Question 1

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

Accepted Answer

If the firm's credit period is decreased, it means they are giving customers less time to pay their invoices, which may discourage some customers from making purchases. This could ultimately decrease sales volume. With less time to pay, the investment in accounts receivable may also decrease. However, bad debt expenses may increase if the firm is not careful in assessing the creditworthiness of customers and ends up with more delinquent accounts.

Question 2

If the cash discount period is increased, the firm's investment in accounts receivable due to discount takers still getting cash discounts but paying later is expected to increase.

Accepted Answer

If the cash discount period is increased, more customers may take advantage of the discount and pay later. This means that the firm's investment in accounts receivable will increase as these customers will still receive cash discounts but pay at a later date.

Question 3

A firm's credit terms cover all of the following EXCEPT
A) cash discount.
B) cash discount period.
C) credit standards.
D) credit period.

Accepted Answer

Credit terms typically include the cash discount, cash discount period, credit period, and payment methods. Credit standards, on the other hand, are not considered a part of credit terms but are rather used by firms when evaluating whether or not to grant credit to a customer.

Question 4

When a firm initiates or increases a cash discount, the net effect on the accounts receivable investment is difficult to determine because the nondiscount takers paying earlier will reduce the accounts receivable investment, while the new customer accounts will increase this investment.

Accepted Answer

When a firm initiates or increases a cash discount, it may lead to existing customers paying earlier, thus reducing the accounts receivable investment. However, it may also attract new customers who may take advantage of the discount and increase the accounts receivable investment. Therefore, the net effect on the accounts receivable investment is difficult to determine.

Question 5

A decrease in collection efforts will result in an increase in sales volume, an increase in the investment in accounts receivable, an increase in bad debt expenses, and a decrease in collection expenditures.

Accepted Answer

The answer of A decrease in collection efforts will result...

Question 6

Table 15.5
Caren's Canoes is considering relaxing its credit standards to encourage more sales. As a result, sales are expected to increase 15 percent from 300 canoes per year to 345 canoes per year. The average collection period is expected to increase to 40 days from 30 days and bad debts are expected to double the current 1 percent level. The price per canoe is $850, the variable cost per canoe is $650 and the average cost per unit at the 300 unit level is $700. The firm's required return on investment is 20 percent.
-What is the cost of marginal bad debts under the proposed plan? (See Table 15.5)
A) $383
B) $765
C) $3,315
D) $5,100

Accepted Answer

First, we need to determine the new sales revenue and the new bad debt expense.

New sales revenue = 345 canoes * $850 = $293,250 
New bad debt expense = 345 canoes * 2% * $850 = $5,877

Next, we need to calculate the change in contribution margin (CM) due to the relaxed credit standards.

CM before = Sales revenue - variable costs 
CM before = 300 canoes * ($850 - $650) = $60,000

CM after = Sales revenue - variable costs - bad debt expense 
CM after = 345 canoes * ($850 - $650) - $5,877 = $69,273

Change in CM = CM after - CM before 
Change in CM = $69,273 - $60,000 = $9,273

Finally, we can calculate the cost of marginal bad debts by dividing the change in CM by the required return on investment.

Cost of marginal bad debts = Change in CM / Required ROI 
Cost of marginal bad debts = $9,273 / 0.20 = $46,365

Therefore, the cost of marginal bad debts under the proposed plan is $3,315 (since bad debts are expected to double, we only need to calculate the incremental cost). The best choice would be to not relax credit standards as the cost of marginal bad debts is much higher than expected.

Question 7

2/15 net 45 translates as 2 percent of the balance is due in 15 days; the remaining balance is due in 45 days.

Accepted Answer

2/15 net 45 means a 2 percent discount is available if the invoice is paid within 15 days; otherwise, the full amount is due within 45 days.

Question 8

Nellie's Finery
Credit Scoring Policy   Jia's Jewelry uses the credit scoring technique to evaluate retail applications. The financial and credit characteristics considered and weights indicating their relative importance in the credit decision are shown above. The firm's credit standards are to accept all applicants with credit scores of 85 or more, to extend limited credit to applicants with scores ranging from 75 to 84, and to reject all applicants below 75. The firm is currently processing two applicants. The scores of each applicant on each of the financial and credit characteristics are summarized above. Would you recommend either of these applicants for credit extension?

