Question 1

In using the net present value (NPV)approach to evaluating credit policy alternatives,all other things equal,

Accepted Answer

In using the net present value (NPV) approach to evaluating credit policy alternatives, the alternative with the highest NPV should be selected. This is because the NPV measures the present value of future cash flows minus the initial investment, and a higher NPV indicates a more favorable return on investment. Therefore, selecting the alternative with the highest NPV will provide the most value and be the most beneficial to the company.

Question 2

You are calculating the NPV of one day's sales associated with a given credit policy that does not offer a discount and has an average collection period of 45 days.You should discount variable costs _____ days and credit administration and collection expenses ______ days.

Accepted Answer

B

Question 3

In calculating each of the last six months' uncollected balance percentages,the current accounts receivable balance is split into uncollected balances by month in which they originate.Then,each month's uncollected balance is divided by the __________________________________________.

Accepted Answer

The percentage of uncollected balance for a specific month is determined by dividing the uncollected balance for that month by the total credit sales for that same month. Therefore, the correct choice is C, which states that each month's uncollected balance is divided by the credit sales for that month.

Question 4

Milsonic Mfg.has been evaluating its short-term financial management practices recently.Below are its uncollected balance percentages for the most recent quarter as well as for the previous year's percentages.  Neither its credit policy nor its collection strategies have changed,and its sales mix is identical to last year's.Based on its numbers,one can conclude that Milsonic's collection experience is

Accepted Answer

The answer of Milsonic Mfg.has been evaluating its short-term financial...

Question 5

Evidence gathered by Smith & Belt indicates that managers consider marketing and ______________ considerations to be primary,rather than secondary,considerations for evaluating credit policy changes.

Accepted Answer

The evidence gathered by Smith & Belt suggests that managers consider marketing (to assess the impact of credit policy changes on sales) and bad debt loss (to evaluate the risk of non-payment by customers) as primary considerations. Production capacity, inventory requirements, and degree of operating leverage may also be relevant factors, but they are not specifically mentioned as primary considerations in the given context.

Question 6

An heuristic approach to evaluating credit policy alternatives,which involves estimating profit effects of each alternative,is the

Accepted Answer

The financial statement approach to evaluating credit policy alternatives involves estimating the profit effects of each alternative, typically by projecting how changes in the credit policy would affect the company's financial statements, particularly the income statement. This method focuses on understanding the impact on revenues, expenses, and ultimately net income, rather than on the time value of money or liquidity effects directly.

Question 7

Which of the following variable(s)did surveyed credit managers believe they could estimate adequately?

Accepted Answer

Surveyed credit managers believed that they could adequately estimate all of the given variables: customer default probability, customer delinquency probability, and the opportunity cost of funds invested in receivables.

Question 8

Additional complications related to extending credit internationally include each of the following except:

Accepted Answer

The lack of banks in a number of countries is not typically considered a complication related to extending credit internationally. While it may be harder to find local banking options in some countries, this can usually be resolved through alternative payment methods or partnerships with international banks. The other choices listed (foreign legal and economic environment, foreign customer payment habits, and foreign currency volatility) are all common challenges that businesses face when extending credit internationally.

Question 9

With an unchanging collection pattern but a trend of increasing sales,a calculated aging schedule would show proportionally _______ dollar sales as current or almost current,indicating a _______ favorable collection experience.

Accepted Answer

Increasing sales indicate a more favorable collection experience, and proportionally higher dollar sales as current or almost current would also reflect this. A lower proportion of current sales would indicate a less favorable collection experience.

Question 10

Late payments by customers may lead to all of the following EXCEPT:

Accepted Answer

Late payments by customers would usually result in a decrease in the seller's working capital since they are not receiving the payment on time. It may also erode shareholder value if investors perceive the late payments as a sign of poor management. It is also likely to increase the length of trade credit from suppliers since the seller would need more time to pay their invoices while waiting for payments from customers. However, it would not generally result in lower interest payments for the seller as interest charges are independent of customer payments.

Question 11

The main weakness of the uncollected balance percentages method of monitoring collection experience is

Accepted Answer

The answer of The main weakness of the uncollected balance...

