Question 1

One way businesses try to overcome the risk associated with new customers is to access a credit scoring report that will predict the probability of a customer causing credit problems in the future.

Accepted Answer

This is a common practice in the business world, as credit scoring reports take into account various factors such as payment history, outstanding debts, and credit utilization to assess a customer's creditworthiness and likelihood of defaulting on payments. This helps businesses make informed decisions about extending credit to new customers and reduce the risk of financial losses due to bad debts.

Question 2

If a firm's average accounts receivable balance increases, this could be because the company improved what customers it extended credit to.

Accepted Answer

If a firm's average accounts receivable balance increases, it means that the company is extending more credit to its customers, either by selling more on credit or by increasing the duration of credit terms. It does not necessarily indicate that the company has improved the quality of customers it extends credit to.

Question 3

Because of changing economic conditions, it is difficult for companies such as Dun & Bradstreet to devise models predicting payment problems and the probability of bankruptcy 12 months in the future.

Accepted Answer

The answer of Because of changing economic conditions, it is...

Question 4

Bankers' acceptances are short-term securities that arise from foreign trade.

Accepted Answer

Bankers' acceptances are a type of short-term security that is commonly used in foreign trade transactions. They are essentially a promise by a bank to pay a specific amount of money at a future date, and are often used to facilitate and secure international trade transactions.

Question 5

If a firm averages $2,000 in daily credit sales and offers 60-day terms, the average accounts receivable balance will be $120,000.

Accepted Answer

If a firm averages $2,000 in daily credit sales, then the average monthly credit sales will be $60,000 (2,000 x 30 days). With 60-day terms, it means that the average accounts receivable balance will be $120,000 (60,000 x 2). Therefore, the statement is true.

Question 6

The two basic costs associated with inventory are production cost and ordering cost.

Accepted Answer

The two basic costs associated with inventory are holding cost (storage, handling, insurance etc.) and ordering cost (cost of placing an order, receiving and processing the order). Production cost is the cost of manufacturing the goods, which may or may not be associated with inventory depending on the production system.

Question 7

A reduction in carrying costs would increase the economic order quantity.

Accepted Answer

By reducing the denominator in the EOQ formula, the quantity is increased.

Question 8

Seasonal production allows for maximum efficiency in machinery and manpower use.

Accepted Answer

Seasonal production often leads to periods of inactivity and underutilization of machinery and manpower, as production is not consistent throughout the year.

Question 9

Small-denomination certificates of deposit are usually more liquid than large-denomination CDs.

Accepted Answer

Large-denomination CDs, often referred to as jumbo CDs, typically offer higher interest rates but are less liquid due to their larger investment requirement. Small-denomination CDs are more accessible to the average investor and can be more easily withdrawn or transferred, making them more liquid.

Question 10

Return on investment is the major decision criteria in credit decisions.

Accepted Answer

Return on investment is a common metric used to evaluate the profitability of an investment, but it is not typically used as a major decision criterion in credit decisions. Credit decisions are typically based on factors such as the borrower's creditworthiness, the amount of the loan, and the interest rate.

Question 11

A stock out occurs when a firm runs out of inventory and is unable to sell or deliver the product requested.

Accepted Answer

A stock out is a situation where a company is unable to meet the demand for a particular product, as it has run out of inventory. This can lead to lost sales, unhappy customers, and a damaged reputation.

Question 12

The 5 Cs of credit include "character, capital, capacity, conditions, and collateral."

Accepted Answer

The 5 Cs of credit are indeed "character, capital, capacity, conditions, and collateral."

Question 13

Finding out who is ultimately responsible for a bad debt can be helped by Dun & Bradstreet's D-U-N-S (Data Universal Number System) that tracks relationships and the ownership of businesses within Dun & Bradstreet's information base.

Accepted Answer

The statement is true that Dun & Bradstreet's D-U-N-S system can aid in identifying the ultimate responsibility for a bad debt by tracking relationships and ownership of businesses within their information base.

Question 14

Lower ordering costs would tend to increase a firm's economic order quantity.

Accepted Answer

By reducing the numerator in the basic EOQ formula, quantity (the quotient) is reduced.

Question 15

The "economic ordering quantity" helps a firm determine the most efficient order size to place.

Accepted Answer

The economic ordering quantity (EOQ) is a formula used to determine the optimal order size for a company to minimize costs related to ordering and holding inventory. By calculating the EOQ, a firm can identify the order quantity that will result in the lowest total inventory costs. Therefore, the statement is true.

Question 16

The rate on Eurodollar certificates of deposit is usually lower than domestic certificates of deposit.

Accepted Answer

Eurodollar certificates of deposit typically offer higher interest rates compared to domestic certificates of deposit because they are not subject to the same banking regulations and reserve requirements, allowing for potentially higher returns.

Question 17

A stock out saves the firm money because little inventory is held on hand, which saves on storage costs.

Accepted Answer

A stock out refers to the situation when a company runs out of inventory, leading to missed sales and potentially dissatisfied customers, which can cost the firm money in lost revenue and harm its reputation, outweighing savings on storage costs.

Question 18

Inventories are usually the most liquid, but lowest-yielding, current asset of a firm.

Accepted Answer

Inventories are not necessarily the most liquid current asset of a firm, as accounts receivable or cash may be more liquid. Additionally, the yield on an inventory can vary depending on the product and the timing of its sale. Therefore, the statement is false.

Question 19

Assuming that inventory is used up at a constant rate and safety stock is zero, the average inventory will be half the re-order size.

Accepted Answer

Since safety stock = 0, and (EOQ/2) + Safety stock = Average inventory, then we carry one half that amount.

Question 20

If a firm's average collection period increases, this could be because the company gave credit to customers with a low credit report.

Accepted Answer

If a company gives credit to customers with a low credit report, it may result in a longer collection period as these customers may have difficulty making payments on time.

Quiz 7: Current Asset Management