Question 1

You are buying goods worth $75,000 from a firm that offers credit terms of 2/10, net 30. What will be the actual payment needed to pay the account in full on Day 7?

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 2

Which one of the following is not an inventory carrying cost?

Accepted Answer

A)  Insurance expense for the inventory 
B)  Opportunity cost of capital for inventory investment 
C)  Cost of inventory 
D) Cost of shelf space 
A)  Insurance expense for the inventory 
B)  Opportunity cost of capital for inventory investment 
C)  Cost of inventory 
D) Cost of shelf space C

Question 3

Which one of the following strategies would continue to be effective if a cash-strapped firm determines that the effective interest rate charged on trade credit is lower than the bank's interest rate?

Accepted Answer

A)  Take the discount but pay after the discount period. 
B)  Borrow from the bank and take the discount. 
C)  Ignore the discount, pay at the end of the period. 
D) Take the discount and hope for longer payment float. 
A)  Take the discount but pay after the discount period. 
B)  Borrow from the bank and take the discount. 
C)  Ignore the discount, pay at the end of the period. 
D) Take the discount and hope for longer payment float. C

Question 4

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 tenth 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 tenth day.

Question 5

Which one of these changes to credit terms of 2/10, net 30 might encourage more purchasers to take the discount?

Accepted Answer

A)  A lower discount percentage 
B)  A longer payment period 
C)  A shorter discount period 
D) A shorter payment period 
A)  A lower discount percentage 
B)  A longer payment period 
C)  A shorter discount period 
D) A shorter payment period

Question 6

A common characteristic of money market instruments is their high degree of liquidity.

Accepted Answer

A) True 
 B)False

Question 7

Calculate the implied cost of trade credit for firms that do not take advantage of cash discounts, based on terms of sale of 5/15, net 60. By how much does this implied cost change if the discount is increased by 1% and the net payment period is increased to 90 days?

Accepted Answer

EAR = [1 + (0.05/(1 - 0.05))]^{365/(60 - 15)}

Question 8

Which one of the following conditions would make a lock-box system potentially more attractive to a firm?

Accepted Answer

A)  Decline in interest rates 
B)  A 2-day reduction in mail time rather than a 3-day reduction 
C)  Larger average payment sizes 
D) Slower processing time 
A)  Decline in interest rates 
B)  A 2-day reduction in mail time rather than a 3-day reduction 
C)  Larger average payment sizes 
D) Slower processing time

Question 9

With rates of return so low on money market instruments, does it actually benefit a firm to pay close attention to cash balances?

Accepted Answer

Opportunity costs are typically lower on

Question 10

What is the effective annual rate of trade credit if the credit terms are 1/10, net 30?

Accepted Answer

A)  13.01% 
B)  18.00% 
C)  18.43% 
D) 20.13% 
A)  13.01% 
B)  18.00% 
C)  18.43% 
D) 20.13%

Question 11

An East Coast firm should establish a lock-box service on the West Coast if:

Accepted Answer

A)  the firm has a large number of customers. 
B)  it has banking facilities in the West Coast area. 
C)  West Coast customers are currently mailing their checks to an East Coast address. 
D) West Coast banks are more efficient. 
A)  the firm has a large number of customers. 
B)  it has banking facilities in the West Coast area. 
C)  West Coast customers are currently mailing their checks to an East Coast address. 
D) West Coast banks are more efficient.

Question 12

An aging schedule illustrates the relationship between:

Accepted Answer

A)  the time history with a customer and the number of repeat sales. 
B)  the average sale size and profitability over time. 
C)  customer ages and the average size of sales. 
D) an accounts receivable and its time outstanding. 
A)  the time history with a customer and the number of repeat sales. 
B)  the average sale size and profitability over time. 
C)  customer ages and the average size of sales. 
D) an accounts receivable and its time outstanding.

Question 13

The more liberal the terms of the collection policy, the lower the potential for bad debts and unprofitable sales.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

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

Question 15

Extending trade credit can increase the probability of repeat orders.

Accepted Answer

A) True 
 B)False

Question 16

An aging schedule is a statement sent to customers who are delinquent in their payments.

Accepted Answer

A) True 
 B)False

Question 17

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 all dollar values are present values.

Accepted Answer

p = (0.64

Question 18

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 19

The Canine Kennel uses 600 cases of dog food annually and orders 40 cases in each shipment. The annual carrying cost per case is $5 and the economic order quantity is 25 cases. Which one of these statements best applies to this situation?

Accepted Answer

A)  The current annual ordering costs exceed $5 per case. 
B)  The firm needs to increase its average inventory level of dog food. 
C)  The current annual ordering costs are less than the carrying costs. 
D) The firm needs to reduce the number of orders placed per year. 
A)  The current annual ordering costs exceed $5 per case. 
B)  The firm needs to increase its average inventory level of dog food. 
C)  The current annual ordering costs are less than the carrying costs. 
D) The firm needs to reduce the number of orders placed per year.

Question 20

What happens to the implied interest rate on trade credit as the time interval between the discount period and payment period is decreased?

Accepted Answer

A)  The rate declines. 
B)  The rate increases. 
C)  The rate remains constant. 
D) It is impossible to predict without knowing the actual length of discount period. 
A)  The rate declines. 
B)  The rate increases. 
C)  The rate remains constant. 
D) It is impossible to predict without knowing the actual length of discount period.

Exam 20: Working Capital Management

You are buying goods worth $75,000 from a firm that offers credit terms of 2/10, net 30. What will be the actual payment needed to pay the account in full on Day 7?

Which one of the following is not an inventory carrying cost?

Which one of the following strategies would continue to be effective if a cash-strapped firm determines that the effective interest rate charged on trade credit is lower than the bank's interest rate?

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

Which one of these changes to credit terms of 2/10, net 30 might encourage more purchasers to take the discount?

A common characteristic of money market instruments is their high degree of liquidity.

Calculate the implied cost of trade credit for firms that do not take advantage of cash discounts, based on terms of sale of 5/15, net 60. By how much does this implied cost change if the discount is increased by 1% and the net payment period is increased to 90 days?

Which one of the following conditions would make a lock-box system potentially more attractive to a firm?

With rates of return so low on money market instruments, does it actually benefit a firm to pay close attention to cash balances?

What is the effective annual rate of trade credit if the credit terms are 1/10, net 30?

An East Coast firm should establish a lock-box service on the West Coast if:

An aging schedule illustrates the relationship between:

The more liberal the terms of the collection policy, the lower the potential for bad debts and unprofitable sales.

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

Extending trade credit can increase the probability of repeat orders.

An aging schedule is a statement sent to customers who are delinquent in their payments.

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 all dollar values are present values.

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

The Canine Kennel uses 600 cases of dog food annually and orders 40 cases in each shipment. The annual carrying cost per case is $5 and the economic order quantity is 25 cases. Which one of these statements best applies to this situation?

What happens to the implied interest rate on trade credit as the time interval between the discount period and payment period is decreased?

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