collection period may indicate efficient collection procedures rather than a cause for concern. Option E is incorrect because it is not a common practice to sell a bankrupt customer's receivable at face value.

Question 8

Which of the following are frequently used as sources of information when trying to ascertain the creditworthiness of a customer?
I.payment history with similar firms
II.credit reports
III.financial statements
IV.information provided by a bank
A)I and III only
B)II and IV only
C)I and II only
D)I, II, and III only
E)I, II, III, and IV

Accepted Answer

All four options (payment history with similar firms, credit reports, financial statements, and information provided by a bank) are commonly used sources to evaluate the creditworthiness of a customer. These sources provide comprehensive insights into a customer's financial behavior, reliability, and overall financial health.

Question 9

The Winter Store just purchased $48,300 of goods from its supplier with credit terms of 2/10,net 25.What is the discounted price?
A)$43,470
B)$46,209
C)$47,334
D)$47,929
E)$48,300

Accepted Answer

Discounted price = $48,300 × (1 - 0.02) = $47,334

Question 10

On average,your firm sells $38,700 of items on credit each day.The firm's average operating cycle is 49 days and it acquires and sells inventory,on average,every 17 days.What is the average accounts receivable balance?
A)$657,900
B)$848,000
C)$1,238,400
D)$1,315,500
E)$1,896,300

Accepted Answer

Accounts receivable balance = $38,700 × (49 - 17) = $1,238,400

Question 11

The incremental investment in receivables under the accounts receivable approach is equal to:
A)P - vQ′.
B)PQ′.
C)PQ + v(Q′ - Q).
D)P(Q′ - Q).
E)PQ(Q′ - Q).

Accepted Answer

The answer of The incremental investment in receivables under the...

Question 12

The EOQ model is designed to determine how much:
A)total inventory a firm needs in any one year.
B)total inventory costs will be for any one given year.
C)inventory should be purchased at a time.
D)inventory will be sold per day.
E)a firm loses in sales per day when an inventory item is depleted.

Accepted Answer

The EOQ model (economic order quantity) is specifically designed to determine the optimal quantity of inventory to reorder at one time, based on factors such as demand, lead time, and ordering costs. It aims to balance the costs of holding too much inventory with the costs of running out of inventory, in order to minimize overall inventory costs. Therefore, choice C is the correct answer.

Question 13

When evaluating the creditworthiness of a customer,the term character refers to the:
A)nature of the cash flows of the customer's business.
B)customer's financial resources.
C)types of assets the customer wants to pledge as collateral.
D)customer's willingness to pay bills in a timely fashion.
E)nature of the customer's line of work.

Accepted Answer

The term character refers to the customer's willingness to pay bills in a timely fashion. It is important to evaluate a customer's payment history and reliability to determine if they are creditworthy.

Question 14

The EOQ model is designed to minimize:
A)production costs.
B)inventory obsolescence.
C)the carrying costs of inventory.
D)the costs of replenishing inventory.
E)the total costs of holding inventory.

Accepted Answer

The answer of The EOQ model is designed to minimize:
A)production...

Question 15

A just-in-time inventory system:
I.when implemented properly reduces the cost of inventory to zero.
II.increases the inventory turnover rate.
III.is sufficient to handle immediate production needs.
IV.minimizes the costs of holding inventory.
A)I and III only
B)II and IV only
C)I, II, and IV only
D)II, III, and IV only
E)I, II, III, and IV

Accepted Answer

The answer of A just-in-time inventory system:
I.when implemented properly reduces...

Question 16

Which one of the five Cs of credit refers to the general economic situation in the customer's line of business?
A)capacity
B)character
C)conditions
D)capital
E)collateral

Accepted Answer

"Conditions" refers to the general economic situation in the customer's line of business, including factors like interest rates, inflation, and industry trends. This is different from "capacity," which refers to the customer's ability to repay the loan based on their income and expenses, and "capital," which refers to their financial reserves and assets. "Character" refers to the customer's credit history and reputation, and "collateral" refers to any assets pledged as security for the loan.

Question 17

Which one of the following inventory items is probably the least liquid?
A)plywood held in inventory by a home builder
B)a wheel barrow held in inventory by a garden center
C)a partially assembled interior for a new vehicle
D)a set of tires owned by an automobile manufacturer
E)a toy owned by a retail toy store

Accepted Answer

A partially assembled interior for a new vehicle is the least liquid inventory item as it requires specific customization and cannot easily be sold to another company or individual. The other items listed can be sold more easily to a wider range of buyers.

Question 18

Which two of the following are the key elements in determining whether or not a switch from a no-credit policy to a credit policy is advisable?
I.variable cost per unit
II.cash discount percentage
III.credit price
IV.default rate
A)I and III only
B)II and IV only
C)II and III only
D)I and IV only
E)III and IV only

Accepted Answer

The answer of Which two of the following are the...

Question 19

The accounts receivable approach to credit policy supports the theory that:
A)a firm's risk of offering credit to a new customer is limited to the variable cost of the sold items.
B)the best credit policy is an all-cash policy.
C)the cost of offering credit to a new customer is the same as the cost of offering credit to an existing customer.
D)foregoing cash discounts is a method of obtaining inexpensive short-term financing.
E)the default risk of a credit policy is the same as the default risk under an all cash-policy if your customers remain the same.

Accepted Answer

The answer of The accounts receivable approach to credit policy...

Question 20

Which one of the following items is most likely a derived-demand inventory item?
A)cereal ready to be bagged and shipped to stores
B)tires held in inventory by an auto maker
C)shoes on display in a retail store
D)toys ready to be shipped to toy stores
E)wheat harvested by a farmer

Accepted Answer

Tires held in inventory by an auto maker are most likely a derived-demand inventory item, as they are used to produce a final good (vehicles) that consumers demand. Cereal, shoes, toys, and wheat are all final goods themselves and not typically used in the production of other goods.

Quiz 20: Credit and Inventory Management

At the optimal order quantity size,the:

Which one of the following inventory-related costs is considered a shortage cost?

The ABC approach to inventory management is based on the concept that:

Which one of the following inventory items is probably the most liquid?

Inventory needs under a derived-demand inventory system are:

Which one of the five Cs of credit refers to a firm's financial reserves?

Which one of the following statements is correct?

Which of the following are frequently used as sources of information when trying to ascertain the creditworthiness of a customer? I.payment history with similar firms II.credit reports III.financial statements IV.information provided by a bank

The Winter Store just purchased $48,300 of goods from its supplier with credit terms of 2/10,net 25.What is the discounted price?

On average,your firm sells $38,700 of items on credit each day.The firm's average operating cycle is 49 days and it acquires and sells inventory,on average,every 17 days.What is the average accounts receivable balance?

The incremental investment in receivables under the accounts receivable approach is equal to:

The EOQ model is designed to determine how much:

When evaluating the creditworthiness of a customer,the term character refers to the:

The EOQ model is designed to minimize:

A just-in-time inventory system: I.when implemented properly reduces the cost of inventory to zero. II.increases the inventory turnover rate. III.is sufficient to handle immediate production needs. IV.minimizes the costs of holding inventory.

Which one of the five Cs of credit refers to the general economic situation in the customer's line of business?

Which one of the following inventory items is probably the least liquid?

Which two of the following are the key elements in determining whether or not a switch from a no-credit policy to a credit policy is advisable? I.variable cost per unit II.cash discount percentage III.credit price IV.default rate

The accounts receivable approach to credit policy supports the theory that:

Which one of the following items is most likely a derived-demand inventory item?