Receivables management, credit policy, discounts, collection, DSO, aging schedule, seasonal, carrying, ordering, safety stock, EOQ, JIT

A JIT system is designed to stretch accounts payable as long as possible.

False

A firm that makes 90% of its sales on credit and 10% for cash is currently growing at a stable, steady rate of 10% annually. This firm's accounts receivable can be kept at their current level, since the 10% cash sales can be used to support the 10% growth rate.

False

Because money has time value, cash sales are always more profitable than credit sales.

False

Cash discounts are mostly used to get new customers in the door since existing customers almost always use the delayed payment terms.

False

Credit standards refer to the financial importance of a potential customer to the firm in order to qualify for credit.

False

If a firm's terms are 2/10, net 30 days, and its DSO is 28 days, we can be certain that the credit department is functioning efficiently and that the percentage of past due accounts is minimal.

False

If your firm's DSO and/or aging schedule deteriorates from the first quarter of the year to the second quarter, this is proof positive that your firm's credit policy has weakened.

False

Since a tighter collection policy is very likely to reduce sales, such a change in policy should not be considered.

False

The addition of a safety stock to the EOQ model does not change the total inventory costs.

False

The addition of a safety stock to the EOQ model increases the EOQ proportionately.

False

The collection process is a fairly inexpensive component of doing business, although sometimes difficult to implement.

False

The credit period is the amount of time it takes to do a credit search on a potential customer.

False

The target cash balance should be set so that it need not be adjusted for either seasonal patterns or unanticipated fluctuations, although it should be adjusted to reflect long-term changes in the firm's operations.

False

A firm's collection policy, i.e., the procedures it follows to collect accounts receivable, plays an important role in keeping its average collection period short, although too strict a collection policy can reduce profits due to lost sales.

True

Changes in a firm's collection policy can affect sales, working capital, and even additional funds needed.

True

Constant demand, constant carrying costs, and constant ordering costs are the three key assumptions of the EOQ model.

True

Decisions on granting credit, or changing credit or collection policies, involve an analysis of the magnitude and timing of the cash flow and the risks and returns expected. This evaluation is done with a net present value framework.

True

For a non-growth firm, it is possible to increase the percentage of sales that are made on credit sales and still keep accounts receivable at their current level, provided the firm can shorten the length of its collection period sufficiently.

True

If a company increases its safety stock, then its average inventory will go up.

True

Marketable securities are liquid assets. Holding too low an amount of these liquid assets may adversely affect a firm's creditworthiness and lower its credit rating, resulting in higher future costs for securing both short- and long-term funds.

True

Suppose a firm changes its credit policy from 2/10, net 30, to 3/10, net 30. The change is meant to meet competition, so no increase in sales is expected. The average accounts receivable balance will probably decline as a result of this change.

True

The EOQ model minimizes total inventory costs.

True

The average accounts receivables balance is determined jointly by the volume of credit sales and the days sales outstanding.

True

The four major elements in a firm's credit policy are (1) credit standards, (2) discounts offered, (3) credit period, and (4) collection policy.

True

When deciding whether to offer a discount for cash payment, a firm must balance the profits from additional sales with the lost revenues from the discount.

True

Bello Inc. had sales of $2,500,000 per year (all credit), and its DSO was 35 days. What was its average amount of accounts receivable outstanding, based on a 365-day year? a. $239,726 b. $251,712 c. $264,298 d. $277,513

a. $239,726 Receivables = Sales/365 DSO = $239,726

Bello Inc. had sales of $2,500,000 per year (all credit), and its DSO was 35 days. What was its average amount of accounts receivable outstanding, based on a 365-day year? a. $239,726 b. $251,712 c. $264,298 d. $277,513

a. $239,726 Receivables = Sales/365 DSO = $239,726

Which statement best describes cash management? a. A cash management system that minimizes collections float and maximizes disbursement float is better than one with higher collections float and lower disbursement float. b. A cash management system that maximizes collections float and minimizes disbursement float is better than one with lower collections float and higher disbursement float. c. The use of a lockbox is designed to minimize cash theft losses in retail stores. If the cost of the lockbox is less than theft losses saved, then the lockbox should be installed. d. Other things held constant, a firm will need an identical line of credit regardless of whether it must pay its bills by the 5th of each month or pay its bills due uniformly during the month.

a. A cash management system that minimizes collections float and maximizes disbursement float is better than one with higher collections float and lower disbursement float. Net float = Disbursements float - Collections float; therefore, the larger the disbursements float and the lower the collections float, the better the cash management system.

Which situation is NOT likely to lead a firm to hold marketable securities? a. The firm has replaced an obsolete machine with a new model; a large write-off must be taken on the old machine. b. The firm must meet a known financial commitment, such as financing an ongoing construction project. c. The firm must finance seasonal operations. d. The firm has just sold long-term securities and has not yet invested the proceeds in earning assets.

a. The firm has replaced an obsolete machine with a new model; a large write-off must be taken on the old machine.

