FIN 420 - Chapter 8 Quiz

A business wants to encourage adoption of electronic payment methods by giving them an equivalent cost to the buyer as that of a check. If the opportunity cost of funds is 11 percent and float-neutral terms would allow electronic payment to be made 3 days later than by check, what is the equivalent discount that could be offered for immediate electronic payment?

0.1 percent

A payment that is due in 30 days and is eligible for a 1% discount if paid within 15 days of the invoice date would be represented by which of the following terms?

1/15 net 30

A banana wholesaler sells shipments using cash terms. How long does the buyer generally have to pay?

7 to 10 days

When assessing the costs of offering trade credit, what is the primary cost to weigh against the cost of bad debt?

A carrying cost of short-term borrowings

Which of the following financing strategies uses some short-term financing to support a portion of permanent current assets?

Aggressive

Which of the following statements is (are) true about bilateral netting systems compared to multilateral netting systems? Select all that apply.

Bilateral netting systems do not require a clearing center to keep track of netting transactions

Which of the following is an advantage of short-term debt over long-term debt?

Can adjust financing to level of current assets to avoid excess financing

Why is careful management of borrowing and investing during the cash cycle critical to a company's short-term liquidity and long-term viability?

Cash flow is often uneven for individual accounts and overall working capital.

Which of the following is an example of a qualitative (nonquantitative) factor used in making credit decisions?

Character

What is most critical to ensure when your customer uses "automatch" processes to perform a three-way match prior to authorizing payment of an invoice?

Clearly stated payment terms and remittance instructions

Which of the following strategies has higher financing costs than other approaches because short-term financing is used for only a portion of the fluctuating current assets?

Conservative financing strategy

Easing of credit standards may cause which two of the following to occur? Select all that apply.

Decreased rejection of an acceptable credit risk Increased acceptance of an unacceptable risk

Which of the following cash management practices can be instituted to optimize collection float?

Depositing checks early in the day

To optimize float, a company would disburse and collect in which of the following ways?

Disburse via check; collect via ACH.

A company has subsidiaries in the United States (US), United Kingdom (UK), Germany and Japan. The US subsidiary sends invoices to the UK, and German subsidiaries and pays invoices to the UK, German and Japanese subsidiaries. A re-invoicing center would affect the US subsidiary in which of the following ways?

Eliminate all currency exposures

In a company that is restrictive in its current asset investment strategy, its credit policy and its inventory policy will have which of the following in comparison to a more relaxed policy?

Higher risks associated with the tighter management of credit and inventory and not having cash available for accounts payable

When credit scoring is used to analyze the creditworthiness of an applicant, what is the correct chronological sequence for the following steps? I. Setting of cutoff scores II. Definition of standard and high-risk accounts III. Weighting of characteristics

II, III, I

Which of the following is an advantage of a centralized A/P and disbursement system?

Improved ability to concentrate excess cash

Which of the following are advantages of a cross-border cash management netting system? Select all that apply.

Improved cash forecasting Reduced foreign exchange transactions Reduced wire transfers

Which of the following are advantages to a company of using a decentralized disbursement system? Select all that apply.

Improved vendor relationships Easier resolution of payment disputes Easier to take advantage of discount terms

A decrease in accounts payable results in a(n) Select all that apply.

Increase in debt Decrease of cash

Stretching payables can have which of the following results? Select all that apply.

Increased asset purchasing power Increased ability to use cash to reduce debt Improved short-term investment opportunities

What changes can happen spontaneously to current asset accounts as a result of a company increasing its sales?

Inventory and accounts receivable rise

Which of the following statements are true about an internal factoring center? Select all that apply.

It deals with exporting and importing units It enables leading and lagging arrangements It improves export trade financing

Under a relaxed current asset investment strategy, a company will have which of the following in comparison to a restrictive strategy?

Less risk if they also have a larger investment in current assets

An Internet-based company buys and sells products in over 30 countries but is still a small enough company that it wants to have minimal banking arrangements. Which of the following will enable this company to achieve its goals?

Multicurrency account

Which of the following statements is true regarding credit policies?

Payment of a draft/bill of lading is not guaranteed by the bank providing the documentary collection

Which of the following components of collection float is affected by a company holiday celebrating the founder's birthday?

Processing delay

A float time study of a company reveals that the company has two days of float between when the payment arrives at the company's door and when it is deposited in the bank. What type of float is this?

Processing float

Which of the following statements are true regarding the factoring of receivables? Select all that apply.

Receivables usually have to be sold at a significant discount. The seller receives funds immediately after factoring. Companies that routinely factor generally add this cost to the sales price.

Which of the following would shorten the cash conversion cycle?

