Question 1

Which one of the following statements related to credit periods is correct?

Accepted Answer

A)  Longer credit periods are granted for sales of perishable items. 
B)  Inexpensive goods tend to have longer credit periods. 
C)  Smaller accounts tend to have longer credit periods. 
D)  Sellers may offer different credit periods to different customers. 
E)  Newer products tend to have shorter credit periods. 
A)  Longer credit periods are granted for sales of perishable items. 
B)  Inexpensive goods tend to have longer credit periods. 
C)  Smaller accounts tend to have longer credit periods. 
D)  Sellers may offer different credit periods to different customers. 
E)  Newer products tend to have shorter credit periods.

Question 2

A conditional sales contract:

Accepted Answer

A)  passes title to the goods sold to the buyer at the time the contract is signed. 
B)  normally calls for one lump sum payment on the contract payment date. 
C)  allows the seller to retain ownership of the goods sold until the customer has fully paid for the purchase. 
D)  is payable immediately upon receipt. 
E)  is a formal bid for a project. 
A)  passes title to the goods sold to the buyer at the time the contract is signed. 
B)  normally calls for one lump sum payment on the contract payment date. 
C)  allows the seller to retain ownership of the goods sold until the customer has fully paid for the purchase. 
D)  is payable immediately upon receipt. 
E)  is a formal bid for a project.

Question 3

Which one of these statements is correct?

Accepted Answer

A)  A firm's cash cycle generally decreases when it switches from a cash to a credit policy, all else equal. 
B)  Most customers will forgo the discount and pay at the end of the credit period. 
C)  Total revenues generally decrease if both the quantity sold and the price per unit increase when credit is granted. 
D)  Only the cost of default should be considered before granting credit. 
E)  A firm may have to increase its long-term borrowing if it decides to grant credit to its customers. 
A)  A firm's cash cycle generally decreases when it switches from a cash to a credit policy, all else equal. 
B)  Most customers will forgo the discount and pay at the end of the credit period. 
C)  Total revenues generally decrease if both the quantity sold and the price per unit increase when credit is granted. 
D)  Only the cost of default should be considered before granting credit. 
E)  A firm may have to increase its long-term borrowing if it decides to grant credit to its customers.

Question 4

Which one of the following statements is correct?

Accepted Answer

A)  The credit period begins when the discount period ends. 
B)  The discount period is the length of time granted to a customer to pay for a purchase. 
C)  The credit period begins on the invoice date. 
D)  With terms of 2/10, net 30, the net credit period is 20 days. 
E)  With EOM dating, all sales are assumed to have occurred on the 15ᵗʰ of each month. 
A)  The credit period begins when the discount period ends. 
B)  The discount period is the length of time granted to a customer to pay for a purchase. 
C)  The credit period begins on the invoice date. 
D)  With terms of 2/10, net 30, the net credit period is 20 days. 
E)  With EOM dating, all sales are assumed to have occurred on the 15ᵗʰ of each month.

Question 5

Currently, Tanner's sells 69 units a month at an average price of $499 a unit. The company thinks it can increase sales by an additional 32 units a month if it switches to a net 30 credit policy. The monthly interest rate is .48 percent and the variable cost per unit is $216. What is the incremental cash inflow of the proposed credit policy switch?

Accepted Answer

A)  $10,120 
B)  $9,056 
C)  $12,760 
D)  $17,810 
E)  $15,968 
A)  $10,120 
B)  $9,056 
C)  $12,760 
D)  $17,810 
E)  $15,968

Question 6

Under credit terms of 1/5, net 15, customers should:

Accepted Answer

A)  Always pay on the 15th day. 
B)  take the discount and pay immediately. 
C)  take the discount and pay on the day following the day of sale. 
D)  either take the discount or pay on the 15th day. 
E)  both take the discount and pay on the 15th day. 
A)  Always pay on the 15th day. 
B)  take the discount and pay immediately. 
C)  take the discount and pay on the day following the day of sale. 
D)  either take the discount or pay on the 15th day. 
E)  both take the discount and pay on the 15th day.

Question 7

A just-in-time inventory system:

Accepted Answer

A)  eliminates all inventory costs. 
B)  reduces the inventory turnover rate. 
C)  averages long-term inventory needs. 
D)  focuses on immediate production needs. 
E)  maximizes inventory costs. 
A)  eliminates all inventory costs. 
B)  reduces the inventory turnover rate. 
C)  averages long-term inventory needs. 
D)  focuses on immediate production needs. 
E)  maximizes inventory costs.

