Question 1

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 is based on the concept that a small percentage of the inventory items probably represents a large percentage of the inventory cost. This means that special attention should be given to the management of the high-value items, rather than treating all inventory items equally. The approach involves categorizing inventory items based on their value and focusing on managing the high-value items more closely. This can help to reduce inventory costs and improve overall efficiency.

Question 2

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 3

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 4

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 accounts receivable approach to credit policy suggests that the risk of offering credit is limited to the variable cost of the items sold, as fixed costs are already incurred regardless of the sale.

Question 5

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 because they are not sold directly to consumers but are used as a component in the production of automobiles, which are the final product demanded by consumers.

Question 6

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. It includes factors such as market trends, competition, and government regulations that can impact the customer's ability to repay the loan.

Question 7

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 incremental investment in receivables under the accounts receivable approach is equal to the change in the level of receivables multiplied by the cost of carrying the receivables. The change in the level of receivables is equal to the difference between the new level of receivables (PQ′) and the old level of receivables (PQ). The cost of carrying the receivables is equal to the interest rate (v) multiplied by the average level of receivables. The average level of receivables is equal to the average of the new and old levels of receivables, which is (PQ′ + PQ)/2. Therefore, the incremental investment in receivables is equal to v(PQ′ + PQ)/2.

Question 8

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 as it can be sold easily in the market and converted into cash quickly. Other items mentioned in the options are either customized, partially built or specific to a particular use, making them less liquid.

Question 9

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

A just-in-time inventory system is designed to minimize the costs of holding inventory by reducing the amount of inventory on hand. This is achieved by implementing a system that ensures that inventory is delivered to the production line just in time to be used. As a result, the inventory turnover rate is increased and the cost of inventory is reduced.

Question 10

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

Shortage cost refers to the cost of losing sales or customer loyalty due to inadequate or out-of-stock inventory. The cost of safety reserves falls under this category as it is the cost of holding inventory to ensure that enough inventory is available to meet demand and prevent stockouts.

Question 11

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 term "capital" refers to a company's or individual's financial reserves, which are considered as a factor in assessing creditworthiness. Therefore, E) capital is the correct answer. A) character refers to an individual's or firm's credit history or reputation. B) capacity refers to an individual's or firm's ability to repay debts based on income and expenses. C) collateral refers to an asset pledged as security for a loan. D) conditions refer to the overall situation or environment in which the loan will be paid back.

Question 12

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 a report that categorizes a company's accounts receivable according to the length of time an invoice has been outstanding. By categorizing these accounts, the company can identify its most overdue accounts and prioritize its collection efforts towards those accounts. Therefore, option A is correct.

B is incorrect because the percentage of total receivables that falls within a certain time period on an aging schedule will change over time as more invoices become overdue.

C is incorrect because firms do not usually call their delinquent customers prior to sending a past due letter. Instead, they send a statement or past due notice as a reminder to the customer.

D is incorrect because a constant average collection period over a period of time indicates that the company is managing its accounts receivable effectively.

E is incorrect because it is not common practice to sell a bankrupt customer's receivable at face value. In fact, once a customer files for bankruptcy, the company may have to write off the receivable as a bad debt.

Question 13

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 14

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

Character refers to the customer's willingness to pay bills in a timely fashion, which is a reflection of their reliability and trustworthiness. It is an important factor in evaluating creditworthiness as it indicates the likelihood of the customer fulfilling their financial obligations.

Question 15

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 16

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 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 probably the least liquid since it requires specific machinery and production processes to complete the assembly, making it difficult to sell quickly. The other items mentioned in the options are relatively more liquid, with less specialized equipment required to sell or dispose of them.

Question 18

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 designed to determine the optimal quantity of inventory that should be ordered/purchased at any given time to minimize inventory carrying costs and ordering costs. Therefore, the correct answer is C - inventory should be purchased at a time.

Question 19

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 20

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

Under a derived-demand inventory system, inventory needs are based on the anticipated demand for the finished product. This means that inventory levels are dependent on the level of demand for the end product that the inventory is intended to support. The inventory levels need to be high enough to meet the demand for the finished product, but not so high that they lead to unnecessary costs associated with restocking inventory. The competitive demands placed on a firm's suppliers may impact inventory levels in some cases, but this is not the primary consideration under a derived-demand inventory system. Kanban systems can be used to manage inventory levels, but they are not the only method used in a derived-demand inventory system.

Quiz 20: Credit and Inventory Management

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

At the optimal order quantity size,the:

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?

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?

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

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

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

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 following inventory-related costs is considered a shortage cost?

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

Which one of the following statements is correct?

The EOQ model is designed to minimize:

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

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

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?

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

The EOQ model is designed to determine how much:

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

Inventory needs under a derived-demand inventory system are: