Ch. 20: Credit & Receivables

Granting credit is an investment in the _____. a. customer b. employee c. company

a

How is NPV calculated under the assumption that not all customers will take credit because of a discount? a. NPV = -PQ + P'Q × (d - π)/R b. NPV = -PQ + P'Q × (d - π)/(1 + R)2 c. NPV = P'Q - PQ × (d - π)/R

a

If a firm's credit sales run $2,000 per day with an average collection period of 30 days, the formula for the firm's accounts receivable will be ______. a. $2,000 × 30 b. $2,000 × 30/$2,000 c. $2,000 × 1.30 d. $2,000/30

a

If credit is extended to a returning, cash-paying customer who wants to switch to a credit basis, the ______ sales price is risked. a. total b. discounted c. marginal d. final

a

Raw materials are inventories that are used at the _____. a. starting point of the production process b. beginning of the cash cycle b. mid-point of the production process d. ending point of the production process

a

The cash discount period is the _____. a. time during which the discount is available b. time during which the discount is not available c. the time during which the customer has to pay the full price

a

The demand for some inventory types is derived from or dependent on other ______ needs. a. inventory b. reinvestable c. sales d. opportune

a

Select all that apply. Which of the following statements are true about extending credit? a. Extending credit to everyone is not a bad strategy b. The best predictor of default is the customer's character c. The amount of initial credit is not important d. Repeat business is a crucial consideration

a, d

When a firm grants credit, what is the typical sequence of events that occur? (put items in correct order) a. The credit sale is made b. The firm's account is credited c. The firm deposits the check d. The customer sends a check to the firm

a, d, c, b

A safety stock is the ______ level of inventory that a firm keeps on hand. a. only b. minimum c. maximum

b

Select all that apply Which of the following are not a major type of inventory management technique? a. EOQ b. XYZ c. IMT d. ABC

b, c

Select all that apply. Which of the following represent carrying costs of inventory? a. Restocking b. Losses from theft c. Insurance d. Storage costs e. Safety reserves

b, c, d

Select all that apply The purpose of the EOQ inventory management model is to _____. a. maximize the present value of the inventory b. establish an optimal inventory level c. minimize the cost of the inventory itself d. establish a minimum total cost point of carrying and shortage costs

b, d

Which one of the following is an example of raw material for an auto manufacturer? a. Stereo system b. Paint c. Steel d. GPS

c

What is the correct order of the steps involved in the collection process? (put items in correct order) a. Take legal action b. Call the customer c. Send a delinquency letter d. Hire a collection agency

c, b, d, a

Select all that apply. Identify the real world captive finance companies. a. FCC b. ABC c. GMAC d. FMC

c, d

A(n) ______ is used to monitor accounts receivable based on their age. a. mortality table b. average collection period c. age collection table d. aging schedule

d

The cost of debt matters in evaluating credit policy because the resulting receivables must be ______: a. restocked b. aged c. eliminated d. financed

d

The time period that it takes to collect on a credit sale is known as the _____. a. graduation b. credit c. accounts payable d. accounts receivable

d

What is the process of deciding whether or not to extend credit to a particular customer called? a. Customer analysis b. Debit analysis c. Default analysis d. Credit analysis

d

Which of the following is the first step in collecting customer payments that are overdue? a. Take legal action b. Call the customer c. Hire a collection agency d. Send a delinquency letter

d

Cash discounts encourage early payment which reduces the firm's investment in _____. a. mutual funds b. receivables c. certificate of deposits d. payables

b

In practice, inventory is ordered when the level of inventory falls to _____. a. three months of sales b. the safety stock level c. zero

b

The main problem with promissory notes is that they are signed _____. a. along with the delivery of goods b. after the delivery of goods c. before the delivery of goods

b

The optimal amount of credit is determined when the ______ cash flows from increased sales are exactly equal to the incremental costs of carrying the increase in investment in accounts receivable. a. incidental b. incremental c. total d. terminal

b

The smaller the account, the ______ the credit period. a. longer b. shorter

b

What is the buyer's receivables period? a. The time it takes to process a check in the bank. b. The time it takes the buyer to collect on the sale. c. The time it takes the buyer to make payment for merchandise. d. The time it takes to deposit a check in the bank.

b

What is the inventory period? a. The time it takes to ship inventory b. The time from acquisition of inventory to sale of inventory c. The time from acquisition of inventory to processing of inventory d. The time it takes to acquire inventory

b

Select all that apply. Which of the following are forms of carrying costs when granting credit? a. The costs of managing payables b. The required return on receivables c. The opportunity costs of losing sales when credit is refused d. The losses from bad debts

b, d

Select all that apply. Which of the following are not among the 5 Cs of credit? a. Capital b. Conscience c. Character d. Creditors e. Conditions

b, d

T/F: Financial managers usually have primary control over inventory management.

False

T/F: The cash discount period is the length of time the customer has to pay.

False

T/F: The terms of sale are fairly consistent across industries.

