Exam 22: Credit Management and Collection

Should credit be granted to a customer wishing to purchase a $2,000 item that has been marked-up 50% over cost if the probability of collection is only 65%? Assume all cash flows are discounted to present value.

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(Multiple Choice)

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Question 1

Correct Answer:

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Why will sellers be less reluctant to grant credit under terms of a banker's acceptance? How do the acceptances work, in general?

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Question 2

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When a seller receives the commitment offered by a banker's acceptance, it has basically substituted the creditworthiness of the bank for the creditworthiness of the buyer.While it may be risky to assume that this substitution of credit quality makes the seller better off, in all but the most extreme cases it probably will.Under a banker's acceptance, the seller provides the buyer's bank with a copy of the invoice and terms of the sale.Once the bank has signed and thus "accepted" it, it returns the time draft to the seller.Unless the bank defaults, the seller may now rest assured that the draft can be presented for payment on the agreed date, and payment will be made regardless of the buyer's liquidity.

Which of the following terms of sale is the most restrictive?

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Question 3

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The more liberal the terms of the collection policy, the less the potential for bad debts and unprofitable sales.

(True/False)

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Question 4

Which of the following would not be a customary source of credit information on customers?

(Multiple Choice)

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Question 5

An aging schedule is a statement sent to customers who are behind in payments.

(True/False)

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Question 6

Which statement is true about terms of trade credit of 2/10, net 30?

(Multiple Choice)

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Question 7

Which of the following statements is typically correct concerning the break-even probability of collection for repeat sale customers?

(Multiple Choice)

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Question 8

How do firms assess the probability that a customer will pay?

(Essay)

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Question 9

Samana Corporation expects to receive $1,500 along with costs of $1,000 on each non-delinquent sale on credit.The probability of collection is 60%.Determine whether credit should be extended.

(Multiple Choice)

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Question 10

In general, a firm's credit policy should grant the credit whenever the expected:

(Multiple Choice)

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Question 11

The break-even probability of collection is positively related to the firm's percentage of profit margin.

(True/False)

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Question 12

The purpose of credit analysis is to:

(Multiple Choice)

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Question 13

The potential benefits of additional credit analysis should always be weighed against the incremental costs.

(True/False)

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Question 14

When does it make sense to ask customers for formal IOUs?

(Essay)

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Question 15

Commercial drafts are issued by a customer's bank.

(True/False)

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Question 16

Credit scoring systems can be used to:

(Multiple Choice)

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Question 17

What is the break-even probability of collection for a firm that has a 40% profit margin (ignore present value)?

(Multiple Choice)

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Question 18

Which of the following assumptions is made when declaring that the break-even probability of collection is lower for customers with repeat orders?

(Multiple Choice)

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Question 19

Jomal Corporation expects to receive $2,300 along with costs of $1,800 on each non-delinquent sale on credit.The probability of collection is 85%.Determine whether credit should be extended.

(Multiple Choice)

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Question 20

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Exam 22: Credit Management and Collection

Should credit be granted to a customer wishing to purchase a $2,000 item that has been marked-up 50% over cost if the probability of collection is only 65%? Assume all cash flows are discounted to present value.

Why will sellers be less reluctant to grant credit under terms of a banker's acceptance? How do the acceptances work, in general?

Which of the following terms of sale is the most restrictive?

The more liberal the terms of the collection policy, the less the potential for bad debts and unprofitable sales.

Which of the following would not be a customary source of credit information on customers?

An aging schedule is a statement sent to customers who are behind in payments.

Which statement is true about terms of trade credit of 2/10, net 30?

Which of the following statements is typically correct concerning the break-even probability of collection for repeat sale customers?

How do firms assess the probability that a customer will pay?

Samana Corporation expects to receive $1,500 along with costs of $1,000 on each non-delinquent sale on credit.The probability of collection is 60%.Determine whether credit should be extended.

In general, a firm's credit policy should grant the credit whenever the expected:

The break-even probability of collection is positively related to the firm's percentage of profit margin.

The purpose of credit analysis is to:

The potential benefits of additional credit analysis should always be weighed against the incremental costs.

When does it make sense to ask customers for formal IOUs?

Commercial drafts are issued by a customer's bank.

Credit scoring systems can be used to:

What is the break-even probability of collection for a firm that has a 40% profit margin (ignore present value)?

Which of the following assumptions is made when declaring that the break-even probability of collection is lower for customers with repeat orders?

Jomal Corporation expects to receive $2,300 along with costs of $1,800 on each non-delinquent sale on credit.The probability of collection is 85%.Determine whether credit should be extended.

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