Which statement best describes receivables management? a. A firm that makes 90% of its sales on credit and 10% for cash is growing at a constant rate of 10% annually. This firm will be able to keep its accounts receivable at the current level, since the 10% cash sales can be used to support the 10% growth rate. b. In managing a firm's accounts receivable, it is possible to increase credit sales per day yet still keep accounts receivable fairly steady, provided the firm can shorten the length of its collection period (its DSO). c. If a firm has a high percentage of accounts over 30 days old, this is a sure sign that the credit manager is not doing his or her job well. d. Since receivables and payables both result from sales transactions, a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio.

b. In managing a firm's accounts receivable, it is possible to increase credit sales per day yet still keep accounts receivable fairly steady, provided the firm can shorten the length of its collection period (its DSO).

Which of the following statements is correct? a. If credit sales as a percentage of a firm's total sales increases, and the volume of credit sales also increases, then the firm's accounts receivable will automatically increase. b. It is possible for a firm to overstate profits by offering very lenient credit terms that encourage additional sales to financially weak firms. A major disadvantage of such a policy is that it is likely to increase uncollectible accounts. c. Firms use seasonal dating primarily to decrease their DSO. d. Seasonal dating with terms 2/15, net 30 days, with April 1 dating, means that if the original sale took place on February 1, the customer can take the discount up until March 15, but must pay the net invoice amount by April 1.

b. It is possible for a firm to overstate profits by offering very lenient credit terms that encourage additional sales to financially weak firms. A major disadvantage of such a policy is that it is likely to increase uncollectible accounts.

Which items does a firm's credit policy consist of? a. credit period, cash discounts, credit standards, receivables monitoring b. credit period, cash discounts, credit standards, collection policy c. credit period, cash discounts, receivables monitoring, collection policy d. cash discounts, credit standards, receivables monitoring, collection policy

b. credit period, cash discounts, credit standards, collection policy

If easing a firm's credit policy lengthens the collection period and results in a worsening of the aging schedule, then why might a firm take this action? a. to slow down an unsustainable growth in sales b. to meet competitive pressures c. to increase the payments deferral period d. to shorten the cash collection cycle

b. to meet competitive pressures

Which of the following statements is NOT correct? a. Collection policy is how a firm goes about collecting past-due accounts. b. A more aggressive collection policy will reduce bad debt expenses, but may also decrease sales. c. Collection policy usually has little impact on sales since collecting past-due accounts occurs only after the customer has already purchased. d. Typically, a firm will turn over an account to a collection agency only after it has tried several times on its own to collect the account.

c. Collection policy usually has little impact on sales since collecting past-due accounts occurs only after the customer has already purchased.

Which statement best describes DSO? a. Other things held constant, the higher a firm's DSO, the better its credit department. b. If a firm that sells on terms of net 30 changes its policy to 2/10, net 30, and if no change in sales volume occurs, then the firm's DSO will probably increase. c. If a firm sells on terms of 2/10, net 30, and its DSO is 30 days, then its aging schedule would probably show some past due accounts. d. DSO indicates the maximum number of days it takes a firm's customers to pay their bills.

c. If a firm sells on terms of 2/10, net 30, and its DSO is 30 days, then its aging schedule would probably show some past due accounts.

Which of the following is true of the EOQ model? Note that the optimal order quantity, Q, will be called EOQ. a. If the fixed per order cost increases by 20%, then EOQ will increase by 20%. b. If the annual sales, in units, increases by 20%, then EOQ will increase by 20%. c. If the average inventory increases by 20%, then the total carrying costs will increase by 20%. d. If the average inventory increases by 20% the total order costs will increase by 20%.

c. If the average inventory increases by 20%, then the total carrying costs will increase by 20%.

Other things held constant, which circumstance will cause an increase in net operating working capital? a. Cash is used to buy marketable securities. b. A cash dividend is declared and paid. c. Merchandise is sold at a profit, but the sale is on credit. d. Missing inventory is written off against retained earnings.

c. Merchandise is sold at a profit, but the sale is on credit.

Which statement best describes DSO and aging? a. If a firm's volume of credit sales declines, then its DSO must also decline. b. If a firm changes its credit terms from 1/20, net 40, to 2/10, net 60, the impact on sales can't be determined because the increase in the discount is offset by the longer net terms, which tends to reduce sales. c. The DSO of a firm with seasonal sales can vary. While the sales per day calculation is usually based on the total annual sales, the accounts receivable balance will be high or low depending on the season. d. An aging schedule is used to determine what portion of customers pay cash and what portion buy on credit.

c. The DSO of a firm with seasonal sales can vary. While the sales per day calculation is usually based on the total annual sales, the accounts receivable balance will be high or low depending on the season.

Suppose a firm has seasonal sales and customers that all pay promptly at the end of 30 days. Which of the following statements is NOT correct? a. DSO will vary from month to month. b. The quarterly uncollected balances schedule will be the same in each quarter. c. The level of accounts receivable will be constant from month to month. d. The ratio of accounts receivable to sales will vary from month to month.

c. The level of accounts receivable will be constant from month to month.

Which one of the following has nothing to do with inventory management? a. EOQ b. JIT c. FIFO d. DSO

d. DSO

18. Which of the following is NOT commonly regarded as being a credit policy variable? a. credit period b. collection policy c. cash discounts d. payments deferral period

d. payments deferral period

Which of the following is NOT commonly regarded as being a credit policy variable? a. credit period b. collection policy c. cash discounts d. payments deferral period

d. payments deferral period