Question 1

Edgeworth Heating is selling a commercial heating unit at the price of £100,000 per unit.The variable cost of producing this unit is £75,000.Edgeworth is considering offering credit terms to their customers,which would allow payment to be delayed one month.Edgeworth predicts that offering these terms will increase monthly sales from 50 units to 60 units.Edgeworth does not expect the increased production to change variable cost and Edgeworth does not expect to charge a higher price.The default rate on credit customers is predicted to be 2.25%.Which of the following statements is true?

Accepted Answer

The answer of Edgeworth Heating is selling a commercial heating...

Question 2

The net credit period for a company with terms of 3/10,net 60 is:

Accepted Answer

The answer of The net credit period for a company...

Question 3

Lory Corporation has variable cost per unit of £.35 per £1 of sales.The firm offers a 2% discount for orders paid within 15 days if the customer increases their order size by 5%.A customer normally orders £75,000,and is considering the discount.Normally,the customer pays within 30 days with no discount.Lory 's cost of debt capital is 12%.Would Lory be wise to offer the discount?
 Calculate the NPV of the decision.

Accepted Answer

The answer of Lory Corporation has variable cost per unit...

Question 4

The carrying value of its account receivable is £700,000 and the average collection period is 45 days.The firm's credit sales per day are:

Accepted Answer

The average collection period is calculated as the carrying value of accounts receivable divided by the credit sales per day. Therefore, credit sales per day = £700,000 / 45 days = £15,555.56.

Question 5

Rockwell Heating is selling a commercial heating unit at the price of £100,000 per unit.The variable cost of producing this unit is £75,000.Rockwell is considering offering credit terms to their customers,which would allow payment to be delayed one month.Rockwell predicts that offering these terms will increase monthly sales from 50 units to 60 units.Rockwell does not expect the increased production to change variable cost and Rockwell does not expect to charge a higher price.The appropriate discount rate is 1% a month.Determine the probability of payment that would make Rockwell indifferent between granting credit and the present policy.

Accepted Answer

The answer of Rockwell Heating is selling a commercial heating...

Question 6

Delta Distributors has an investment in trade receivables of £2,750,000.Daily credit sales are £118,280.If 30% of Delta's credit customers receive a discount by paying within 10 days,what is the net period that Delta maintains?

Accepted Answer

The answer of Delta Distributors has an investment in trade...

Question 7

The credit decision usually includes riskier customers.The credit decision should adjust for this by:

Accepted Answer

When dealing with riskier customers, the credit decision should adjust for this by determining the probability that the customers will pay and reducing the expected cash flow accordingly. This will help to mitigate potential losses and ensure that the credit decision is appropriate given the level of risk involved. Discounting the cash flows at a lower or higher rate, delaying collections, or speeding up deliveries are not necessarily effective ways to address the increased risk associated with these customers.

Question 8

The Ault Company made a credit sale of £15,000.The invoice was sent today with the terms,3/15 net 60.This customer normally pays at the net date.If your opportunity cost of funds is 9% the expected payment is worth how much today?

Accepted Answer

Using the terms 3/15 net 60, the customer receives a 3% discount if they pay within 15 days. This means they would only pay 97% of the $15,000, or $14,550 if they take the discount. If they do not take the discount, they would pay the full $15,000 within 60 days. 
To calculate the present value of the expected payment, we need to use the formula: 
PV = FV / (1 + r)^n 
PV = Present Value 
FV = Future Value 
r = interest rate 
n = number of periods

In this case, FV is either $14,550 (if the customer takes the discount) or $15,000 (if the customer does not take the discount). The interest rate, or opportunity cost of funds, is 9%. The number of periods is either 15 days (if the customer takes the discount) or 60 days (if the customer does not take the discount).

If the customer takes the discount: 
PV = $14,550 / (1 + 0.09/365)^15 
PV ≈ $14,789

If the customer does not take the discount: 
PV = $15,000 / (1 + 0.09/365)^60 
PV ≈ $13,761

Therefore, the expected payment is worth $14,789 today if the customer takes the discount, and $13,761 today if the customer does not take the discount. The best choice is B, since it represents the expected payment if the customer takes the discount, which is the most likely scenario based on the information given.

