Question 1

In credit analysis of a customer,commonly used information includes the customer's:

Accepted Answer

A)  financial statements. 
B)  credit report. 
C)  payment history with the firm. 
D)  All of these. 
E)  Both credit report and payment history with the firm. 
A)  financial statements. 
B)  credit report. 
C)  payment history with the firm. 
D)  All of these. 
E)  Both credit report and payment history with the firm.

Question 2

Which of the following statements is not true?

Accepted Answer

A)  Commercial drafts represent a way to obtain a credit commitment from a customer before the goods are delivered. 
B)  When a banker's acceptance is discounted in the secondary market it becomes a commercial note. 
C)  Sight drafts require immediate payment. 
D)  Banker's acceptances arise when a bank guarantees payment on a commercial draft. 
E)  Both Commercial drafts represent a way to obtain a credit commitment from a customer before the goods are delivered; and Sight drafts require immediate payment. 
A)  Commercial drafts represent a way to obtain a credit commitment from a customer before the goods are delivered. 
B)  When a banker's acceptance is discounted in the secondary market it becomes a commercial note. 
C)  Sight drafts require immediate payment. 
D)  Banker's acceptances arise when a bank guarantees payment on a commercial draft. 
E)  Both Commercial drafts represent a way to obtain a credit commitment from a customer before the goods are delivered; and Sight drafts require immediate payment.

Question 3

Delta Distributors has an investment in accounts receivable of $2,750,000. Daily credit sales are $118,280. If 30% of Delta's credit customers receive a discount by paying within 10 days,what is the net period that Delta maintains?

Accepted Answer

A)  10 days 
B)  23 days 
C)  38 days 
D)  45 days 
E)  There is not enough information to tell. 
A)  10 days 
B)  23 days 
C)  38 days 
D)  45 days 
E)  There is not enough information to tell.

Question 4

The net credit period for a company with terms of 3/10,net 60 is:

Accepted Answer

A)  10 days. 
B)  50 days. 
C)  57 days. 
D)  60 days. 
E)  None of these. 
A)  10 days. 
B)  50 days. 
C)  57 days. 
D)  60 days. 
E)  None of these.

Question 5

United Distributors has an investment in accounts receivable of $2,750,000. Costs of goods sold represent 75% of the sales price. Daily credit sales are $118,280. Thirty percent of United's credit customers receive a discount by paying within 10 days. The firm's terms are net 30. How are the other 70% of customers paying; are they meeting the terms?

Accepted Answer

Other 70% paying in:
A/R = $2,750,000/.7

Question 6

On September 1,a firm grants credit with terms of 2/10 net 45. The creditor:

Accepted Answer

A)  must pay a penalty of 2% when payment is made later than September 1st. 
B)  must pay a penalty of 10% when payment is made later than 2 days after September 1st. 
C)  receives a discount of 2% when payment is made at least 10 days before September 1st. 
D)  receives a discount of 2% when payment is made before September 1st and pays a penalty of 10% if payment is made after September 1st. 
E)  receives a discount of 2% when payment is made within 10 days after the effective invoice date of September 1st. 
A)  must pay a penalty of 2% when payment is made later than September 1st. 
B)  must pay a penalty of 10% when payment is made later than 2 days after September 1st. 
C)  receives a discount of 2% when payment is made at least 10 days before September 1st. 
D)  receives a discount of 2% when payment is made before September 1st and pays a penalty of 10% if payment is made after September 1st. 
E)  receives a discount of 2% when payment is made within 10 days after the effective invoice date of September 1st.

Question 7

Which of the following is not one of the "five C's of Credit" for credit scoring?

Accepted Answer

A)  Capability 
B)  Capacity 
C)  Capital 
D)  Character 
E)  Conditions 
A)  Capability 
B)  Capacity 
C)  Capital 
D)  Character 
E)  Conditions

Question 8

The optimal credit amount is determined by:

Accepted Answer

A)  the point which minimizes the total credit cost curve. 
B)  the point which maximizes the carrying costs associated with granting credit. 
C)  the point which maximizes opportunity costs associated with granting credit. 
D)  the point where the additional net cash flow from new customers equals the additional carrying costs of the investment in receivables. 
E)  Both the point which minimizes the total credit cost curve; and the point where the additional net cash flow from new customers equals the additional carrying costs of the investment in receivables. 
A)  the point which minimizes the total credit cost curve. 
B)  the point which maximizes the carrying costs associated with granting credit. 
C)  the point which maximizes opportunity costs associated with granting credit. 
D)  the point where the additional net cash flow from new customers equals the additional carrying costs of the investment in receivables. 
E)  Both the point which minimizes the total credit cost curve; and the point where the additional net cash flow from new customers equals the additional carrying costs of the investment in receivables.

