Question 1

Table 15.6
A breakdown of Teffan, Inc.'s outstanding accounts receivable dated June 30, 2014 on the basis of the month in which the credit sale was initially made follows. The firm extends 30-day credit terms. 
-A decrease in collection efforts by a firm will result in ________ in sales volume, ________ in the investment in accounts receivable, ________ in bad debt expenses, and ________ in collection expenditures.

Accepted Answer

A decrease in collection efforts typically leads to an increase in sales volume because less stringent credit policies can attract more customers. However, this also results in an increase in the investment in accounts receivable, as more sales on credit lead to higher outstanding receivables. Bad debt expenses are likely to increase because with less emphasis on collections, the likelihood of defaults rises. Collection expenditures decrease because the firm is putting less effort and resources into collecting outstanding debts.

Question 2

Which of the following is true of changes in cash discount period?

Accepted Answer

If a firm increases its cash discount period, it provides customers with more time to pay, which could result in increased sales. However, this may also result in a higher likelihood of bad debts as customers may take longer to pay or default altogether. Additionally, the profit per unit may decrease as the firm may offer a higher discount for customers who pay within the new, longer discount period. Conversely, if a firm decreases its cash discount period, customers will have less time to pay and may be more likely to pay on time, resulting in lower bad debts. Additionally, the firm may be able to offer lower discounts for early payment, resulting in a higher profit per unit. However, this shorter discount period may result in decreased sales as customers may not be as incentivized to make early payments.

Question 3

If the cash discount period is increased, a firm's investment in accounts receivable is expected to ________.

Accepted Answer

The answer of If the cash discount period is increased,...

Question 4

Table 15.7
Fizzy Animators, Inc. currently makes all sales on credit and offers no cash discount. The firm is considering a 3 percent cash discount for payment within 10 days. The firm's current average collection period is 90 days, sales are 400 films per year, selling price is $25,000 per film, variable cost per film is $18,750, and the average cost per film is $21,000. The firm expects that the change in credit terms will result in a minor increase in sales of 10 films per year, that 75 percent of the sales will take the discount, and the average collection period will drop to 30 days. The firm's bad debt expense is expected to become negligible under the proposed plan. The bad debt expense is currently 0.5 percent of sales. The firm's required return on equal-risk investments is 20 percent. (Assume a 360-day year.)
-What is the cost of marginal investment in accounts receivable under the proposed plan? (See Table 15.7)

Accepted Answer

The cost of the marginal investment in accounts receivable under the proposed plan can be calculated by finding the difference in the investment in accounts receivable before and after the proposed changes. Initially, the investment in accounts receivable (A/R) is based on the average collection period of 90 days, with sales of 400 films at $25,000 each, leading to an annual sales volume of $10,000,000. The initial A/R investment is ($10,000,000/360) * 90 = $2,500,000. After the proposed changes, sales increase to 410 films, with 75% taking the discount, leading to discounted sales of $9,862,500 (310 films at $25,000 each with a 3% discount) and full-price sales of $2,500,000 (100 films at $25,000 each). The new average collection period is 30 days, so the new A/R investment is (($9,862,500 + $2,500,000)/360) * 30 = $1,025,000. The cost of the marginal investment in A/R is the difference between the initial and new A/R investments: $2,500,000 - $1,025,000 = $1,475,000. However, since none of the provided options match this calculation, it appears there may have been a misunderstanding in the calculation process or an error in the provided options. The correct approach involves calculating the average investment in accounts receivable before and after the proposed changes, considering the impact of the discount on sales volume and the average collection period.

Question 5

Table 15.6
A breakdown of Teffan, Inc.'s outstanding accounts receivable dated June 30, 2014 on the basis of the month in which the credit sale was initially made follows. The firm extends 30-day credit terms. 
-An increase in collection efforts by a firm will result in ________ in sales volume, ________ in the investment in accounts receivable, ________ in bad debt expenses, and ________ in collection expenditures.

Accepted Answer

An increase in collection efforts typically leads to a decrease in sales volume as stricter credit policies may deter some customers. It also decreases the investment in accounts receivable as collections are more efficient. Bad debt expenses decrease due to better collection, while collection expenditures increase due to the additional efforts.

Question 6

If a firm's credit period is increased, the sales volume can be expected to ________, the investment in accounts receivable can be expected to ________, and the bad debt expenses can be expected to ________.

Accepted Answer

Increasing a firm's credit period typically leads to an increase in sales volume as more customers are attracted by the more lenient payment terms. This also results in an increase in investment in accounts receivable because the firm has to wait longer to receive payments. Additionally, with longer credit periods, the risk of non-payment or late payment increases, leading to an increase in bad debt expenses.

Question 7

When a firm initiates or increases a cash discount, sales are expected to ________, the investment in accounts receivable is expected to ________, the bad debt expense is expected to ________, and the profit per unit is expected to ________.

