Exam 18: Management of Accounts Receivable and Inventories

Potential losses can occur in the credit evaluation process when

The ____ measures the promptness with which customers repay their credit obligations.

Mace Auto Parts Company sells to retail auto supply stores on credit terms of "net 60". Annual credit sales are $300 million (spread evenly throughout the year) and its accounts average 28 days overdue. The firm's variable cost ratio is 0.75 (i.e. variable costs are 75 percent of sales). When converting from annual to daily data or vice versa, assume there are 365 days per year. Suppose that Mace's sales are expected to increase by 20 percent next year and, through more effective collection methods, the firm is able to reduce its average collection period by 20 days. Determine the firm's average investment in receivables for next year under these conditions.

For the firm with a seasonal sales pattern, offering seasonal datings to its customers is likely to result in

Inventory related costs are all of the following EXCEPT:

Describe how an aging of accounts is a useful monitoring technique for accounts receivable.

If a lawn mower assembly plant orders 25,000 frames per year at a price of $27 each, what is the EOQ if the ordering cost per order is $35 and the annual inventory carrying cost is 12 percent?

In determining the creditworthiness of a customer from financial statements, the statements can indicate all of the following EXCEPT:

Haulsee Inc. builds 800,000 golf carts a year and purchases the electronic motors for these carts for $370 each. Ordering costs are $540 and Haulsee's inventory carrying costs average 14% of the inventory value. What is the EOQ for Haulsee?

Tool Mart sells 1400 electronic water pumps every year. These pumps cost $54.30 each. If annual inventory carrying costs are 12% and the cost of placing an order is $90, what is the optimal ordering frequency?

Willoughby Industries, Inc. is considering whether to discontinue offering credit to customers who are more than 10 days overdue on repaying the credit extended to them. Current annual credit sales are $10 million on credit terms of "net 30". Such a change in policy is expected to reduce sales by 10 percent, cut the firm's bad-debt losses from 5 to 3 percent, and reduce its average collection period from 72 days to 45 days. The firm's variable cost ratio is 0.70 (profit contribution ratio is 0.30) and its required pretax return (i.e. opportunity cost) on receivables investments is 25 percent. Determine the net effect of this credit tightening policy on the pretax profits of Willoughby. When converting from annual to daily data or vice versa, assume that there are 365 days per year.

Covers, Inc. (CI) sells its stainless steel products on terms of "2/10, net 40". CI is considering granting credit to retailers with total assets as low as $500,000. Currently the lowest asset limit is $750,000. CI believes sales will increase $7 million from the new credit group but the average collection period for this new group will be 60 days versus the current average collection period of 35 days. If management estimates that 20% of the new customers will take the cash discount but 4% of the new business will be written off as a bad-debt loss, should CI lower its credit standards? Assume CI's variable cost ratio is 0.7 and its required pretax rate of return on receivables investment is 15%.

The credit policy variables that a firm can use to exercise control over its level of receivables investment include

Mace Auto Parts Company sells to retail auto supply stores on credit terms of "net 60". Annual credit sales are $300 million (spread evenly throughout the year) and its accounts average 28 days overdue. The firm's variable cost ratio is 0.75 (i.e., variable costs are 75 percent of sales). When converting from annual to daily data or vice versa, assume there are 365 days per year. Determine Mace's average collection period.

Which of the following is not a cost related to the extension of credit to customers?

Maximizing shareholder wealth by investing in accounts receivables is considered when: I. Marginal costs are exceeded by marginal returns. II. The cost of the funds invested are exceeded by expected marginal returns.

Increasing collection expenditures is likely to result in

All of the following are reliable sources of the creditworthiness of a customer EXCEPT:

____ serves as a buffer between the various phases in the procurement-production-sales cycle of a manufacturing firm.

Cycles de Oro produces 120,000 high-tek bikes a year and orders the brake assembly from IKON for $15.40 each. The order cost is $84 and Cycles estimates their inventory carrying costs are 15%. What is their total ordering cost per year?