Chapter 18

Seasonal datings are offered to specific retailers. These retailers: a. Do not have the capacity to make sales without seasonal dating. b. Do not have the ability to finance a buildup of inventory in advance of the peak selling period. c. Are known to be credit-risky. d. Are considered a distributive subsidiary of the parent company

b. Do not have the ability to finance a buildup of inventory in advance of the peak selling period.

The most widely known credit-reporting organization is: a. Phelps Credit Services b. Dun & Bradstreet Credit Services c. Equitable Credit Services d. Creditreport.com

b. Dun & Bradstreet Credit Services

Inventory related costs are all of the following EXCEPT: a. Ordering costs b. Product advertising costs c. Carrying costs d. Stockout costs

b. Product advertising costs

The ____ measures the promptness with which customers repay their credit obligations. a. bad-debt loss ratio b. average collection period c. credit term d. cash discount

b. average collection period

Traditional discussion of guidelines for examining credit worthiness include "the five Cs of credit". Each of the following is one of the "five Cs" except a. capacity b. cooperation c. character d. conditions

b. cooperation

A numerical credit scoring system may rate all of the following EXCEPT: a. D & B credit rating b. location of the business c. financial characteristics of the applicant d. current ratio of the applicant

b. location of the business

The primary goal of accounts receivable management should be a. minimizing lost sales b. maximizing shareholder wealth c. increasing market share d. minimizing receivables investment

b. maximizing shareholder wealth

Lengthening the credit period is likely to result in all of the following except a. higher sales b. more cash sales c. larger investment in receivables d. longer average collection period

b. more cash sales

When a company measures its marginal costs and marginal returns it is developing: a. target capital structure b. optimal credit extension policy c. required rate of return d. a financing decision

b. optimal credit extension policy

All the following are assumptions of the basic EOQ model except: a. annual demand known with certainty b. ordering costs fluctuate c. demand is uniform throughout the year d. orders are filled instantaneously

b. ordering costs fluctuate

The types of inventories that manufacturing firms generally hold include all the following except: a. raw materials b. working stock c. finished goods d. work-in-process

b. working stock

Accounts receivable consist of the credit of the business. It can take the form of which of the following? I. Trade credit II. Consumer credit a. I only b. II only c. Both I and II d. Neither I nor II

c. Both I and II

Cash discounts are offered for which of the following reasons? I. Speed up collection of accounts receivable II. Reduce a company's level of receivables investment and associated costs. a. I only b. II only c. Both I and II d. Neither I nor II

c. Both I and II

Maximizing shareholder wealth by investing in accounts receivables is considered when: I. Marginal costs are exceeded by marginal returns. II. The cost of the funds invested are exceeded by expected marginal returns. a. I only b. II only c. Both I and II d. Neither I nor II

c. Both I and II

In determining the creditworthiness of a customer from financial statements, the statements can indicate all of the following EXCEPT: a. Financial strength b. Ability to repay credit obligations c. Length of time needed to repay on credit d. Proposed budgetary expenses for the near future

c. Length of time needed to repay on credit

All other things being equal, the application of a seasonal dating to the terms of credit offered by the firms below would be expected to generate additional sales for each firm except a. a Christmas novelty manufacturer b. an agricultural implements manufacturer c. a wholesale frozen food supplier d. a swimsuit manufacturer

c. a wholesale frozen food supplier

The effect of a change in a firm's credit terms from "net 30" to "2/10, net 30" on its customer's balance sheets is likely to be a. decreased accounts receivable b. increased accounts receivable c. decreased accounts payable d. increased accounts payable

c. decreased accounts payable

When an order is placed for an item that is manufactured internally within a company, ordering costs consist primarily of ____. a. storage and handling costs b. deterioration costs c. production set-up costs d. carrying costs

c. production set-up costs

Which of the following is not a cost related to the extension of credit to customers? a. bad-debt losses b. cash discounts c. quantity discounts d. collection costs

c. quantity discounts

Safety stock is needed to absorb a. changes in accounts receivables b. cyclical changes c. random fluctuations in sales d. annual model changes

c. random fluctuations in sales

The ____ is the inventory level at which an order should be placed for replenishment of an item. a. nonzero inventory level b. safety stock c. reorder point d. inventory quantity

c. reorder point

The cost of funds invested in inventories is measured by the ____. a. cost of insuring the inventory b. stockout costs c. required rate of return d. rate of interest on borrowed funds

c. required rate of return

The most widely known credit reporting organization is: a. Moody's b. Standard and Poor's c. National Association of Credit Management d. Dun and Bradstreet

d. Dun and Bradstreet

All of the following are reliable sources of the creditworthiness of a customer EXCEPT: a. Credit reporting organizations b. Company's experience c. Banks d. General credit application

d. General credit application

Increasing collection expenditures is likely to result in a. a shorter average collection period b. reduced bad-debt losses c. higher accounts receivable balances d. a shorter average collection period and reduced bad-debt losses

d. a shorter average collection period and reduced bad-debt losses

Which of the following is(are) not related to the extension of credit to customers? a. compensating balances b. cash discounts c. quantity discounts d. compensating balances and quantity discounts

d. compensating balances and quantity discounts

Potential losses can occur in the credit evaluation process when a. credit is denied to a credit-worthy customer b. the credit decision is delayed too long c. credit is denied to a customer who is not credit worthy d. credit is denied to a credit-worthy customer and the credit decision is delayed too long

d. credit is denied to a credit-worthy customer and the credit decision is delayed too long