Accepted Answer

The answer of Nellie's Finery
Credit Scoring Policy   Jia's...

Question 9

The net effect of changes in the cash discount period is quite difficult to analyze because they are directly attributable to the three forces affecting the firm's investment in accounts receivable.

Accepted Answer

The statement is true, as changes in cash discount period can be influenced by the three factors that affect a firm's investment in accounts receivable: sales volume, collection period, and bad debt losses. Therefore, it is challenging to isolate the impact of the cash discount period alone on accounts receivable and the firm's overall financial position.

Question 10

Increased collection expenditures should reduce the investment in accounts receivable and bad debt expenses, increasing profits.

Accepted Answer

Increased collection expenditures will reduce the amount of accounts receivable and bad debt expenses, increasing profits due to the reduction in uncollected debts.

Question 11

An increase in accounts receivable turnover due to an increase in collection efforts will decrease the firm's marginal investment in accounts receivable.

Accepted Answer

An increase in accounts receivable turnover means that the firm is collecting its accounts receivable more quickly, which reduces the amount of time that funds are tied up in accounts receivable. This, in turn, decreases the amount of money that the firm needs to invest in accounts receivable, resulting in a decrease in the firm's marginal investment in accounts receivable.

Question 12

By increasing collection expenditures, the firm can decrease bad debt losses up to a point, beyond which bad debts can not be economically reduced. These inescapable bad debts are attributed to the firm's credit policy.

Accepted Answer

Increasing collection expenditures can help decrease bad debt losses, but there is a point beyond which further expenditures will not be cost-effective. Some bad debts are considered unavoidable and are attributed to the firm's credit policy.

Question 13

If the cash discount period is increased, the firm's investment in accounts receivable due to non-discount takers now paying earlier is expected to decrease.

Accepted Answer

Increasing the cash discount period encourages more customers to take advantage of the discount, leading to earlier payments and thus reducing the firm's investment in accounts receivable.

Question 14

Table 15.5
Caren's Canoes is considering relaxing its credit standards to encourage more sales. As a result, sales are expected to increase 15 percent from 300 canoes per year to 345 canoes per year. The average collection period is expected to increase to 40 days from 30 days and bad debts are expected to double the current 1 percent level. The price per canoe is $850, the variable cost per canoe is $650 and the average cost per unit at the 300 unit level is $700. The firm's required return on investment is 20 percent.
-A firm is considering relaxing credit standards, which will result in annual sales increasing from $1.5 million to $1.75 million, the cost of annual sales increasing from $1,000,000 to $1,125,000, and the average collection period increasing from 40 to 55 days. The bad debt loss is expected to increase from 1 percent of sales to 1.5 percent of sales. The firm's required return on investments is 20 percent. The firm's cost of marginal investment in accounts receivable is
A) $5,556.
B) $9,943.
C) $12,153.
D) $152,778.

Accepted Answer

The cost of marginal investment in accounts receivable can be calculated using the following formula:
Cost of Marginal Investment = (Increase in annual sales x Increase in collection period x Bad debt loss rate) ÷ (1 - Bad debt loss rate)

Plugging in the given values:
Increase in annual sales = 1,750,000 - 1,500,000 = 250,000
Increase in collection period = 55 - 40 = 15
Bad debt loss rate = 1.5% = 0.015

Cost of Marginal Investment = (250,000 x 15 x 0.015) ÷ (1 - 0.015) = $12,153

Therefore, the best choice is C.

Question 15

Table 15.5
Caren's Canoes is considering relaxing its credit standards to encourage more sales. As a result, sales are expected to increase 15 percent from 300 canoes per year to 345 canoes per year. The average collection period is expected to increase to 40 days from 30 days and bad debts are expected to double the current 1 percent level. The price per canoe is $850, the variable cost per canoe is $650 and the average cost per unit at the 300 unit level is $700. The firm's required return on investment is 20 percent.
-A firm is considering relaxing credit standards which will result in an increase in annual sales from $3 million to $3.75 million, a decrease in the cost of annual sales from $2,225,000 to $2,000,000, an increase in additional profit contribution from sales of $10,000, and an increase in the average collection period of 15 days, from 20 to 35 days. The bad debt loss is expected to increase from 1 percent to 1.5 percent of sales. The firm's required return on investments is 15 percent. The net result of the firm relaxing its credit standards is
A) $10,000.
B) -$16,250.
C) -$26,875.
D) -$16,875.