False

If the terms of credit are 1/10, net 30, the net credit period is ______ days, and the discount period is ______ days. a. 30; 10 b. 10; 30 c. 1; 30 d. 30; 1

a

Which of the following approaches to credit policy analysis will arrive at the same conclusion as the NPV approach in terms of a proposed credit policy switch? a. The one-shot approach b. The deploring approach c. The factoring approach d. The accounts payable approach

a

Select all that apply. Which of the following are opportunity costs of refusing to grant credit? a. Losing the ability to charge a higher price b. A decrease in quantity sold c. Losses from bad debts d. The costs of managing credit and collections

a, b

Select all that apply What are the main components of a credit policy? a. Credit analysis b. Terms of sale c. Collection policy d. Default policy

a, b, c

Select all that apply. Which of the following are part of collection policy procedures? a. Collecting on past-due amounts b. Monitoring payables c. Monitoring receivables d. Settling outstanding debts

a, c

Select all that apply Which of the following approaches to credit policy analysis will arrive at the same conclusion in terms of a proposed credit policy switch? a. The Accounts Receivable Approach b. The Shotgun Approach c. The NPV Approach d. The One-Shot Approach

a, c, d

The process of monitoring receivables to spot trouble and obtaining payment on past-due accounts is called ______ policy. a. intrusion b. rejection c. acceptance d. collection

d

A company will offer a discount in order to _____. a. speed up the collection of payables b. speed up the collection of receivables c. slow down the collection of receivables d. slow down the collection of payables

b

T/F: The optimal amount of credit is determined when the incremental cash flows from increased sales are exactly equal to the incremental costs of carrying the increased investment in accounts receivable.

True

A(n) _____ is a written account of merchandise shipped to the buyer. a. memoir b. invoice c. journal d. diary

b

The credit period refers to the _____. a. time for which the discount is offered b. time until collection efforts begin c. time for which credit is granted d. time it takes to do a credit check on a customer

c

What provides a written documentation of merchandise shipped to a buyer? a. The sales account b. The merchandise brief c. The invoice d. The bill of lading

c

Perishable items usually have a relatively _____ collateral value. a. low b. high

a

The direct and opportunity costs of keeping inventory on hand are classified as _____. a. carrying costs b. finished goods c. radical management d. shortage costs

a

The focus of credit analysis is on losses incurred on _____. a. receivables b. purchases c. sales d. payables

a

The terms of sale within a particular industry tend to be: a. fairly standard b. fairly erratic c. unrelated d. extremely erratic

a

The total restocking cost will tend to ______ as the number of orders increases. a. increase b. decrease

a

What is the another term for a promissory note? a. IOU b. Interest c. Deposit d. Credit

a

Select all that apply. Which of the following are true about restocking costs in the EOQ model? a. They are assumed to be fixed. b. The firm will place T/Q orders per year. c. They assumed to be variable. d. The firm orders TQ units each restocking period.

a, b

Select all that apply. Which of the following functional areas share control of inventory management? a. Marketing b. Production c. Purchasing d. Finance

a, b, c

Select all that apply Which of the following are characteristics of the ABC inventory management approach? a. It divides inventory into a few groups. b. It focuses exclusively on quantity over value. c. It is simple. d. It monitors closely the large number of low value items.

a, c

Select all that apply Which of the following are the most popular business credit reporting agencies? a. Dun & Bradstreet b. Transunion c. Experian d. Equifax

a, c

Select all that apply. Granting credit to customers will _____. a. make an investment in a customer b. reduce sales to customers c. promote sales

a, c

Select all that apply. What are the two components of the credit period when a cash discount is offered? a. The net credit period b. The expense period c. The net income period d. The cash discount period

a, d

Select all that apply. Which of the following are methods for managing demand-dependent inventories? a. Materials requirements planning (MRP) b. Minimum order cost (MOC) c. Economic order quantity (EOQ) d. Just-in-time inventories (JIT)

a, d

Select all that apply. The terms of sale specify the _____. a. credit period b. corporation benefits c. employee discount period d. discount period e. type of credit instrument f. cash discount

a, d, e, f

A(n) ______ finance company is a wholly owned subsidiary that handles the credit function for the parent company. a. mutual b. captive c. registered d. independent

b

What is the length of time for which credit is granted called? a. The assistance period b. The credit period c. The debit period d. The loan period

b

Select all that apply. Which of the following statements are true about the use of aging schedules? a. Eventually, all accounts can be collected. b. High current sales lower the percentage of older accounts. c. It is not important to monitor older accounts d. Seasonal sales affect the aging schedule.

b, d

Accounts receivable are generally equal to average daily sales times _____. a. average income period b. accounts collection period c. average collection period d. average crediting period e. accounting calculation period

c

Granting credit results in delayed revenues, but the costs of sales is _____. a. delayed even longer b. an unknown factor c. incurred immediately

c

In the NPV calculation that assumes not all customers will take the credit because a discount is offered, the π symbol represents the _____. a. change in payables b. interest rate c. default rate

c

Which of the following is the most obvious way to determine the creditworthiness of a customer? a. The customer's recent financial statements b. The customer's primary bank c. The customer's payment history with the inquiring firm

c

Which of the following refers to an asset pledged in the case of default? a. Capacity b. Capital c. Collateral d. Character

c