Question 9

Which of the following statements is true?

Accepted Answer

A)  Customers in high tax brackets would be more likely to take cash discounts and corporations in high tax brackets would be more likely to offer credit. 
B)  Customers in high tax brackets would be more likely to take cash discounts and corporations in low tax brackets would be more likely to offer credit. 
C)  Customers in low tax brackets would be more likely to take cash discounts and corporations in high tax brackets would be more likely to offer credit. 
D)  Customers in low tax brackets would be more likely to take cash discounts and corporations in low tax brackets would be more likely to offer credit. 
E)  Taxes have an effect on the propensity to grant credit, but no effect on the propensity to use credit. 
A)  Customers in high tax brackets would be more likely to take cash discounts and corporations in high tax brackets would be more likely to offer credit. 
B)  Customers in high tax brackets would be more likely to take cash discounts and corporations in low tax brackets would be more likely to offer credit. 
C)  Customers in low tax brackets would be more likely to take cash discounts and corporations in high tax brackets would be more likely to offer credit. 
D)  Customers in low tax brackets would be more likely to take cash discounts and corporations in low tax brackets would be more likely to offer credit. 
E)  Taxes have an effect on the propensity to grant credit, but no effect on the propensity to use credit.

Question 10

When analyzing the NPV of a decision to change cash discounts,the firm would probably not consider:

Accepted Answer

A)  the size of the discount. 
B)  the expected change in the order size. 
C)  the firm's cost of debt. 
D)  the expected change in sales due to the cash discount policy change. 
E)  All of these would probably be considered. 
A)  the size of the discount. 
B)  the expected change in the order size. 
C)  the firm's cost of debt. 
D)  the expected change in sales due to the cash discount policy change. 
E)  All of these would probably be considered.

Question 11

Seasonal dating of accounts receivable:

Accepted Answer

A)  is used by all firms that grant credit. 
B)  brings the receivable immediately due during the season of the product. 
C)  makes the effective date of the invoice on a specific date in or around the relevant season of the product. 
D)  All of these. 
E)  None of these. 
A)  is used by all firms that grant credit. 
B)  brings the receivable immediately due during the season of the product. 
C)  makes the effective date of the invoice on a specific date in or around the relevant season of the product. 
D)  All of these. 
E)  None of these.

Question 12

If 20% of the customers pay on day 10 and 80% pay on day 30,the average collection period is:

Accepted Answer

A)  10 days. 
B)  15 days. 
C)  22.5 days. 
D)  24 days. 
E)  26 days. 
A)  10 days. 
B)  15 days. 
C)  22.5 days. 
D)  24 days. 
E)  26 days.

Question 13

Delta Distributors has total credit sales of $3,000,000 for the year. Delta's credit sales represent 80% of total sales. What are total sales?

Accepted Answer

A)  $2,000,000 
B)  $2,500,000 
C)  $3,000,000 
D)  $3,750,000 
E)  None of these. 
A)  $2,000,000 
B)  $2,500,000 
C)  $3,000,000 
D)  $3,750,000 
E)  None of these.

Question 14

Collegiate Tuxedo rents apparel throughout the year. They have experienced non-payment by about 15% of their customers with an average loss of $200. Collegiate wants to stem their losses by using an instant electronic credit check on the customer. These checks will cost them $7 on each of the 1,000 customers. The opportunity cost is 1.5% for the credit period. Should they pursue the credit check?

Accepted Answer

A)  No, because the $7000 cost is too high. 
B)  No, because a $200 loss is minor. 
C)  Yes, because the net gain is $30,000. 
D)  Yes, because the net gain is $23,000. 
E)  Yes, because the net gain is $193,000. 
A)  No, because the $7000 cost is too high. 
B)  No, because a $200 loss is minor. 
C)  Yes, because the net gain is $30,000. 
D)  Yes, because the net gain is $23,000. 
E)  Yes, because the net gain is $193,000.

Question 15

Risk should be incorporated into the decision to grant credit by:

Accepted Answer

A)  decreasing the discount rate. 
B)  increasing the credit period to allow for customers in financial distress to reorganize. 
C)  decreasing the cash inflows, or the numerator of the NPV formula. 
D)  increasing the cash inflows, or the numerator of the NPV formula. 
E)  increasing costs per unit. 
A)  decreasing the discount rate. 
B)  increasing the credit period to allow for customers in financial distress to reorganize. 
C)  decreasing the cash inflows, or the numerator of the NPV formula. 
D)  increasing the cash inflows, or the numerator of the NPV formula. 
E)  increasing costs per unit.