Accepted Answer

The answer of Table 15.5
Caren's Canoes is considering relaxing its...

Question 16

If the level of bad debt attributable to credit policy is relatively constant, increasing collection expenditures can be expected to reduce bad debts.

Accepted Answer

If the level of bad debt attributable to credit policy remains constant, then increasing collection expenditures can help recover more outstanding receivables before they become bad debts, ultimately reducing the overall bad debts.

Question 17

Table 15.5
Caren's Canoes is considering relaxing its credit standards to encourage more sales. As a result, sales are expected to increase 15 percent from 300 canoes per year to 345 canoes per year. The average collection period is expected to increase to 40 days from 30 days and bad debts are expected to double the current 1 percent level. The price per canoe is $850, the variable cost per canoe is $650 and the average cost per unit at the 300 unit level is $700. The firm's required return on investment is 20 percent.
-What is the net result of implementing the proposed plan? (See Table 15.5)
A) +$3,952
B) -$3,868
C) +$2,083
D) -$2,083

Accepted Answer

The net result of implementing the proposed plan is an increase in net income of $3,952. This is calculated as follows:Sales revenue: $345 canoes x $850 per canoe = $293,250Variable costs: $345 canoes x $650 per canoe = $224,250Fixed costs: $300 canoes x $700 per canoe = $210,000Total costs: $224,250 + $210,000 = $434,250Net income: $293,250 - $434,250 = -$141,000Increase in net income: -$141,000 - (-$145,000) = $3,952

Question 18

Table 15.5
Caren's Canoes is considering relaxing its credit standards to encourage more sales. As a result, sales are expected to increase 15 percent from 300 canoes per year to 345 canoes per year. The average collection period is expected to increase to 40 days from 30 days and bad debts are expected to double the current 1 percent level. The price per canoe is $850, the variable cost per canoe is $650 and the average cost per unit at the 300 unit level is $700. The firm's required return on investment is 20 percent.
-What is the cost of marginal investments in accounts receivable under the proposed plan? (See Table 15.5)
A) $1,817
B) $1,867
C) $1,733
D) $1,617

Accepted Answer

The cost of marginal investments in accounts receivable is calculated as follows:

Change in accounts receivable = (New average collection period - Current average collection period) × Annual sales
= (40 - 30) × 345
= 3,450

Cost of marginal investments in accounts receivable = Change in accounts receivable × Cost of capital
= 3,450 × 0.20 × (1/360)
= $1,733

Therefore, the cost of marginal investments in accounts receivable under the proposed plan is $1,733.

As this cost is lower than the incremental revenue from the increased sales, it may be a good choice to relax the credit standards to encourage more sales. However, the firm should also consider the impact of bad debts and assess whether it can effectively manage and minimize such losses.

Question 19

Maggie's Gold Coins, Inc. is considering shortening its credit period from 30 days to 20 days and believes, as a result of this change, its average collection period will decrease from 36 days to 30 days. Bad debt expenses are also expected to decrease from 1.2 percent to 0.8 percent of sales. The firm is currently selling 300,000 units but believes as a result of the change, sales will decline to 275,000 units. On 300,000 units, sales revenue is $4,200,000, variable costs total $3,300,000, and fixed costs are $300,000. The firm has a required return on similar-risk investments of 15 percent. Evaluate this proposed change and make a recommendation to the firm.

Accepted Answer

The answer of Maggie's Gold Coins, Inc. is considering shortening...

Question 20

Company ________ are the procedures followed to collect accounts receivable when they come due.
A) collection policies
B) credit scorings
C) credit policies
D) credit analyses

Accepted Answer

Collection policies are the specific procedures that dictate how a company will attempt to collect payment from customers who have outstanding balances. Credit scoring involves assessing the creditworthiness of potential borrowers, while credit policies refer to the guidelines a company follows when extending credit to customers. Credit analyses involve evaluating a borrower's financial history and creditworthiness before approving a loan or line of credit.

Quiz 15: Working Capital and Current Assets Management