Chapters 5 + 6 + 7 - ACCT312

Credit analyst John Adams is considering a $1,000 order from a new customer. The cost of filling the order is $950. John estimates collection costs are $20. The customer will pay in 60 days. If the appropriate cost of capital is 18%, what is the NPV of extending credit to the new customer?

$1.84

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.

$6,483.06

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.

0, 45

When evaluating the accuracy of a cash forecast range using r2, which of the following represents the highest accuracy:

0.7 to 1.0

Credit terms of "2/10, net 30" implies that if payments are made in _____ days a cash discount of _____ % may be taken.

10, 2

The XYZ Company has annual average purchases of $200,000 and an ending accounts payable balance of $36,000. How long, on average, does XYZ take to pay for its purchases?

65.70 days

The Johnson Company forecasts an ending cash balance for the month of January of $2,700,000. The historical standard deviation for January's ending cash position is $1,000,000. Assuming ending cash balances are normally distributed, what would be an estimate of the probability of the company ruing out of cash in January?

<5%

Measures for monitoring receivables may be compared to:

A key competitor's values, historical trends, management targets

The primary determinants of credit limits include the following:

Customer's requirements for the firm's products Customer's recent payment history Customer's ability to pay its debts

Which of the following constitute(s) a spontaneous financing source? I. accounts receivable II. accounts payable III. deferred expenses IV. inventories V. accrued expenses

II and V

Which of the following are advantages that credit sellers have over banks

Information advantage, Control advantage, and Salvage value advantage

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

Lower interest payments for the seller

Recent evidence shows that credit professionals work with

Marketing and sales personnel, Other finance personnel

____________________ refers to fitting data to a model so that coefficients for the model can be determined.

Model calibration

An objective of accuracy within +/- 3% is most appropriate for which cash forecast horizon?

One month

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:

[(1+0.12)^1/365 - 1]*

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

bad debt loss

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. Month Most recent year Previous Year Jan 12% 18% Feb 22% 22% Mar 47% 41% Total 81% 81% 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

better than last year

Cleveland Megatron, Inc. is short on cash and finds itself in a "net borrowed position." It has $2 million of its $5 million credit line available at present, however. If the annualized cost of credit line borrowing is lesser than the annualized cash discount rate, the NPV-maximizing decision is to

borrow the necessary funds and take the cash discount

The financial motive for extending trade credit posits that credit sellers:

charge a higher selling price

The highest tier of ethical decisions, which entails a greater ethical commitment on the part of the decision-maker, is to

consider whether the well-being of affected parties would be enhanced even if it requires a sacrifice by the decision-maker

Departments of local credit associations that provide information in the form of "Business Credit Reports" and other reports are called

credit interchange bureaus

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 __________________________________________.

credit sales for that month

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

customer default probability, customer delinquency probability, the opportunity cost of funds invested in receivables

The average collection period is also:

days sales outstanding

The decision rule a payables manager should follow when considering how best to apply NPV analysis to payables decisions is to _______________, so long as payment is not made late.

delay payment for an additional day as long as NPV continues to fall

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.

do, more

Weakness of the "Five C's" framework of credit include all of the following EXCEPT:

does not specify a framework for the development of credit standards

Regarding credit limits, most credit executives

employ limits for a majority of their customers

Rule-based computerized applications of artificial intelligence to credit decision making are known as

expert systems

Each of the following account for the corporate emphasis on short-term cash forecasts EXCEPT:

financial staff salaries, in total, are lower for companies doing cash forecasts

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

financial statement approach

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.

higher, more

The operating motive for offering trade credit suggests that the amount of credit extended by a business is an alternative to

increasing or decresing the level of inventories

Cash application should be done as quickly as possible by a seller because

it enables customers to order more merchandise

The mixed approach to forecasting includes the ______________ and _______________ approaches.

judgmental, quantitative

A very important cost of paying an invoice late which is difficult to estimate accurately is:

lost supplier goodwill

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.

more important

"Estimated Financial Strength" in the Dun & Bradstreet ratings system refers to

net worth

The main reasons for the monthly cash forecast serving as a valuable planning tool for top-level managers include the following EXCEPT:

none

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

none of the above

The advantage of consignment to the retailer is

not having to pay for the goods unless they are sold

Which of the following is a payment option for the financial manager purchasing on credit

pay on the day of purchase, payment at the end of the cash discount period, pay after the end of the credit period

The most reliable measure of a firm's payment practices is

payables balance fractions

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

preserving customer goodwill

Unpublished changes in a seller's credit terms serve as a substitute for price changes in an oligopolistic industry according to the _______________ motive for credit extension.

pricing

The major motives for trade credit extension include all of the following except:

production motive

Another name for the receipts and disbursements method, which is descriptive of the activity involved in coming up with the cash forecast when using this method, is

scheduling

A gas station is likely to receive ________ term credit for gasoline purchases; a grocery store is likely to receive _________ term credit for vegetables purchases; and a manufacturer is likely to receive _________ term credit for purchase of plant and equipment.

short, short, long

______________ companies and/ or those with _____________ cash flow patterns are logically not as willing to spend very much time or money in developing cash forecasts.

small, stable

A ________________ source of financing provides funds automatically as a company's operations expand.

spontaneous

A payables manager is debating which guideline to adopt for his payables practices. Regardless of the NPV effect of doing so, a best ethical rule to follow in determining when to pay invoices is to

stretch payables only when the company is financially unable to pay them

A credit analyst is going over a Dun & Bradstreet report on a potential new customer. The credit history shows that the company paid two of its many suppliers late within the last six months. The least likely conclusion to be drawn is

that the company would be a poor credit risk

Credit terms of 2/10, prox net 30 mean that a cash discount of 2% can be taken if payment is made by _________________ or the full invoice must be paid by __________________ .

the 10th day of the next calendar month, the 30th day of the next calendar month

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

the alternative with the highest NPV should be selected *

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

the currency is expected to decline in value relative to the U.S. dollar

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

the lack of banks in a number of countries

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.)

the length of the period over which they are calculated

A company's forecasting philosophy refers to:

the number of forecasts, who will make the forecasts, making of daily forecasts

The value for "b" in the regression equation Y = a + b(X) + e is shown in Excel as

the slope

Accruals provide an attractive and accessible financing source but affected parties may object to their use as a financing source

their availability can change based on the level of business activity

Credit scoring models are used to discriminate between good and bad credit applicants. Which of the following items is a major weakness of this approach?

they do not look at collateral

The PRIMARY reason given by those companies that impose credit limits is:

to control risk exposure

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

uncollected balance percentages

The two main objectives for a monthly cash forecast are ______________ and _______________.

usefulness, accuracy

A credit policy includes each of the following except

whether a "just in time" system will be used