Accepted Answer

When a firm initiates or increases a cash discount, sales are expected to increase due to the incentive for customers to buy more. The investment in accounts receivable is expected to decrease because customers are encouraged to pay earlier, reducing the amount of outstanding receivables. The bad debt expense is expected to decrease as well, since earlier payments reduce the risk of defaults. Finally, the profit per unit is expected to decrease because the cash discount reduces the amount of revenue received per unit sold.

Question 8

Table 15.7
Fizzy Animators, Inc. currently makes all sales on credit and offers no cash discount. The firm is considering a 3 percent cash discount for payment within 10 days. The firm's current average collection period is 90 days, sales are 400 films per year, selling price is $25,000 per film, variable cost per film is $18,750, and the average cost per film is $21,000. The firm expects that the change in credit terms will result in a minor increase in sales of 10 films per year, that 75 percent of the sales will take the discount, and the average collection period will drop to 30 days. The firm's bad debt expense is expected to become negligible under the proposed plan. The bad debt expense is currently 0.5 percent of sales. The firm's required return on equal-risk investments is 20 percent. (Assume a 360-day year.)
-What is the firm's marginal profit contribution from sales under the proposed plan of initiating the cash discount? (See Table 15.7)

Accepted Answer

Marginal profit contribution from sales under the proposed plan can be calculated as follows: Increase in sales = 10 films per year Selling price per film = $25,000 Variable cost per film = $18,750 Marginal profit per film = Selling price - Variable cost = $25,000 - $18,750 = $6,250 Total marginal profit = Marginal profit per film * Increase in sales = $6,250 * 10 = $62,500.

Question 9

Table 15.6
A breakdown of Teffan, Inc.'s outstanding accounts receivable dated June 30, 2014 on the basis of the month in which the credit sale was initially made follows. The firm extends 30-day credit terms. 
-An evaluation of the firm's collection efforts based on the aging schedule would suggest ________. (See Table 15.6)

Accepted Answer

The aging schedule shows that a significant portion of the firm's accounts receivable are overdue, indicating poor credit management.

Question 10

If the cash discount period is increased, a firm's investment in accounts receivable is expected to ________.

Accepted Answer

If the cash discount period is increased, it will encourage more customers to take advantage of the discount, resulting in fewer outstanding accounts receivable. Non-discount takers are likely to pay earlier to take advantage of the cash discount, reducing the firm's investment in accounts receivable. However, the other options do not represent the likely outcome of increasing the cash discount period.

Question 11

Which of the following is true of cash discount?

Accepted Answer

Cash discounts are offered to encourage early payment, thus speeding up collections without pressuring customers.

Question 12

Table 15.7
Fizzy Animators, Inc. currently makes all sales on credit and offers no cash discount. The firm is considering a 3 percent cash discount for payment within 10 days. The firm's current average collection period is 90 days, sales are 400 films per year, selling price is $25,000 per film, variable cost per film is $18,750, and the average cost per film is $21,000. The firm expects that the change in credit terms will result in a minor increase in sales of 10 films per year, that 75 percent of the sales will take the discount, and the average collection period will drop to 30 days. The firm's bad debt expense is expected to become negligible under the proposed plan. The bad debt expense is currently 0.5 percent of sales. The firm's required return on equal-risk investments is 20 percent. (Assume a 360-day year.)
-What is the marginal investment in accounts receivable under the proposed plan? (See Table 15.7)

Accepted Answer

The marginal investment in accounts receivable is calculated by comparing the accounts receivable under the current and proposed plans. Under the current plan, the accounts receivable is calculated as (400 films * $25,000 * 90/360). Under the proposed plan, it is (410 films * $25,000 * 30/360). The difference gives the marginal investment.

Question 13

Table 15.6
A breakdown of Teffan, Inc.'s outstanding accounts receivable dated June 30, 2014 on the basis of the month in which the credit sale was initially made follows. The firm extends 30-day credit terms. 
-Accounts receivable over 90 days total ________. (See Table 15.6)

Accepted Answer

The answer of Table 15.6
A breakdown of Teffan, Inc.'s outstanding...

Question 14

If a firm's credit period is decreased, the sales volume can be expected to ________, the investment in accounts receivable can be expected to ________, and the bad debt expenses can be expected to ________.

Accepted Answer

Decreasing a firm's credit period typically leads to a decrease in sales volume as customers have less time to pay, a decrease in investment in accounts receivable as funds are collected more quickly, and a decrease in bad debt expenses as stricter credit terms often lead to fewer defaults.

Question 15

When a firm decreases or cancels a cash discount, sales are expected to ________, the investment in accounts receivable is expected to ________, the bad debt expense is expected to ________, and the profit per unit is expected to ________.

