Question 1

Collegiate Tuxedo rents apparel throughout the year.They have experienced non-payment by about 20% of their customers with an average loss of $300.Collegiate wants to stem their losses by using an instant electronic credit check on the customer.These checks will cost them $12 on each of the 1,000 customers.The opportunity cost is 2.0% for the credit period.Should they pursue the credit check?

Accepted Answer

First, we need to calculate the expected value of the losses without the credit check:

Expected loss = 20% * 1,000 customers * $300 = $60,000

Next, we need to calculate the total cost of implementing the credit check:

Total cost = $12 * 1,000 customers = $12,000

Now, we can calculate the expected value of the losses with the credit check:

Expected loss = 2% * $300 * 1,000 customers = $6,000

Finally, we can calculate the net gain from using the credit check:

Net gain = $60,000 - $12,000 - $6,000 = $42,000

Since the net gain is positive, Collegiate Tuxedo should pursue the credit check. The correct answer is D.

Question 2

Risk is incorporated into the decision to grant credit by:

Accepted Answer

C

Question 3

Which of the following statements is true?

Accepted Answer

A

Question 4

When credit is granted to another firm this gives rise to a(n):

Accepted Answer

When credit is granted to another firm, it gives rise to an accounts receivable, which is called trade credit. Trade credit is a type of credit that is extended by one business to another business for the purchase of goods and services.

Question 5

Delta PDA Distributors has an investment in accounts receivable of $2,750,000.Daily credit sales are $118,280.If 30% of Delta's credit customers receive a discount by paying within 10 days and the remainder of Delta's customers pay in 40 days,what is the Average collection period that Delta maintains?

Accepted Answer

The average collection period is calculated by taking into account the different payment terms for the two groups of customers. 30% of customers pay within 10 days, and the remaining 70% pay in 40 days. The calculation is as follows: (0.3 * 10 days) + (0.7 * 40 days) = 3 days + 28 days = 31 days.

Question 6

The three components of credit policy are:

Accepted Answer

The three components of credit policy are collection policy, credit analysis, and terms of the sale. Collection policy includes the procedures for collecting overdue accounts, credit analysis evaluates the creditworthiness of potential customers, and terms of the sale specify the payment terms and conditions for the sale of goods or services. None of the other answer choices accurately reflect the three components of credit policy.

Question 7

The Torval Company made a credit sale of $15,000.The invoice was sent today with the terms,3/15 net 60.This customer normally pays at the net date.If your opportunity cost of funds is 9% the expected payment is worth how much today?

Accepted Answer

The answer of The Torval Company made a credit sale...

Question 8

The credit decision usually includes riskier customers.The credit decision should adjust for this by:

Accepted Answer

The answer of The credit decision usually includes riskier customers.The...

Question 9

Collegiate Tuxedo rents apparel throughout the year.They have experienced non-payment by about 15% of their customers with an average loss of $200.Collegiate wants to stem their losses by using an instant electronic credit check on the customer.These checks will cost them $7 on each of the 1000 customers.The opportunity cost is 1.5% for the credit period.Should they pursue the credit check?

Accepted Answer

To determine whether Collegiate should pursue the credit check, we need to compare the cost and benefits.

First, let's look at the cost:
- The cost of the credit check is $7 per customer, for a total cost of $7 x 1000 = $7,000.

Now, let's consider the potential benefits:
- Currently, Collegiate experiences non-payment by 15% of their customers, resulting in an average loss of $200 per customer. If all 1000 customers rent apparel, they can expect to lose 15% x 1000 x $200 = $30,000 due to non-payment.
- By using the credit check, Collegiate can identify customers who are likely to default on their payments and refuse to rent apparel to them. If they refuse to rent apparel to 15% of the potential customers (i.e. 150 customers) based on the credit check, they will avoid a loss of 150 x $200 = $30,000. 
- However, Collegiate also incurs an opportunity cost by refusing to rent apparel to these customers. The opportunity cost is 1.5% for the credit period, which we can assume is one year. If the average transaction is $500 and the credit period is one year, the opportunity cost per refused customer is 1.5% x $500 = $7.50. The total opportunity cost for refusing to rent to 150 customers is $7.50 x 150 = $1,125.

