Question 1

A purchaser was offered terms of trade credit of 2/10,net 30,with an invoice date of January 1.Which one of the following acts threatens creditworthiness?

Accepted Answer

A)  Taking the discount, paying on January 5. 
B)  Taking the discount, paying on January 10. 
C)  Ignoring the discount, paying on January 30. 
D)  Ignoring the discount, paying on February 9. 
A)  Taking the discount, paying on January 5. 
B)  Taking the discount, paying on January 10. 
C)  Ignoring the discount, paying on January 30. 
D)  Ignoring the discount, paying on February 9. D

Question 2

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

Accepted Answer

Through credit analysis,companies will determine whether companies are likely to pay their bills.There are various sources of information - past experience with customer,experience of other creditors,assessment of credit agency,contact with the customer's bank,market values of customer's securities and analysis of financial statements.Firms that handle a large volume of credit information,often use a formal system of combining various sources into an overall credit score.

Question 3

You are buying goods worth $75,000 from a firm that offers the credit terms of 2/10,net 30.What will be the actual payment if you paid within 10 days?

Accepted Answer

A)  $73,500 
B)  $74,250 
C)  $75,000 
D)  $76,500 
A)  $73,500 
B)  $74,250 
C)  $75,000 
D)  $76,500 A

Question 4

Balsam Corporation is concerned about their current bad debt ratio of 9%.The CFO believes imposing a more stringent credit policy may reduce sales by 8% and reduce the bad debt ratio to 6%.If the cost of goods sold is 85% of the selling price,determine if the new policy should be undertaken.

Accepted Answer

A)  Undertake; increase of 40% in profits 
B)  Undertake; increase of 38% in profits 
C)  Do not undertake; decrease of 36% in profits 
D)  Do not undertake; decrease of 34% in profits 
A)  Undertake; increase of 40% in profits 
B)  Undertake; increase of 38% in profits 
C)  Do not undertake; decrease of 36% in profits 
D)  Do not undertake; decrease of 34% in profits

Question 5

Consider a firm with the following financial ratios:
EBIT/total assets = .12
Sales/total assets = 1.4
Market equity/book debt = .9
Retained earnings/total assets = .4
Working capital/total assets = .12
What is the firm Z scorer?

Accepted Answer

(3.3 x .12)+ (1.0 x 1.4)+ (.6 x .9)+ (1.

Question 6

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 7

Credit scoring systems can be used to:

Accepted Answer

A)  Reduce the effective cost of trade 
B)  Determine the cost of goods sold 
C)  Evaluate Dun & Bradstreet's reports 
D)  Evaluate credit risk based on the borrower's characteristics 
A)  Reduce the effective cost of trade 
B)  Determine the cost of goods sold 
C)  Evaluate Dun & Bradstreet's reports 
D)  Evaluate credit risk based on the borrower's characteristics

Question 8

Extending trade credit can increase the probability of repeat orders.

Accepted Answer

A) True 
 B)False

Question 9

SamanaCorporation 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.

Accepted Answer

A)  Extend credit - net benefit of $100 
B)  Extend credit - net benefit of $0 
C)  Do not extend credit - net detriment of $100 
D)  Do not extend credit - net detriment of $200 
A)  Extend credit - net benefit of $100 
B)  Extend credit - net benefit of $0 
C)  Do not extend credit - net detriment of $100 
D)  Do not extend credit - net detriment of $200

Question 10

When sellers deliberately postdate an invoice by several months,their terms of sale include:

Accepted Answer

A)  COD 
B)  EOM 
C)  CBD 
D)  Season dating 
A)  COD 
B)  EOM 
C)  CBD 
D)  Season dating

Question 11

What effective interest rate is charged to a purchaser receiving terms of 5/10,net 90 if the purchaser avoids the discount and pays in 90 days?

Accepted Answer

A)  20.00% 
B)  22.81% 
C)  24.93% 
D)  26.37% 
A)  20.00% 
B)  22.81% 
C)  24.93% 
D)  26.37%

Question 12

Which of the following would be least expected to change as a result of a higher average age of receivables?

Accepted Answer

A)  Current ratio 
B)  Total collection costs 
C)  Accounts payable 
D)  Bad debt expense 
A)  Current ratio 
B)  Total collection costs 
C)  Accounts payable 
D)  Bad debt expense

Question 13

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 14

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

Accepted Answer

Credit analysis is the process of decidi

Question 15

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

Accepted Answer

A)  A 10% cash discount is offered for payment before 30 days 
B)  A 2% cash discount can be taken for payment before the 10th of the following month 
C)  A 10% cash discount can be taken if paid by the second day after invoicing 
D)  No cash discount is offered after the eleventh day 
A)  A 10% cash discount is offered for payment before 30 days 
B)  A 2% cash discount can be taken for payment before the 10th of the following month 
C)  A 10% cash discount can be taken if paid by the second day after invoicing 
D)  No cash discount is offered after the eleventh day

Question 16

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 17

Which of the following financial ratios has the highest weight in Altman's Z score estimation?

Accepted Answer

A)  Working capital/total assets 
B)  Retained earnings/total assets 
C)  EBIT/total assets 
D)  Sales/total assets 
A)  Working capital/total assets 
B)  Retained earnings/total assets 
C)  EBIT/total assets 
D)  Sales/total assets

Question 18

Which of the following would not be included in the five C's of credit?

Accepted Answer

A)  Character 
B)  Condition 
C)  Charges 
D)  Capital 
A)  Character 
B)  Condition 
C)  Charges 
D)  Capital

Question 19

Determine the annual effective rate of a customer that does not take advantage of credit terms of 3/15,n/30.

Accepted Answer

A)  109.84% 
B)  69.84% 
C)  29.84% 
D)  9.84% 
A)  109.84% 
B)  69.84% 
C)  29.84% 
D)  9.84%

Question 20

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

Exam 22: Credit Management and Collection

A purchaser was offered terms of trade credit of 2/10,net 30,with an invoice date of January 1.Which one of the following acts threatens creditworthiness?

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

You are buying goods worth $75,000 from a firm that offers the credit terms of 2/10,net 30.What will be the actual payment if you paid within 10 days?

Balsam Corporation is concerned about their current bad debt ratio of 9%.The CFO believes imposing a more stringent credit policy may reduce sales by 8% and reduce the bad debt ratio to 6%.If the cost of goods sold is 85% of the selling price,determine if the new policy should be undertaken.

Consider a firm with the following financial ratios: EBIT/total assets = .12 Sales/total assets = 1.4 Market equity/book debt = .9 Retained earnings/total assets = .4 Working capital/total assets = .12 What is the firm Z scorer?

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?

Credit scoring systems can be used to:

Extending trade credit can increase the probability of repeat orders.

SamanaCorporation 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.

When sellers deliberately postdate an invoice by several months,their terms of sale include:

What effective interest rate is charged to a purchaser receiving terms of 5/10,net 90 if the purchaser avoids the discount and pays in 90 days?

Which of the following would be least expected to change as a result of a higher average age of receivables?

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

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

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

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

Which of the following financial ratios has the highest weight in Altman's Z score estimation?

Which of the following would not be included in the five C's of credit?

Determine the annual effective rate of a customer that does not take advantage of credit terms of 3/15,n/30.

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

Goals and Governance of the Firm

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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 and Payout Policy

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