Accepted Answer

When a firm decreases or cancels a cash discount, sales are expected to decrease because the incentive for early payment is reduced. The investment in accounts receivable is expected to increase as more customers take longer to pay. The bad debt expense is expected to increase because with longer payment terms, there's a higher risk of defaults. The profit per unit is expected to increase because the firm is no longer offering a discount, thus maintaining a higher margin on sales.

Question 16

Table 15.7
Fizzy Animators, Inc. currently makes all sales on credit and offers no cash discount. The firm is considering a 3 percent cash discount for payment within 10 days. The firm's current average collection period is 90 days, sales are 400 films per year, selling price is $25,000 per film, variable cost per film is $18,750, and the average cost per film is $21,000. The firm expects that the change in credit terms will result in a minor increase in sales of 10 films per year, that 75 percent of the sales will take the discount, and the average collection period will drop to 30 days. The firm's bad debt expense is expected to become negligible under the proposed plan. The bad debt expense is currently 0.5 percent of sales. The firm's required return on equal-risk investments is 20 percent. (Assume a 360-day year.)
-What are the savings of marginal bad debts under the proposed plan? (See Table 15.7)

Accepted Answer

The answer of Table 15.7
Fizzy Animators, Inc. currently makes all...

Question 17

Table 15.7
Fizzy Animators, Inc. currently makes all sales on credit and offers no cash discount. The firm is considering a 3 percent cash discount for payment within 10 days. The firm's current average collection period is 90 days, sales are 400 films per year, selling price is $25,000 per film, variable cost per film is $18,750, and the average cost per film is $21,000. The firm expects that the change in credit terms will result in a minor increase in sales of 10 films per year, that 75 percent of the sales will take the discount, and the average collection period will drop to 30 days. The firm's bad debt expense is expected to become negligible under the proposed plan. The bad debt expense is currently 0.5 percent of sales. The firm's required return on equal-risk investments is 20 percent. (Assume a 360-day year.)
-What is the cost of the marginal cash discount? (See Table 15.7)

Accepted Answer

The answer of Table 15.7
Fizzy Animators, Inc. currently makes all...

Question 18

Table 15.7
Fizzy Animators, Inc. currently makes all sales on credit and offers no cash discount. The firm is considering a 3 percent cash discount for payment within 10 days. The firm's current average collection period is 90 days, sales are 400 films per year, selling price is $25,000 per film, variable cost per film is $18,750, and the average cost per film is $21,000. The firm expects that the change in credit terms will result in a minor increase in sales of 10 films per year, that 75 percent of the sales will take the discount, and the average collection period will drop to 30 days. The firm's bad debt expense is expected to become negligible under the proposed plan. The bad debt expense is currently 0.5 percent of sales. The firm's required return on equal-risk investments is 20 percent. (Assume a 360-day year.)
-What is the net result of increasing the cash discount? (See Table 15.7)

Accepted Answer

The answer of Table 15.7
Fizzy Animators, Inc. currently makes all...

Question 19

Which of the following is true of changes in cash discount period?

Accepted Answer

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

Question 20

Table 15.6
A breakdown of Teffan, Inc.'s outstanding accounts receivable dated June 30, 2014 on the basis of the month in which the credit sale was initially made follows. The firm extends 30-day credit terms. 
-An increase in accounts receivable turnover for a firm due to an increase in collection efforts will ________.

Accepted Answer

An increase in accounts receivable turnover indicates that a company is collecting its receivables more quickly. This efficiency reduces the need for additional investments in accounts receivable, as funds are being recovered faster and can be used for other purposes.

Quiz 15: Working Capital and Current Assets Management

Which of the following is true of changes in cash discount period?

If the cash discount period is increased, a firm's investment in accounts receivable is expected to ________.

If a firm's credit period is increased, the sales volume can be expected to , the investment in accounts receivable can be expected to , and the bad debt expenses can be expected to .

When a firm initiates or increases a cash discount, sales are expected to , the investment in accounts receivable is expected to , the bad debt expense is expected to , and the profit per unit is expected to .

If the cash discount period is increased, a firm's investment in accounts receivable is expected to ________.

Which of the following is true of cash discount?

Table 15.6 A breakdown of Teffan, Inc.'s outstanding accounts receivable dated June 30, 2014 on the basis of the month in which the credit sale was initially made follows. The firm extends 30-day credit terms. -Accounts receivable over 90 days total ________. (See Table 15.6)

If a firm's credit period is decreased, the sales volume can be expected to , the investment in accounts receivable can be expected to , and the bad debt expenses can be expected to .

When a firm decreases or cancels a cash discount, sales are expected to , the investment in accounts receivable is expected to , the bad debt expense is expected to , and the profit per unit is expected to .

Which of the following is true of changes in cash discount period?