Question 8

Which one of the following inventory items is probably the most liquid?

Accepted Answer

A)  A custom made set of kitchen cabinets 
B)  Metal cabinets for dishwashers 
C)  Wheat stored in a grain silo 
D)  A customized drill press 
E)  A partially built modular home 
A)  A custom made set of kitchen cabinets 
B)  Metal cabinets for dishwashers 
C)  Wheat stored in a grain silo 
D)  A customized drill press 
E)  A partially built modular home

Question 9

Assume all sales are one-time credit sales with a probability of collection of 96 percent. The variable cost per unit is $1.67, the sales price per unit is $4.99, and the monthly interest rate is 1.35 percent. What is the NPV of a credit sale of one item?

Accepted Answer

A)  $3.18 
B)  $2.87 
C)  $3.38 
D)  $2.92 
E)  $3.06 
A)  $3.18 
B)  $2.87 
C)  $3.38 
D)  $2.92 
E)  $3.06

Question 10

The Cellar Door currently sells 1,849 units a month for total monthly sales of $627,800. The company is considering replacing its current cash only credit policy with a net 30 policy. The variable cost per unit is $214 and the monthly interest rate is .87 percent. What is the new sales quantity at the switch break-even level of sales?

Accepted Answer

A)  1,711 units 
B)  1,779 units 
C)  1,814 units 
D)  1,957 units 
E)  1,893 units 
A)  1,711 units 
B)  1,779 units 
C)  1,814 units 
D)  1,957 units 
E)  1,893 units

Question 11

Turner's offers credit terms of net 30 with payments received an average of 2.8 days past their due date. Annual credit sales are $2.38 million. What is the average book value of accounts receivable? Assume a 365-day year.

Accepted Answer

A)  $213,874 
B)  $223,333 
C)  $211,667 
D)  $215,407 
E)  $223,593 
A)  $213,874 
B)  $223,333 
C)  $211,667 
D)  $215,407 
E)  $223,593

Question 12

Music City has an average collection period of 34.6 days and an average daily investment in receivables of $71,407. What are the annual credit sales given a 365-day year?

Accepted Answer

A)  $668,407 
B)  $577,109 
C)  $753,282 
D)  $625,893 
E)  $767,123 
A)  $668,407 
B)  $577,109 
C)  $753,282 
D)  $625,893 
E)  $767,123

Question 13

Assume that RSF is a wholly owned subsidiary of the Rolled Steel Company. RSF provides credit financing solely for large ticket items purchased from the Rolled Steel Company. Which one of the following terms describes RSF?

Accepted Answer

A)  Credit department 
B)  Parent company 
C)  Captive finance company 
D)  Credit union 
E)  Service unit 
A)  Credit department 
B)  Parent company 
C)  Captive finance company 
D)  Credit union 
E)  Service unit

Question 14

Assume you put your purchases on your credit card and then take advantage of any cash discounts offered. Which one of these credit terms do you prefer?

Accepted Answer

A)  1/10, net 20 
B)  2/5, net 30 
C)  2/10, net 30 
D)  1/15, net 45 
E)  2/15, net 30 
A)  1/10, net 20 
B)  2/5, net 30 
C)  2/10, net 30 
D)  1/15, net 45 
E)  2/15, net 30

Question 15

Scott purchased a shovel, a rake, and a wheelbarrow from The Local Hardware Store yesterday. Today, the store issued a bill for these items and mailed it to Scott. What is the name given to this bill?

Accepted Answer

A)  Ledger statement 
B)  Warranty 
C)  Indenture 
D)  Receipt 
E)  Invoice 
A)  Ledger statement 
B)  Warranty 
C)  Indenture 
D)  Receipt 
E)  Invoice

Question 16

At the optimal order quantity size, the:

Accepted Answer

A)  total cost of holding inventory is fully offset by the restocking costs. 
B)  carrying costs are equal to zero. 
C)  restocking costs are equal to zero. 
D)  total costs equal the carrying costs. 
E)  carrying costs equal the restocking costs. 
A)  total cost of holding inventory is fully offset by the restocking costs. 
B)  carrying costs are equal to zero. 
C)  restocking costs are equal to zero. 
D)  total costs equal the carrying costs. 
E)  carrying costs equal the restocking costs.

