Question 1

________ 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 are the maximum amount of credit that a financial institution or other lender will extend to a borrower, while credit limits are the maximum amount of credit that a single customer is allowed to have. Collection agencies are typically hired by lenders to collect on delinquent or defaulted accounts.

Question 2

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 3

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 can improve the ability of a firm to collect debts, and thus reduce bad debt losses up to a certain point. However, beyond a certain level of expenditures, the cost of collecting the debt may exceed the amount collected, making it uneconomical to continue. Therefore, bad debts cannot be economically reduced beyond a certain point.

Question 4

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 5

________ 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 described procedure is credit scoring, which involves evaluating an applicant's creditworthiness based on various financial and credit-related factors, resulting in a numerical score. This score is then used by lenders, credit card issuers, and other institutions to determine the level of risk involved in extending credit to the applicant.

Question 6

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 7

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 sound economic principles, which include evaluating the cost of investigating a customer's creditworthiness and considering the expected size of their credit purchases.

Question 8

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 9

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 an applicant's ability to repay the requested credit, which is determined by analyzing their cash flows, income, expenses, and debt-to-income ratio. Collateral refers to the assets that the borrower pledges as security, capital refers to the borrower's net worth and financial stability, and conditions refer to any external factors that may impact the borrower's ability to repay the credit.

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

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 12

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

Accepted Answer

A firm's credit standards are the guidelines that must be met for a customer to be considered creditworthy and obtain credit from the firm. These standards are the minimum requirements set by the firm to reduce the risk of default and financial loss.

Question 13

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

Extending the credit period increases the risk of customers defaulting on payments or delaying payments, which increases the investment in accounts receivable and bad debt expenses. However, it can also increase sales as customers are given more time to make payments.

Question 14

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 15

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

Accepted Answer

The formula for calculating turnover of accounts receivable is to divide the total credit sales by the average accounts receivable. However, if you have average collection period instead of accounts receivable, you can still calculate turnover by dividing 365 days by average collection period. So, the statement is true.

Question 16

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

Accepted Answer

Relaxing credit standards means allowing customers who may not have met previous credit requirements to purchase from the firm on credit. This can lead to an increase in the volume of accounts receivable, as more customers are able to make purchases on credit. However, this also means the firm will have to carry the cost of maintaining these accounts receivable, such as the cost of billing and collecting payments. Therefore, the carrying cost of the firm will increase if credit standards are relaxed.

Question 17

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. Character refers to the applicant's level of responsibility and reliability in meeting financial obligations, which can be determined by examining their credit history and reputation. Collateral refers to assets that can be used as security for a loan, capacity refers to the ability to repay a loan based on income and other financial obligations, and capital refers to the applicant's overall financial position and ability to absorb losses. However, out of these options, character is the best choice for the given question.

Question 18

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

Accepted Answer

The objective for managing accounts receivable is to ensure timely collection of credit sales and minimize bad debt expenses, while also maintaining good customer relationships. Avoiding credit sales altogether may not always be feasible or prudent for a business.

Question 19

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 typically gives primary attention to are character and capacity, not collateral and condition. Collateral and condition are also important factors, but they are not the most basic requirements for extending credit.

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

________ are established to evaluate a customer's creditworthiness and to determine the minimum requirements for extending credit to a customer.