The credit policy variables that a firm can use to exercise control over its level of receivables investment include a. credit standards b. credit terms c. collection effort d. credit standards, credit terms, and collection effort

d. credit standards, credit terms, and collection effort

____ serves as a buffer between the various phases in the procurement-production-sales cycle of a manufacturing firm. a. cash b. accounts receivable c. notes payable d. inventories

d. inventories

Relaxing (i.e., lowering) the firm's credit standards is likely to result in a. lower sales b. smaller bad-debt losses c. a shorter average collection period d. possible higher pre-tax profits

d. possible higher pre-tax profits

All of the following are components of carrying costs except: a. insurance b. storage costs c. handling costs d. set-up costs

d. set-up costs

Capacity, which is one of the traditional "five Cs" of credit analysis, refers to a. the general economic climate and its effect on the applicant's ability to pay b. the willingness of the applicant to meet its financial obligations c. the financial strength of the applicant (i.e., net worth) d. the ability of an applicant to meet its financial obligations

d. the ability of an applicant to meet its financial obligations

Possible sources of relevant information about a credit applicant include a. financial statements submitted by the applicant b. credit reporting organizations c. U.S. Department of Commerce d. the applicant's financial statements and credit reporting agencies

d. the applicant's financial statements and credit reporting agencies

Character, which is one of the traditional "five Cs" of credit analysis, refers to a. the ability of the applicant to meet its financial obligations (i.e., liquidity and cash flow) b. the general economic climate and its effect on the applicant's ability to pay c. the financial strength of the applicant (i.e., net worth) d. the willingness of the applicant to meet it's financial obligations

d. the willingness of the applicant to meet it's financial obligations

____are useful in monitoring the status and composition of a firm's accounts receivable. a. Numerical credit scoring systems b. Aging of accounts schedules c. Seasonal datings d. Aging of accounts schedules and seasonal datings

b. Aging of accounts schedules

____ are the criteria the firm uses to screen credit applicants in order to determine which of its customers should be offered credit and how much. a. Credit terms b. Credit standards c. Seasonal datings d. Credit extension policies

b. Credit standards

Examples of credit-related marginal costs are all of the following EXCEP: a. Advertising costs associated with promoting the company's credit policy. b. Opportunity costs associated with supporting a higher level of receivables. c. Labor costs associated with checking new credit accounts and collecting receivables. d. Bad-debt expenses.

a. Advertising costs associated with promoting the company's credit policy.

All of the following are possible solutions to a large bad-debt loss ratio EXCEPT: a. Loosening credit b. Offering cash discounts for prompt payment c. Seasonal datings d. Determine creditworthiness of customers

a. Loosening credit

The proportion of the total receivables volume a company never collects is the: a. bad-debt loss ratio b. mismanaged accounts payable c. uncollectable bills d. recorded debts

a. bad-debt loss ratio

The effect of a change in a firm's credit terms from "net 30" to "2/10, net 30" on its own balance sheet is likely to be a. decreased accounts receivable b. increased accounts receivable c. decreased accounts payable d. increased accounts payable

a. decreased accounts receivable

The likelihood that a customer will fail to repay credit extended ot it is referred to as: a. default risk b. maturity risk c. bad-debt loss ratio d. opportunity cost

a. default risk

The objective of offering seasonal datings to customers is to a. encourage customers to place their orders prior to the peak selling period b. speed up the collection of accounts receivable c. increase the firm's inventory storage costs d. reduce the number of bad checks received from customers

a. encourage customers to place their orders prior to the peak selling period

For the firm with a seasonal sales pattern, offering seasonal datings to its customers is likely to result in a. increased sales b. higher inventory investment and warehousing costs c. lower receivables investment cost d. an offer of a cash discount

a. increased sales

In general, the ____ a firm's production cycle, the ____ its work-in-process inventory. a. longer, larger b. longer, smaller c. shorter, larger d. length of cycle is not related to amount of work-in-process

a. longer, larger

The average collection period measures the: a. number of days between when a typical credit sale is made and when the firm receives the payment b. number of days it takes a typical check to "clear" through the banking system c. number of days beyond the end of the credit period before a typical customer payment is received d. number of days before a typical account becomes delinquent

a. number of days between when a typical credit sale is made and when the firm receives the payment

The primary objective of offering a cash discount is to a. reduce the firm's level of receivables investment b. reduce the number of bad checks received from customers c. encourage customers to place their orders prior to the peak selling period d. avoid just-in-time orders

a. reduce the firm's level of receivables investment

To minimize the possibility of running out of inventory, most companies add a ____ to their inventory. a. safety stock b. lead time stock level c. few days d. replenishment factor

a. safety stock

The reorder point is a. the lead time multiplied by the daily usage plus safety stock b. the EOQ plus safety stock c. the lead time multiplied by the annual usage d. a product of daily usage and the lead time

a. the lead time multiplied by the daily usage plus safety stock