Question 17

A firm offers credit terms of 2/15, net 45. What effective annual interest rate does the firm earn when a customer forgoes the discount?

Accepted Answer

A)  18.67 percent 
B)  20.45 percent 
C)  23.37 percent 
D)  25.34 percent 
E)  27.86 percent 
A)  18.67 percent 
B)  20.45 percent 
C)  23.37 percent 
D)  25.34 percent 
E)  27.86 percent

Question 18

When credit policy is at the optimal point, the:

Accepted Answer

A)  total costs of granting credit will be maximized. 
B)  carrying costs of credit will be equal to zero. 
C)  opportunity cost of credit will be equal to zero. 
D)  carrying costs will equal the opportunity costs. 
E)  total costs will equal the opportunity costs. 
A)  total costs of granting credit will be maximized. 
B)  carrying costs of credit will be equal to zero. 
C)  opportunity cost of credit will be equal to zero. 
D)  carrying costs will equal the opportunity costs. 
E)  total costs will equal the opportunity costs.

Question 19

CJ Stores has current cash-only sales of 218 units per month at a price of $236.55 a unit. If it switches to a net 30 credit policy, the credit sales price will be $249 while the cash price will remain at $236.55. The switch is not expected to affect the sales quantity but a 3 percent default rate is expected. The monthly interest rate is 1.4 percent. What is the net present value of the proposed credit policy switch?

Accepted Answer

A)  $24,727 
B)  $26,893 
C)  $27,965 
D)  $25,978 
E)  $29,481 
A)  $24,727 
B)  $26,893 
C)  $27,965 
D)  $25,978 
E)  $29,481

Question 20

A firm's total investment in accounts receivables depends primarily on the firm's:

Accepted Answer

A)  total sales and cash discount period. 
B)  cash to credit sales ratio. 
C)  bad debt ratio. 
D)  average collection period and amount of credit sales. 
E)  amount of credit sales and cash discount percentage. 
A)  total sales and cash discount period. 
B)  cash to credit sales ratio. 
C)  bad debt ratio. 
D)  average collection period and amount of credit sales. 
E)  amount of credit sales and cash discount percentage.

Exam 20: Credit and Inventory Management

Which one of the following statements related to credit periods is correct?

A conditional sales contract:

Which one of these statements is correct?

Which one of the following statements is correct?

Under credit terms of 1/5, net 15, customers should:

A just-in-time inventory system:

Which one of the following inventory items is probably the most liquid?

Assume all sales are one-time credit sales with a probability of collection of 96 percent. The variable cost per unit is $1.67, the sales price per unit is $4.99, and the monthly interest rate is 1.35 percent. What is the NPV of a credit sale of one item?

Turner's offers credit terms of net 30 with payments received an average of 2.8 days past their due date. Annual credit sales are $2.38 million. What is the average book value of accounts receivable? Assume a 365-day year.

Music City has an average collection period of 34.6 days and an average daily investment in receivables of $71,407. What are the annual credit sales given a 365-day year?

Assume that RSF is a wholly owned subsidiary of the Rolled Steel Company. RSF provides credit financing solely for large ticket items purchased from the Rolled Steel Company. Which one of the following terms describes RSF?

Assume you put your purchases on your credit card and then take advantage of any cash discounts offered. Which one of these credit terms do you prefer?

Scott purchased a shovel, a rake, and a wheelbarrow from The Local Hardware Store yesterday. Today, the store issued a bill for these items and mailed it to Scott. What is the name given to this bill?

At the optimal order quantity size, the:

A firm offers credit terms of 2/15, net 45. What effective annual interest rate does the firm earn when a customer forgoes the discount?

When credit policy is at the optimal point, the:

A firm's total investment in accounts receivables depends primarily on the firm's:

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working with Financial Statements

Long-Term Financial Planning and Growth

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Project Analysis and Evaluation

Some Lessons from Capital Market History

Return, Risk, and the Security Market Line

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policy

Short Term Finance and Planning

Cash and Liquidity Management

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Enterprise Risk Management

Options and Corporate Finance

Option Valuation

Mergers and Acquisitions

Leasing

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