Question 1

The turnover of accounts receivable can be calculated by dividing 365 days by average collection period.

Accepted Answer

The turnover of accounts receivable is calculated by dividing the number of days in a year (365) by the average collection period, not the other way around.

Question 2

The average investment of a firm in accounts receivable is equal to the firm's total variable cost of annual sales divided by its average collection period.

Accepted Answer

The average investment in accounts receivable is typically calculated as the firm's annual credit sales divided by 365 days, then multiplied by the average collection period. It is not directly related to the firm's total variable cost of annual sales.

Question 3

The cost of marginal investment in accounts receivable can be calculated by finding the difference between the average investment in accounts receivable before and after the introduction of the changes in credit standards.

Accepted Answer

The cost of marginal investment in accounts receivable is calculated by considering the additional investment in accounts receivable due to changes in credit policies, not just the difference in average investment before and after these changes. It involves assessing the incremental costs associated with the additional accounts receivable, including factors like the cost of additional financing and potential bad debt expenses.

Question 4

________ is a procedure resulting in a number reflecting an applicant's credit strength,derived as a weighted average of the scores obtained on a variety of key financial and credit characteristics.
A) Credit scoring
B) Aging of receivables
C) CAPM
D) The economic order quantity model

Accepted Answer

The procedure described in the question is credit scoring.

Question 5

In analyzing an applicant's creditworthiness,a credit manager typically gives primary attention to two of the five C's of credit-collateral and condition-since they represent the most basic requirements for extending credit to an applicant.

Accepted Answer

The two primary C's of credit that a credit manager gives attention to are character and capacity, not collateral and condition. Collateral and condition may be considered, but they are not the most basic requirements.

Question 6

________ are established to evaluate a customer's creditworthiness and to determine the minimum requirements for extending credit to a customer.
A) Lines of credit
B) Credit limits
C) Collection agencies
D) Credit standards

Accepted Answer

Credit standards are established to evaluate a customer's creditworthiness and to determine the minimum requirements for extending credit to a customer. Lines of credit refer to the maximum amount of credit that a customer is allowed to access, while credit limits refer to the maximum amount of credit that a customer is allowed to owe at any given time. Collection agencies are third-party companies hired to collect overdue debts from customers.

Question 7

If a firm relaxes its credit standards,the volume of accounts receivable increases and so does the firm's carrying cost.

Accepted Answer

When a firm relaxes its credit standards, it allows more customers to purchase on credit, which increases the volume of accounts receivable. However, this also increases the risk of non-payment and requires the firm to carry a higher level of inventory, which increases the firm's carrying cost.

Question 8

The key dimension of credit selection which analyzes an applicant's ability to repay the requested credit focused on cash flows available is ________.
A) collateral
B) capital
C) conditions
D) capacity

Accepted Answer

Capacity refers to the borrower's ability to repay the loan, which is primarily assessed by analyzing their cash flows available. Collateral, capital, and conditions are also important dimensions of credit selection, but they do not directly assess the borrower's ability to repay the requested credit.

Question 9

A relaxation of credit standards is expected to affect profits positively due to lower carrying costs,whereas tightening credit standards would affect profits negatively as a result of higher carrying costs.

Accepted Answer

Relaxation of credit standards can lead to higher sales and potentially higher profits due to increased customer base, but it also increases the risk of bad debts and carrying costs due to extended credit terms. Tightening credit standards might reduce sales volume but can lead to lower carrying costs and bad debt expenses, potentially stabilizing or improving profits.

Question 10

The cost of marginal bad debts is found by multiplying a firm's opportunity cost by the difference between the level of bad debts before and after the relaxation of credit standards.

Accepted Answer

The cost of marginal bad debts is actually found by multiplying the additional bad debts that result from relaxing credit standards by the cost per dollar of bad debt, not by the firm's opportunity cost.

Question 11

One of the key inputs to the final credit decision is a credit analyst's subjective judgment of a firm's creditworthiness since it can provide a better feel of a firm's operation than any quantitative figures.

Accepted Answer

The answer of One of the key inputs to the...

Question 12

Increasing the length of the credit period can increase sales,but both the investment in accounts receivable and bad debt expenses are likely to increase as well.

Accepted Answer

When the credit period is increased, customers have more time to pay their invoices, which can make them more likely to make purchases. However, this also means that the business will have to invest more money in accounts receivable and may experience higher bad debt expenses due to delayed or defaulted payments.

Question 13

The key dimension of credit selection which analyzes an applicant's record of meeting past obligations is ________.
A) collateral
B) capacity
C) character
D) capital

Accepted Answer

The key dimension of credit selection that analyzes an applicant's record of meeting past obligations is character. It refers to the borrower's reputation for paying back debts and meeting financial obligations. Collateral refers to the assets pledged as security for the loan. Capacity refers to the borrower's ability to repay the loan. Capital refers to the borrower's net worth or financial cushion.

Question 14

A firm's credit selection procedures must be established on a sound economic basis that considers the costs of investigating the creditworthiness of a customer and the expected size of its credit purchases.

Accepted Answer

A firm's credit selection procedures should be based on a sound economic basis that considers the costs of investigating the creditworthiness of a customer and the expected size of its credit purchases. This ensures that the firm approves credit only to customers who are most likely to make timely payments and who will generate sufficient revenue to cover the cost of credit investigation.

Question 15

The increase in bad debts associated with tightening credit standards raises bad debt expenses and has a negative impact on profits.

Accepted Answer

Tightening credit standards typically leads to a decrease in bad debts because stricter criteria are applied to whom credit is extended, reducing the likelihood of default.

Question 16

By increasing collection expenditures,a firm can decrease bad debt losses up to a point,beyond which bad debts cannot be economically reduced.

Accepted Answer

Increasing collection expenditures allows the firm to more aggressively pursue payments from customers and thus reduce bad debt losses. However, there is a point where the cost of increased collection efforts outweighs the benefits gained from reducing bad debt losses, meaning that bad debts cannot be economically reduced beyond this point.

Question 17

A firm's credit standards are the minimum requirements for extending credit to a customer.

Accepted Answer

This statement is true. A firm's credit standards serve as a guideline for evaluating a customer's creditworthiness and determining whether to extend credit to them.

Question 18

The objective for managing accounts receivable is to avoid credit sales as much as possible.

Accepted Answer

Managing accounts receivable is about efficiently collecting payments from credit sales, not avoiding credit sales altogether.

Question 19

As credit standards are relaxed,sales are expected to increase and the investment in accounts receivable is expected to decrease.

Accepted Answer

When credit standards are relaxed, sales are expected to increase because more customers are able to buy on credit. However, the investment in accounts receivable is expected to increase, not decrease, because more sales on credit result in more outstanding receivables.

Question 20

A firm's credit standard is a procedure for ranking an applicant's overall credit strength,derived as a weighted average of scores on key financial and credit characteristics.

Accepted Answer

The answer of A firm's credit standard is a procedure...

Quiz 14: Working Capital and Current Assets Management