Question 1

If the cash discount period is increased,a firm's investment in accounts receivable is expected to ________.
A) increase because existing customers attracted by the new policy will buy more products
B) decrease because of non-discount takers paying earlier to avail the cash discount
C) decrease because discount takers will pay more in order to get more discount
D) decrease because new customers will doubt the quality of product due to increase in discount

Accepted Answer

By increasing the cash discount period, the firm is providing an incentive for non-discount takers to pay earlier, resulting in a decrease in the investment in accounts receivable as the firm will receive payments sooner. Existing customers attracted by the new policy may or may not buy more products, discount takers paying more to get more discount is not a logical expectation, and there is no evidence to support the claim that new customers will doubt the product quality due to an increase in discount.

Question 2

Table 14.7
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 14.7)
A) +$33,750
B) -$33,750
C) +$128,750
D) -$58,750

Accepted Answer

The answer of Table 14.7
Fizzy Animators, Inc. currently makes all...

Question 3

An increase in accounts receivable turnover for a firm due to an increase in collection efforts will ________.
A) decrease the firm's marginal investments in accounts receivable
B) increase the firm's marginal investments in accounts receivable
C) decrease the firm's collection expense
D) increase the firm's bad debt expense

Accepted Answer

An increase in accounts receivable turnover means that the firm is collecting its outstanding debts more quickly, which ultimately decreases the amount of time and money that the firm invests in these accounts. Therefore, the firm's marginal investment in accounts receivable will decrease.

Question 4

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 ________.
A) increase; decrease; decrease
B) increase; increase; decrease
C) increase; increase; increase
D) decrease; decrease; decrease

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 5

Which of the following is true of changes in cash discount period?
A) If a firm increases its cash discount period, the sales are expected to decrease, the bad debts are expected to decrease, and the profit per unit is expected to increase.
B) If a firm decreases its cash discount period, the sales are expected to decrease, the bad debts are expected to decrease, and the profit per unit is expected to increase.
C) If a firm increases its cash discount period, the sales are expected to increase, the bad debts are expected to decrease, and the profit per unit is expected to decrease.
D) If a firm decreases its cash discount period, the sales are expected to decrease, the bad debts are expected to increase, and the profit per unit is expected to decrease.

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 6

Table 14.6
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 14.6)
A) poor credit management
B) satisfactory credit management
C) superior credit management
D) overzealous collection efforts

Accepted Answer

The majority of the accounts receivable balance is in the 31-60 day aging category, indicating that many customers are not paying within the 30-day credit terms. This suggests poor credit management as the firm is not efficiently collecting receivables within the specified time frame.

Question 7

Ashley's Ad Agency's accounts receivable totaled $451,000 on January 30,2015.An aging summary of receivables at this date follows:  The firm extends 30-day credit terms to all its credit customers.
(a)Prepare an aging schedule for Ashley's Ad Agency.
(b)Evaluate the firm's collection performance.

Accepted Answer

The answer of Ashley's Ad Agency's accounts receivable totaled $451,000...

Question 8

Table 14.7
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 14.7)
A) $1,234,375
B) $1,382,500
C) $1,567,300
D) $1,841,570

Accepted Answer

The answer of Table 14.7
Fizzy Animators, Inc. currently makes all...

Question 9

Table 14.7
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 14.7)
A) $768,750
B) $300,000
C) $307,500
D) $230,625

Accepted Answer

The answer of Table 14.7
Fizzy Animators, Inc. currently makes all...

Question 10

The entire process resulting from a check issue and mail by a payer company to a payee company (i.e.,mail float,processing float,and clearing float)is disbursement float to the payer company and is collection float to the payee company.

Accepted Answer

Disbursement float refers to the delay between when a company issues a check and when the funds are actually withdrawn from their account. Collection float, on the other hand, refers to the delay between when a company receives a check and when the funds become available in their account. In the scenario described, the payer company experiences disbursement float while the payee company experiences collection float.

Question 11

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 ________.
A) increase; decrease; decrease
B) increase; increase; decrease
C) increase; increase; increase
D) decrease; decrease; decrease

Accepted Answer

If a firm's credit period is decreased, customers will have to pay sooner which may decrease the sales volume due to reduced purchasing power. The investment in accounts receivable can be expected to decrease as customers are paying earlier. Additionally, bad debt expenses can be expected to decrease as collecting payment earlier can reduce the risk of customers defaulting on payments. Therefore, the best choice is D - decrease; decrease; decrease.