Question 12

The basic principle underlying collection philosophy is to collect the amount owed as close to the credit terms as possible while

Accepted Answer

The basic principle of collection philosophy is to collect the amount owed while preserving customer goodwill. While maximizing accounts receivable turnover and minimizing total collection costs are important considerations, they should not come at the expense of damaging the relationship with the customer. Minimizing the cost of capital is also a consideration, but it is secondary to customer goodwill in this context.

Question 13

The annual effective rate of interest for the Calgon Corp.is 12%.If the cash manager typically invests freed-up funds in overnight investments or uses funds to pay down a credit line on which the company pays daily compounded interest,the appropriate daily opportunity rate for short-term financial decisions would be:

Accepted Answer

The correct choice is C, which represents the formula for converting an annual effective interest rate into a daily rate, taking into account the effect of compounding. The formula is derived from the general formula for converting annual rates to daily rates with daily compounding: $[(1 + annual\ rate)^{1/365} - 1]$. This formula accurately reflects the effect of daily compounding on the equivalent daily interest rate.

Question 14

Relative to minimizing inventory investment,minimizing bank balances,and slowing payment on payables,surveyed financial executives believed speeding collection of receivables to be ______________________ as a recommended short-term financial management strategy.

Accepted Answer

Surveyed financial executives believed that speeding collection of receivables is more important than minimizing inventory investment, minimizing bank balances, and slowing payment on payables as a recommended short-term financial management strategy.

Question 15

In addition to the bias introduced when sales are changing,DSO and accounts receivable turnover are sensitive to ________________,making them imperfect measures of changing collection experience (Assume they are calculated correctly based on a necessary information.)

Accepted Answer

The answer of In addition to the bias introduced when...

Question 16

Emily Cheney is evaluating a proposal to extend credit to a group of new customers.The new customers will generate an average of $40,000 per day in new sales.On average,they will pay in 68 days.The variable cost ratio is 80%,collection expenses are 2% of sales,and the cost of capital is 10%.What is the NPV of one day's sales if Emily grants credit? Assume that there is no bad debt loss.

Accepted Answer

The answer of Emily Cheney is evaluating a proposal to...

Question 17

Credit managers of U.S.-based multinational companies should be especially forceful in collecting past due receivables in foreign countries where

Accepted Answer

If the currency of a foreign country is expected to decline in value relative to the U.S. dollar, it is important for credit managers to be forceful in collecting past due receivables as the company may receive less money in the future due to the currency depreciation.

Question 18

The average collection period is also:

Accepted Answer

The average collection period refers to the average number of days it takes for a company to collect payment on its accounts receivable. It is also commonly known as days sales outstanding (DSO). Therefore, option B is the correct answer. Option A is incorrect because accounts receivable turnover measures how quickly a company collects payment on its accounts receivable in a year, while the average collection period measures it in days. Option C refers to a report that shows the age of each unpaid invoice, which is used to calculate the average collection period. Option D is irrelevant to the calculation of average collection period.

Question 19

Traditional but flawed measures used to monitor receivables balances include each of the following except:

Accepted Answer

Uncollected balance percentages are not a traditional measure used to monitor receivables balances. The other options are all commonly used measures, but they may have limitations or flaws in their accuracy and usefulness. For example, the aging schedule may not accurately reflect the collectability of receivables if customers have a history of paying late, and accounts receivable turnover and days sales outstanding do not account for differences in credit terms or payment patterns among customers.

Question 20

Evidence from recent studies indicates that creditors behave as if they _______ understand the goodwill tradeoff when selecting collection methods and that they are __________ aggressive in collecting receivables when their receivable investment grows relatively large.

Accepted Answer

Creditors are aware of the goodwill tradeoff when choosing collection methods and become more aggressive in collecting receivables as their investment in receivables increases.

Quiz 6: Credit Policy and Collections

In using the net present value (NPV) approach to evaluating credit policy alternatives,all other things equal,

You are calculating the NPV of one day's sales associated with a given credit policy that does not offer a discount and has an average collection period of 45 days.You should discount variable costs _ days and credit administration and collection expenses __ days.