Question 16

Aging schedules are flawed because they:

Accepted Answer

A)  do not identify specific customers. 
B)  show the percent of accounts that are past due. 
C)  only give the yearly or periodic average of account age. 
D)  All of these. 
E)  None of these. 
A)  do not identify specific customers. 
B)  show the percent of accounts that are past due. 
C)  only give the yearly or periodic average of account age. 
D)  All of these. 
E)  None of these.

Question 17

Determining the optimal credit policy is based on a trade-off of:

Accepted Answer

A)  carrying costs of granting credit and making an investment in receivables. 
B)  stock out costs of losing sales from not offering credit. 
C)  the opportunity cost of lost sales from not offering credit. 
D)  Both carrying costs of granting credit and making an investment in receivables; and the opportunity cost of lost sales from not offering credit. 
E)  Both stock out costs of losing sales from not offering credit; and the opportunity cost of lost sales from not offering credit. 
A)  carrying costs of granting credit and making an investment in receivables. 
B)  stock out costs of losing sales from not offering credit. 
C)  the opportunity cost of lost sales from not offering credit. 
D)  Both carrying costs of granting credit and making an investment in receivables; and the opportunity cost of lost sales from not offering credit. 
E)  Both stock out costs of losing sales from not offering credit; and the opportunity cost of lost sales from not offering credit.

Question 18

Quattro Incorporated has an investment in accounts receivable of $3,500,000. Daily credit sales are $120,000. If 20% of Quattro's credit customers receive a discount by paying within 10 days,what is the net period that Quattro maintains?

Accepted Answer

A)  10 days 
B)  23 days 
C)  38 days 
D)  45 days 
E)  There is not enough information to tell. 
A)  10 days 
B)  23 days 
C)  38 days 
D)  45 days 
E)  There is not enough information to tell.

Question 19

Cash discounts:

Accepted Answer

A)  conveniently separate the pricing of credit and cash customers. 
B)  lower profit margins on sales. 
C)  speed the collection of receivables. 
D)  All of these. 
E)  Both conveniently separate the pricing of credit and cash customers; and lower profit margins on sales. 
A)  conveniently separate the pricing of credit and cash customers. 
B)  lower profit margins on sales. 
C)  speed the collection of receivables. 
D)  All of these. 
E)  Both conveniently separate the pricing of credit and cash customers; and lower profit margins on sales.

Question 20

When a firm sells its accounts receivables to a financial institution,it is called:

Accepted Answer

A)  captive financing. 
B)  collateralization. 
C)  securitization. 
D)  legalization. 
E)  None of these. 
A)  captive financing. 
B)  collateralization. 
C)  securitization. 
D)  legalization. 
E)  None of these.

Exam 28: Credit and Inventory Management

In credit analysis of a customer,commonly used information includes the customer's:

Which of the following statements is not true?

Delta Distributors has an investment in accounts receivable of $2,750,000. Daily credit sales are $118,280. If 30% of Delta's credit customers receive a discount by paying within 10 days,what is the net period that Delta maintains?

The net credit period for a company with terms of 3/10,net 60 is:

On September 1,a firm grants credit with terms of 2/10 net 45. The creditor:

Which of the following is not one of the "five C's of Credit" for credit scoring?

The optimal credit amount is determined by:

Which of the following statements is true?

When analyzing the NPV of a decision to change cash discounts,the firm would probably not consider:

Seasonal dating of accounts receivable:

If 20% of the customers pay on day 10 and 80% pay on day 30,the average collection period is:

Delta Distributors has total credit sales of $3,000,000 for the year. Delta's credit sales represent 80% of total sales. What are total sales?

Risk should be incorporated into the decision to grant credit by:

Aging schedules are flawed because they:

Determining the optimal credit policy is based on a trade-off of:

Quattro Incorporated has an investment in accounts receivable of $3,500,000. Daily credit sales are $120,000. If 20% of Quattro's credit customers receive a discount by paying within 10 days,what is the net period that Quattro maintains?

Cash discounts:

When a firm sells its accounts receivables to a financial institution,it is called:

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Financial Models

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return: Lessons From Market History

Return and Risk: the Capital Asset Pricing Model Capm

An Alternative View of Risk and Return: The Arbitrage Pricing Theory

Risk, Cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Raising Capital

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Mergers, Acquisitions, and Divestitures

Financial Distress

International Corporate Finance

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