Question 1

Which of the following typically justifies the offering of season dating?

Accepted Answer

A)  The firm earns interest on the receivables 
B)  Product demand is increased during the low-sales months of the year 
C)  The firm is experiencing cash flow difficulties 
D)  The firm develops repeat business 
A)  The firm earns interest on the receivables 
B)  Product demand is increased during the low-sales months of the year 
C)  The firm is experiencing cash flow difficulties 
D)  The firm develops repeat business

Question 2

JomalCorporation 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.

Accepted Answer

A)  Extend credit - net benefit of $155 
B)  Extend credit - net benefit of $80 
C)  Do not extend credit - net detriment of $155 
D)  Do not extend credit - net detriment of $80 
A)  Extend credit - net benefit of $155 
B)  Extend credit - net benefit of $80 
C)  Do not extend credit - net detriment of $155 
D)  Do not extend credit - net detriment of $80

Question 3

According to credit experts,a full credit analysis should be conducted:

Accepted Answer

A)  On each customer of a firm 
B)  Only when payment is doubtful 
C)  Only on customers that are delinquent 
D)  On all repeat customers 
A)  On each customer of a firm 
B)  Only when payment is doubtful 
C)  Only on customers that are delinquent 
D)  On all repeat customers

Question 4

Universal Corporation is concerned about their current bad debt ratio of 6%.The CFO believes imposing a more stringent credit policy may reduce sales by 5% and reduce the bad debt ratio to 4%.If the cost of goods sold is 80% of the selling price,determine if the new policy should be undertaken.

Accepted Answer

A)  Undertake; increase of 8.57% in profits 
B)  Undertake; increase of 9.55% in profits 
C)  Do not undertake; decrease of 8.57% in profits 
D)  Do not undertake; decrease of 9.55% in profits 
A)  Undertake; increase of 8.57% in profits 
B)  Undertake; increase of 9.55% in profits 
C)  Do not undertake; decrease of 8.57% in profits 
D)  Do not undertake; decrease of 9.55% in profits

Question 5

Credit analysis is a procedure used to determine the implied cost of trade credit.

Accepted Answer

A) True 
 B)False

Question 6

Suppose CumChan Inc.sells goods on terms 2/10 net 20.On January 1 you would buy goods from CumChan with invoice value of $40,000.How much would you need to pay if you took the cash discount? What is the latest date on which the cash discount is available? By what date should you pay for your purchase if you decide not to take the cash discount?

Accepted Answer

To get the cash discount you have to pay

Question 7

Before spilling coffee on an invoice and obliterating the final due date,you calculate the implied interest cost of trade credit at 24.89% and remember there is a 3% cash discount if paid within 10 days.When is the due date?

Accepted Answer

A)  30 days 
B)  45 days 
C)  50 days 
D)  90 days 
A)  30 days 
B)  45 days 
C)  50 days 
D)  90 days

Question 8

What credit decision is appropriate for a potential customer that offers an 80% chance of paying on a $10,000 (present value)sale that has an 80% (present value)cost?

Accepted Answer

A)  Grant credit since expected profit is $3,200 
B)  Grant credit since expected profit is $800 
C)  Refuse credit since expected profit is zero 
D)  Refuse credit since expected loss is $3,000 
A)  Grant credit since expected profit is $3,200 
B)  Grant credit since expected profit is $800 
C)  Refuse credit since expected profit is zero 
D)  Refuse credit since expected loss is $3,000

Question 9

Ignoring the time value of money,how much does a firm lose on a $2,000 sale that has a 30% profit margin if the 20% probability of default occurs?

Accepted Answer

A)  $120 
B)  $280 
C)  $600 
D)  $1,400 
A)  $120 
B)  $280 
C)  $600 
D)  $1,400

Question 10

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 11

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 12

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

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

When a seller receives the commitment of

Question 14

Since defaults can be costly,it is cost effective to undertake a full credit analysis of all customers.

Accepted Answer

A) True 
 B)False

Question 15

A customer who ignores the cash discount but pays within the payment period need not add interest to the invoice.

Accepted Answer

A) True 
 B)False

Question 16

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.

Accepted Answer

A)  No; the expected loss is $33.33 
B)  No; the expected loss is $150.00 
C)  Yes; the expected profit is $33.33 
D)  Yes; the expected profit is $150.00 
A)  No; the expected loss is $33.33 
B)  No; the expected loss is $150.00 
C)  Yes; the expected profit is $33.33 
D)  Yes; the expected profit is $150.00

Question 17

Determine the annual effective rate of a customer that does not take advantage of credit terms of 2/10,n/30.

Accepted Answer

A)  38.59% 
B)  40.59% 
C)  42.59% 
D)  44.59% 
A)  38.59% 
B)  40.59% 
C)  42.59% 
D)  44.59%

Question 18

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

Accepted Answer

A)  Net 30 
B)  Seasonal dating 
C)  CBD 
D)  COD 
A)  Net 30 
B)  Seasonal dating 
C)  CBD 
D)  COD

Question 19

An aging schedule illustrates the relationship between:

Accepted Answer

A)  Customers and repeat sales 
B)  Sales and profitability 
C)  The ratio of accounts receivable to sales 
D)  Accounts receivable and their average time outstanding 
A)  Customers and repeat sales 
B)  Sales and profitability 
C)  The ratio of accounts receivable to sales 
D)  Accounts receivable and their average time outstanding

Question 20

The Five C's of Credit refer to the:

Accepted Answer

A)  Credit reports issued by Dun & Bradstreet 
B)  Interpretation of numerical credit scoring systems 
C)  Attributes that help determine creditworthiness 
D)  Financial ratios used to determine Altman's Z score 
A)  Credit reports issued by Dun & Bradstreet 
B)  Interpretation of numerical credit scoring systems 
C)  Attributes that help determine creditworthiness 
D)  Financial ratios used to determine Altman's Z score

Exam 22: Credit Management and Collection

Which of the following typically justifies the offering of season dating?

JomalCorporation 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.

According to credit experts,a full credit analysis should be conducted:

Universal Corporation is concerned about their current bad debt ratio of 6%.The CFO believes imposing a more stringent credit policy may reduce sales by 5% and reduce the bad debt ratio to 4%.If the cost of goods sold is 80% of the selling price,determine if the new policy should be undertaken.

Credit analysis is a procedure used to determine the implied cost of trade credit.

Before spilling coffee on an invoice and obliterating the final due date,you calculate the implied interest cost of trade credit at 24.89% and remember there is a 3% cash discount if paid within 10 days.When is the due date?

What credit decision is appropriate for a potential customer that offers an 80% chance of paying on a $10,000 (present value)sale that has an 80% (present value)cost?

Ignoring the time value of money,how much does a firm lose on a $2,000 sale that has a 30% profit margin if the 20% probability of default occurs?

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

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

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

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

Since defaults can be costly,it is cost effective to undertake a full credit analysis of all customers.

A customer who ignores the cash discount but pays within the payment period need not add interest to the invoice.

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.

Determine the annual effective rate of a customer that does not take advantage of credit terms of 2/10,n/30.

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

An aging schedule illustrates the relationship between:

The Five C's of Credit refer to the:

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 and Payout Policy

Leasing

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Cash and Inventory Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Filters