Therefore, the net gain from using the credit check is the benefit minus the cost:
Net gain = $30,000 - ($7,000 + $1,125) = $21,875.

Option D indicates that the net gain is $23,000, which is close to our calculated net gain of $21,875. Therefore, the best choice is D, which states that Collegiate should pursue the credit check because the net gain is $23,000.

Question 10

If a firm grants credit with terms of 2/10 net 45,September 1 dating the creditor:

Accepted Answer

The terms "2/10 net 45, September 1 dating" mean that the buyer can take a 2% discount if the invoice is paid within 10 days of the September 1 invoice date, otherwise the full amount is due 45 days after the September 1 invoice date.

Question 11

If a firm refuses to offer credit the NPV of the transaction is:

Accepted Answer

The NPV (Net Present Value) of the transaction refers to the value of the future cash flows in today's dollars. If a firm refuses to offer credit, there are no future cash flows to consider. Therefore, the NPV can only be calculated based on the initial cash revenue received and the cost paid at time period 0. This is represented by Choice A - the cash revenues received minus the cost paid in time period 0.

Question 12

When analyzing the decision to change the cash discount policy,the firm should:

Accepted Answer

The firm should choose the policy with the highest NPV (Net Present Value) as it represents the present value of expected cash flows from the policy, taking into consideration the time value of money. Choosing the policy with the highest NPV will result in the most optimal financial outcome for the firm.

Question 13

When credit is offered with only the invoice as a formal instrument of credit,the credit procedure is called:

Accepted Answer

An open account is a type of credit arrangement where credit is offered based on the invoice only, without any collateral or formal instrument. This means the buyer receives goods or services and then pays an invoice at a later date, typically within 30 to 90 days. This is a common form of credit for businesses, but it does carry some risk as the seller is relying on the customer to pay the invoice on time.

Question 14

Which of the following is not one of the "five Cs of Credit" for credit scoring?

Accepted Answer

The answer of Which of the following is not one...

Question 15

Lengthening the credit period _____ the price paid by the customer.Generally,this acts to _____ sales.

Accepted Answer

The answer of Lengthening the credit period _____ the price...

Question 16

Edgeworth Heating is selling a commercial heating unit at the price of $100,000 per unit.The variable cost of producing this unit is $75,000.Edgeworth is considering offering credit terms to their customers,which would allow payment to be delayed one month.Edgeworth predicts that offering these terms will increase monthly sales from 50 units to 60 units.Edgeworth does not expect the increased production to change variable cost and Edgeworth does not expect to charge a higher price.The default rate on credit customers is predicted to be 2.25%.Which of the following statements is true?

Accepted Answer

The answer of Edgeworth Heating is selling a commercial heating...

Question 17

Which of the following is not true concerning considerations in setting a credit policy?

Accepted Answer

Lengthening the credit period effectively reduces the customer's cost, as it allows them to delay payment without additional charge, acting like a discount. Firms dealing with perishable goods or high-risk customers indeed tend to offer more restrictive credit terms to minimize the risk of non-payment. However, small accounts, especially those associated with firms that find it difficult to acquire a line of credit, are more likely to face stricter, not more lenient, credit terms due to their higher perceived risk.

Question 18

Which of the following statements is not true?

Accepted Answer

When a trade acceptance is discounted in the secondary market, it becomes a banker's acceptance, not a market acceptance.

Question 19

Selling goods and services on credit is:

Accepted Answer

Selling goods and services on credit is an investment in a customer because it allows them to pay later and establish a relationship with the seller. It shows a level of trust and can lead to repeat business.

Question 20

The carrying value of its account receivable is $700,000 and the average collection period is 45 days.The firm's credit sales per day are:

Accepted Answer

The average collection period formula is: Average Collection Period = (Accounts Receivable / Credit Sales) * Days. Rearranging this formula to solve for Credit Sales gives us: Credit Sales = (Accounts Receivable * Days) / Average Collection Period. Plugging in the given values: Credit Sales = ($700,000 * 365) / 45 = $5,644,444.44 annually. To find daily credit sales, divide by 365: $5,644,444.44 / 365 = $15,460.12. The closest answer provided is A) $15,555.56, indicating a slight calculation or rounding difference in the question's formulation or my interpretation.

Quiz 29: Credit Management