Reducing the inventory conversion period

Which of the following is true of a re-invoicing center?

Requires local government approval

A company makes most of its working capital payments by accessing a short-term line of credit with an adjustable rate (base rate is LIBOR). Assuming the organization can tolerate a fluctuating opportunity cost, which of the following should the organization use as its opportunity cost for working capital decisions?

Short-term borrowing rate

Seasonal-dated credit terms would most likely be offered by a company that sells which of the following?

Sporting goods

The following lists the four steps involved in purchasing and selling goods when trade credit is used: I. Purchase raw materials II. Pay supplier for materials III. Sell goods IV. Collect cash from accounts receivable Which of the following correctly lists the beginning and end points of the cash conversion cycle?

Start II, end IV

Which of the following are important sources of internally generated credit information? Select all that apply.

The actual payment history of the applicant A credit application completed by an applicant

Which of the following will help convince both buyers and sellers to adopt electronic payments over paper-based payments? Select all that apply.

The buyer delays electronic payment to compensate for float The seller offers a discount if the buyer agrees to instant electronic debits

Which of the following statements are true about installment credit?

The buyer usually signs a contract specifying the obligation terms Payments are usually made in equal monthly amounts It is commonly used for high-value consumer durables

Which of the following would be important considerations to a buyer and seller renegotiating credit terms as part of implementing an e-commerce or EFT initiative? Select all that apply.

The determination of a float neutral position The transaction cost of making electronic payments The changes in the cash flow timeline

From the seller's perspective, which of the following are advantages of accepting credit cards rather than maintaining accounts receivable (A/R)? Select all that apply.

The seller is paid more quickly The seller does not have to finance A/R No direct costs of running a credit department

A company has a relatively high current ratio. Which of the following is a possible detractor for this position?

There is a high cost associated with having too much liquidity

What is the primary reason that obsolete or spoiled inventory might be sold at a loss?

To get the inventory off the books

External information sources used to assist a company in determining the creditworthiness of a credit applicant include which of the following? Select all that apply.

Trade references Financial statements

A firm has shortened its cash conversion cycle. Which of the following could make this improvement in the cycle be short-lived? Select all that apply.

Vendors charging higher prices because individual orders are smaller or payment is slower Excessive reliance on accounts payable in lieu of a stable base of short-term bank credit Refusal to sell to customers who are good credit risks but are occasionally slow in paying Payables stretched beyond the due date or cost-saving trade discounts foregone

A company that decides to maintain a large investment in current asset accounts probably has which of the following?

a conservative management style

A company's credit terms, sales and collection patterns determine its level of

accounts receivable

The time from the deposit of a check in a bank account until the funds can be used by the payee is known as

availability float

A quick ratio is part of determining which of the following five C's of credit?

capacity

The process of matching and applying a customer's payment against outstanding invoices is known as

cash application

If a customer's credit terms are cash before delivery (CBD), which of the following may be required before goods are shipped?

cashier's check

Which of the following terms of sale provides the most assurance that creditors will receive payment when it is due?

draft/bill of lading

All of the following are benefits of an in-house bank EXCEPT that it

establishes, measures and reduces the cost of back-office business processes and operations.

Which of the following would MOST LIKELY be opposed to a large inventory of finished goods to meet consumer demand and a liberal credit policy to stimulate sales?

financial managers

Before a funding decision on whether to use short- or long-term sources of funding is made, it is important for a treasurer to accurately determine or forecast all of the following EXCEPT

future sales levels for the organization.

A netting system can be used for all of the following EXCEPT

giro payments

All of the following are disadvantages of accepting credit cards for purchases EXCEPT

he seller is usually forced to absorb bad-debt losses.

Which is still an issue impeding the further growth in use of B2B quantitative credit scoring models?

less reliable sample size

Collection float for check-based payments is defined as the delay between the time the payor

mails the check and the payee receives the available funds.

A company purchases short-term securities to finance all of their fluctuating current assets. The company finances all permanent current assets and fixed assets using long-term debt or equity sources. What is this practice called?

maturity matching

Credit can be extended to a customer in which of the following ways?

open account

Which of the following connects with other areas of the cash flow timeline at the point after finished goods are shipped and when payment is received from the customer?

order to cash cycle

A just-in-time (JIT) system can help a company fulfill all of the following goals EXCEPT

reduce risk of back orders.

A company makes an indirect purchase of a chemical parts degreaser to prepare its goods for painting. Which of the following types of inventory is this?

stores and supplies inventories

All of the following are reasons that companies hold inventory EXCEPT

to meet shareholder requirements

An accounts receivable department becomes necessary in all of the following situations EXCEPT

when a company decides to sell goods and services on a cash before delivery basis.