Question 9

Aggie Corporation has been asked by its customers to grant them a 2% discount if they pay their bill within 15 days.The purchase size of the average order is £75,000.Normally,the customer pays within 30 days with no discount.Aggie 's cost of debt capital is 12%.Should the request be granted?

Accepted Answer

The answer of Aggie Corporation has been asked by its...

Question 10

Businesses in deciding to extend credit to new customers try to reduce defaults by:

Accepted Answer

Businesses can reduce defaults by determining the probability of non-payment through analyzing the customer's financial history, gathering independent credit checks to verify the customer's creditworthiness, and determining if it is profitable to extend credit based on the customer's financial stability and history. Therefore, all of the above methods can help businesses reduce the risk of defaults.

Question 11

Which of the following statements is not true?

Accepted Answer

An aging schedule shows all accounts receivable, not just overdue accounts.

Question 12

Collegiate Tuxedo rents apparel throughout the year.They have experienced non-payment by about 15% of their customers with an average loss of £200.Collegiate wants to stem their losses by using an instant electronic credit check on the customer.These checks will cost them £7 on each of the 1,000 customers.The opportunity cost is 1.5% for the credit period.Should they pursue the credit check?

Accepted Answer

Without credit check:
Expected loss = 15%*£200*1,000 = £30,000
With credit check:
Revenue from customers who pass credit check = 85%*1,000 = £85,000
Cost of credit check = £7*1,000 = £7,000
Opportunity cost of credit period = 1.5%*£85,000 = £1,275
Net gain = £85,000 - £30,000 - £7,000 - £1,275 = £46,725
Therefore, Collegiate should pursue the credit check as it results in a net gain of £23,000.

Question 13

Companies will frequently use information from which of the following sources when conducting their credit analysis?

Accepted Answer

Companies conducting credit analysis will typically use information from various sources including financial statements provided by the customer, payment history from other firms, and payment history from banks. Therefore, all of the above sources are commonly used in credit analysis.

Question 14

The decision to grant credit does not depend on:

Accepted Answer

All of the given factors (delayed revenues, immediate costs, probability of payment, and required rate of return) are considered in the decision to grant credit.

Question 15

Delta Distributors has total credit sales of £2,750,000 for the year.Delta's credit sales represent 75% of total sales.What are total sales?

Accepted Answer

We can use the formula:
Total sales = Credit sales / % of credit sales
So, Total sales = £2,750,000 / 0.75 = £3,666,667. Therefore, the answer is D.

Question 16

Aging schedules are flawed because they:

Accepted Answer

While aging schedules do provide a picture of the overall age of accounts, they do not provide specific information about individual customers, and the percentage of accounts that are past due can be misleading. Additionally, the periodic or yearly average can mask individual outliers, making it difficult to identify and address potential problem areas.

Question 17

Which of the following statements is true?

Accepted Answer

The answer of Which of the following statements is true?
...

Question 18

Delta Distributors has an investment in trade receivables of £2,750,000.Daily credit sales are £118,280.If 30% of Delta's credit customers receive a discount by paying within 10 days and the remainder of Delta's customers pay in 40 days,what is the net period that Delta maintains?

Accepted Answer

The net period is calculated as a weighted average of the payment periods: (30% * 10 days) + (70% * 40 days) = 3 + 28 = 31 days.

Question 19

If 25% of the customers pay on day 10 and 75% pay on day 30,the average collection period is:

Accepted Answer

We can use the weighted average formula to calculate the average collection period:

(25% * 10 days) + (75% * 30 days) = 7.5 + 22.5 = 30 days

Therefore, the average collection period is 30 days.

Question 20

To collect on the trade receivables due to the firm,a firm can:

Accepted Answer

To collect on trade receivables, a firm can use a combination of strategies, including sending delinquency letters, making personal contact by telephone, employing a collection agency, and taking legal action, as needed. By using all available methods, the firm increases the likelihood of collecting the amount due, while minimizing the impact on customer relationships. Therefore, the best choice is to use all the options available.

Quiz 28: Credit Management