Question 1

Which of the following statements is correct about banker's acceptances?

Accepted Answer

A) They are equivalent to a sight draft 
B) They represent the norm for installment sales 
C) The bank guarantees payment of the invoice 
D) The bank retains title to the merchandise 
A) They are equivalent to a sight draft 
B) They represent the norm for installment sales 
C) The bank guarantees payment of the invoice 
D) The bank retains title to the merchandise

Question 2

Which of the following credit agreements provides the least protection to the seller?

Accepted Answer

A) Banker's acceptance 
B) Conditional sale 
C) Open account 
D) Commercial draft 
A) Banker's acceptance 
B) Conditional sale 
C) Open account 
D) Commercial draft

Question 3

A firm that makes only cash sales has the luxury of no uncollectible receivables at the expense of forgone sales.Does it make financial sense to allow credit sales if doing so would increase sales from 1,000 units monthly to 1,150, at a sales price of $50, and a present value of costs of $39 per unit? Assume that all sales will now be made on credit and that 6% of sales will end up being uncollectible after the 30-day payment period.The opportunity cost of capital is 1% per month.

Accepted Answer

Current profit per sale:
= p × PV(Rev -

Question 4

At what point does a customer's unpaid account become delinquent when the terms of sale are 2/10, net 60?

Accepted Answer

A) 11 days after the sale 
B) 31 days after the sale 
C) 61 days after the sale 
D) 71 days after the sale 
A) 11 days after the sale 
B) 31 days after the sale 
C) 61 days after the sale 
D) 71 days after the sale

Question 5

What is the break-even probability of collection if the present value of the revenues from the sale is $2,200 rather than $2,400? Why does the break-even probability increase? Use your answer to decide whether firms that sell high-profit margin or low-margin goods should be more willing to issue credit.

Accepted Answer

The present value of costs is still $200

Question 6

Which of the following credit agreements will provide the highest likelihood of cash payment to a seller of goods?

Accepted Answer

A) Banker's acceptance 
B) Time draft 
C) Open account 
D) Conditional sale 
A) Banker's acceptance 
B) Time draft 
C) Open account 
D) Conditional sale

Question 7

What is the break-even probability of collection when the present value of revenues from a sale is $100,000 and the present value of cost is $87,000?

Accepted Answer

A) 1.00 
B) 0.87 
C) 0.74 
D) 0.13 
A) 1.00 
B) 0.87 
C) 0.74 
D) 0.13

Question 8

A higher score in a typical questionnaire for credit scoring analysis indicates a higher creditworthiness.

Accepted Answer

A) True 
 B)False

Question 9

Discuss the premise behind the validity of a numerical credit scoring system.

Accepted Answer

This form of credit scoring attempts to

Question 10

Determine the break-even probability of collection for the following seller: $2,000 average invoice, 64% costs, 1% per month opportunity cost of capital.Assume that production costs were just paid and that receivables are outstanding an average of two months.

Accepted Answer

Expected profit = p × PV(Rev -

Question 11

What is the minimum probability of collection that should be accepted by firms that have a 25% profit margin? Ignore the time value of money.

Accepted Answer

A) 20% 
B) 25% 
C) 50% 
D) 75% 
A) 20% 
B) 25% 
C) 50% 
D) 75%

Question 12

Profits are maximized in a firm when the number of bad accounts is minimized.

Accepted Answer

A) True 
 B)False

Question 13

Would it ever make financial sense to forgo cash discounts that are offered from suppliers? Can you provide an example?

Accepted Answer

The provision of trade credit is a form

Question 14

Which of the following is correct concerning terms of trade credit of 4/10, EOM, net 90?

Accepted Answer

A) The discount period expires on the last day of the month. 
B) The invoice becomes delinquent 90 days after the last day of the month. 
C) The discount period ends on the tenth day of the month following the invoice. 
D) The discount period ends either 10 days after invoicing or at the end of the month, whichever is earlier. 
A) The discount period expires on the last day of the month. 
B) The invoice becomes delinquent 90 days after the last day of the month. 
C) The discount period ends on the tenth day of the month following the invoice. 
D) The discount period ends either 10 days after invoicing or at the end of the month, whichever is earlier.

Question 15

A firm with ______ profit margin should extend credit to customers with a high probability of default.

Accepted Answer

A) High 
B) Average 
C) Low 
D) Zero 
A) High 
B) Average 
C) Low 
D) Zero

Question 16

The set of rules that determines whether or not to extend credit is known as:

Accepted Answer

A) Credit analysis 
B) Credit policy 
C) Multiple discriminate analysis 
D) The terms of trade credit 
A) Credit analysis 
B) Credit policy 
C) Multiple discriminate analysis 
D) The terms of trade credit

Question 17

A retailer buys Christmas merchandize from the manufacturer on Sep.1.The manufacturer postdates the invoice to Dec.31, and the credit terms of the sale are 2/10, net 30.When is the payment due?

Accepted Answer

A) Jan.10 
B) Jan.30 
C) Feb.10 
D) Sep.30 
A) Jan.10 
B) Jan.30 
C) Feb.10 
D) Sep.30

Question 18

How do firms decide whether it makes sense to grant credit to a customer?

Accepted Answer

Credit policy refers to the decision to

Question 19

With terms of 4/15, net 60, what is the implied interest rate for forgoing a cash discount and paying at the end of the period?

Accepted Answer

A) 25.63% 
B) 28.19% 
C) 39.25% 
D) 61.15% 
A) 25.63% 
B) 28.19% 
C) 39.25% 
D) 61.15%

Exam 22: Credit Management and Collection

Which of the following statements is correct about banker's acceptances?

Which of the following credit agreements provides the least protection to the seller?

At what point does a customer's unpaid account become delinquent when the terms of sale are 2/10, net 60?

Which of the following credit agreements will provide the highest likelihood of cash payment to a seller of goods?

What is the break-even probability of collection when the present value of revenues from a sale is $100,000 and the present value of cost is $87,000?

A higher score in a typical questionnaire for credit scoring analysis indicates a higher creditworthiness.

Discuss the premise behind the validity of a numerical credit scoring system.

Determine the break-even probability of collection for the following seller: $2,000 average invoice, 64% costs, 1% per month opportunity cost of capital.Assume that production costs were just paid and that receivables are outstanding an average of two months.

What is the minimum probability of collection that should be accepted by firms that have a 25% profit margin? Ignore the time value of money.

Profits are maximized in a firm when the number of bad accounts is minimized.

Would it ever make financial sense to forgo cash discounts that are offered from suppliers? Can you provide an example?

Which of the following is correct concerning terms of trade credit of 4/10, EOM, net 90?

A firm with ______ profit margin should extend credit to customers with a high probability of default.

The set of rules that determines whether or not to extend credit is known as:

A retailer buys Christmas merchandize from the manufacturer on Sep.1.The manufacturer postdates the invoice to Dec.31, and the credit terms of the sale are 2/10, net 30.When is the payment due?

How do firms decide whether it makes sense to grant credit to a customer?

With terms of 4/15, net 60, what is the implied interest rate for forgoing a cash discount and paying at the end of the period?

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, Ipos, and Seasoned Offerings

Debt Policy

Leasing

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Cash and Inventory Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

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