Question 12

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.
A) an increase; an increase; an increase; a decrease
B) an increase; a decrease; an increase; an increase
C) an increase; a decrease; an increase; a decrease
D) a decrease; a decrease; a decrease; an increase

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 13

Which of the following is true of changes in cash discount period?
A) If a firm decreases its cash discount period, the sales are expected to decrease, the bad debts are expected to increase, and the profit per unit is expected to increase.
B) If a firm decreases its cash discount period, the sales are expected to increase, the bad debts are expected to increase, and the profit per unit is expected to decrease.
C) If a firm increases its cash discount period, the sales are expected to decrease, the bad debts are expected to decrease, and the profit per unit is expected to increase.
D) If a firm increases its cash discount period, the sales are expected to increase, the bad debts are expected to decrease, and the profit per unit is expected to increase.

Accepted Answer

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

Question 14

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.
A) an increase; a decrease; an increase; a decrease
B) an increase; a decrease; a decrease; an increase
C) an increase; a decrease; an increase; an increase
D) a decrease; a decrease; a decrease; an increase

Accepted Answer

The answer of An increase in collection efforts by a...

Question 15

Table 14.6
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 due over 90 days total ________.(See Table 14.6)
A) $200,000
B) $470,000
C) $300,000
D) $100,000

Accepted Answer

The answer of Table 14.6
A breakdown of Teffan, Inc.'s outstanding...

Question 16

Receipts and disbursements management techniques are aimed at minimizing a firm's financing requirements by taking advantage of certain imperfections in the collection and payment system.

Accepted Answer

Receipts and disbursements management techniques focus on optimizing cash flow and minimizing financing needs by utilizing strategies such as accelerating payments from customers and delaying payments to suppliers. This can help a company to maintain sufficient liquidity without relying heavily on external financing sources.

Question 17

Table 14.7
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 14.7)
A) $22,500
B) $40,000
C) $62,500
D) $100,000

Accepted Answer

Under the current credit terms:
Sales = 400 films x $25,000 = $10,000,000
Variable costs = 400 films x $18,750 = $7,500,000
Fixed costs = 400 films x $21,000 = $8,400,000
Total costs = $15,900,000
Operating income = $10,000,000 - $15,900,000 = -$5,900,000

Under the proposed credit terms:
Sales = (400 + 10) films x $25,000 = $10,250,000
Variable costs = (400 + 10) films x $18,750 = $7,612,500
Fixed costs = (400 +10) films x $21,000 = $8,904,000
Total costs = $16,516,500
Operating income = $10,250,000 - $16,516,500 = -$6,266,500

The marginal profit contribution from the sales under the proposed plan is:
Marginal profit contribution = (new operating income - old operating income) / additional sales
= ($6,266,500 - (-$5,900,000)) / 10
= $62,650

However, if the bad debt expense becomes negligible under the proposed plan, then the operating income would increase by 0.5% of sales, or $51,250. Therefore, the total marginal profit contribution would be $62,650 + $51,250 = $113,900.

The best choice is to initiate the cash discount, as it will result in a positive marginal profit contribution and potentially reduce bad debts.

Question 18

If the cash discount period is increased,a firm's investment in accounts receivable is expected to ________.
A) increase because new customers attracted by the new policy will result in new accounts receivable
B) decrease because new customers will doubt the quality of product due to increase in discount
C) increase because existing discount takers will pay more to get more discount
D) decrease because of existing discount takers will now pay earlier to avail the cash discount

Accepted Answer

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

Question 19

Table 14.7
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 14.7)
A) $500,000
B) $50,000
C) $10,000
D) $5,000

Accepted Answer

The answer of Table 14.7
Fizzy Animators, Inc. currently makes all...

Question 20

Table 14.7
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 14.7)
A) $313,460
B) $276,500
C) $246,875
D) $368,314

Accepted Answer

The answer of Table 14.7
Fizzy Animators, Inc. currently makes all...

Quiz 14: Working Capital and Current Assets Management

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

An increase in accounts receivable turnover for a firm due to an increase in collection efforts will ________.

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 .

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

Ashley's Ad Agency's accounts receivable totaled $451,000 on January 30,2015.An aging summary of receivables at this date follows: The firm extends 30-day credit terms to all its credit customers. (a)Prepare an aging schedule for Ashley's Ad Agency. (b)Evaluate the firm's collection performance.

The entire process resulting from a check issue and mail by a payer company to a payee company (i.e.,mail float,processing float,and clearing float)is disbursement float to the payer company and is collection float to the payee company.

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 .

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.

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

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.

Table 14.6 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 due over 90 days total ________.(See Table 14.6)

Receipts and disbursements management techniques are aimed at minimizing a firm's financing requirements by taking advantage of certain imperfections in the collection and payment system.

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