Question 1

A 2/10,net 30 credit policy:

Accepted Answer

A) is an expensive form of short-term credit if a buyer foregoes the discount. 
B) provides cheap financing to the buyer for 30 days. 
C) is an inexpensive means of reducing the seller's collection period if every customer takes the discount. 
D) tends to have little effect on the seller's collection period. 
E) tends to increase a firm's investment in receivables as compared to a straight net 30 policy. 
A) is an expensive form of short-term credit if a buyer foregoes the discount. 
B) provides cheap financing to the buyer for 30 days. 
C) is an inexpensive means of reducing the seller's collection period if every customer takes the discount. 
D) tends to have little effect on the seller's collection period. 
E) tends to increase a firm's investment in receivables as compared to a straight net 30 policy.

Question 2

Preston Milled Products currently sells a product with a variable cost per unit of $21 and a unit selling price of $40.At the present time,the firm only sells on a cash basis with monthly sales of 2,800 units.The monthly interest rate is 0.5 percent.What is the switch break-even point if the firm switched to a net 30 credit policy? Assume the selling price per unit and the variable costs per unit remain constant.

Accepted Answer

A) 2,830 units 
B) 2,910 units 
C) 3,333 units 
D) 3,414 units 
E) 3,526 units 
A) 2,830 units 
B) 2,910 units 
C) 3,333 units 
D) 3,414 units 
E) 3,526 units

Question 3

On average,your firm sells $38,700 of items on credit each day.The firm's average operating cycle is 49 days and it acquires and sells inventory,on average,every 17 days.What is the average accounts receivable balance?

Accepted Answer

A) $657,900 
B) $848,000 
C) $1,238,400 
D) $1,315,500 
E) $1,896,300 
A) $657,900 
B) $848,000 
C) $1,238,400 
D) $1,315,500 
E) $1,896,300

Question 4

The Green Hornet sells earnings forecasts for international securities.Its credit terms are 2/10,net 30.Based on experience,55 percent of all customers will take the discount.The firm sells 2,700 forecasts every month at a price of $1,100 each.What is the firm's average balance sheet amount in accounts receivable?

Accepted Answer

A) $940,274 
B) $1,408,272 
C) $1,855,233 
D) $1,867,012 
E) $1,915,387 
A) $940,274 
B) $1,408,272 
C) $1,855,233 
D) $1,867,012 
E) $1,915,387

Question 5

All else equal,firms with (1)excess capacity,(2)low variable costs,and (3)repeat customers are more apt to offer liberal credit terms to their customers than are other firms.Explain why this tendency exists.

Accepted Answer

Firms with excess capacity are more apt

Question 6

A firm's total investment in receivables depends primarily on the firm's:

Accepted Answer

A) total sales and cash discount period. 
B) cash to credit sales ratio. 
C) bad debt ratio. 
D) average collection period and amount of credit sales. 
E) amount of credit sales and cash discount percentage. 
A) total sales and cash discount period. 
B) cash to credit sales ratio. 
C) bad debt ratio. 
D) average collection period and amount of credit sales. 
E) amount of credit sales and cash discount percentage.

Question 7

Quest,Inc.,is considering a change in its cash-only sales policy.The new terms of sale would be one month.The required return is 1.6 percent per month.Based on the following information,what is the NPV of the new policy?

Accepted Answer

A) $28,750 
B) $32,500 
C) $35,000 
D) $38,250 
E) $40,000 
A) $28,750 
B) $32,500 
C) $35,000 
D) $38,250 
E) $40,000

Question 8

Inventory needs under a derived-demand inventory system are:

Accepted Answer

A) primarily dependent upon the competitive demands placed on a firm's suppliers. 
B) based on the anticipated demand for the finished product. 
C) based on minimizing the cost of restocking inventory. 
D) held constant over time. 
E) determined by a kanban system. 
A) primarily dependent upon the competitive demands placed on a firm's suppliers. 
B) based on the anticipated demand for the finished product. 
C) based on minimizing the cost of restocking inventory. 
D) held constant over time. 
E) determined by a kanban system.

Question 9

The EOQ model is designed to determine how much:

Accepted Answer

A) total inventory a firm needs in any one year. 
B) total inventory costs will be for any one given year. 
C) inventory should be purchased at a time. 
D) inventory will be sold per day. 
E) a firm loses in sales per day when an inventory item is depleted. 
A) total inventory a firm needs in any one year. 
B) total inventory costs will be for any one given year. 
C) inventory should be purchased at a time. 
D) inventory will be sold per day. 
E) a firm loses in sales per day when an inventory item is depleted.

Question 10

Which one of the following inventory-related costs is considered a shortage cost?

Accepted Answer

A) storage costs 
B) insurance cost 
C) cost of safety reserves 
D) obsolescence cost 
E) opportunity cost of capital used for inventory purchases 
A) storage costs 
B) insurance cost 
C) cost of safety reserves 
D) obsolescence cost 
E) opportunity cost of capital used for inventory purchases

Question 11

When evaluating the creditworthiness of a customer,the term character refers to the:

Accepted Answer

A) nature of the cash flows of the customer's business. 
B) customer's financial resources. 
C) types of assets the customer wants to pledge as collateral. 
D) customer's willingness to pay bills in a timely fashion. 
E) nature of the customer's line of work. 
A) nature of the cash flows of the customer's business. 
B) customer's financial resources. 
C) types of assets the customer wants to pledge as collateral. 
D) customer's willingness to pay bills in a timely fashion. 
E) nature of the customer's line of work.

Question 12

You have recently been hired as an accounting intern for Jefferson Mills.The job that you have been assigned for today is to compile a spreadsheet that has six columns.The column headings are: Invoice #; Customer name;  90 days.You are to list every unpaid invoice by customer name with the amount owed entered into the appropriate column for the number of days between the sale date and today.Once you have completed that,you are to sort the report by customer name and then total the amounts listed in each column.What is this report called?

Accepted Answer

A) credit report 
B) aging schedule 
C) risk assessment report 
D) turnover delineation 
E) receivables consolidation report 
A) credit report 
B) aging schedule 
C) risk assessment report 
D) turnover delineation 
E) receivables consolidation report

Question 13

Currently,Glasgow Importers sells 280 units a month at a price of $729 a unit.The firm believes it can increase its sales by an additional 40 units if it switches to a net 30 credit policy.The monthly interest rate is 0.5 percent and the variable cost per unit is $480.What is the net present value of the proposed credit policy switch?

Accepted Answer

A) -$213,360 
B) -$9,240 
C) $190,200 
D) $1,287,520 
E) $1,768,680 
A) -$213,360 
B) -$9,240 
C) $190,200 
D) $1,287,520 
E) $1,768,680

Question 14

Which one of the following is a system for managing demand-dependent inventories that minimizes the inventory levels of a firm?

Accepted Answer

A) just-in-time inventory 
B) turnover planning 
C) net working capital planning 
D) inventory scoring 
E) inventory ranking 
A) just-in-time inventory 
B) turnover planning 
C) net working capital planning 
D) inventory scoring 
E) inventory ranking

Question 15

A firm sells 4,500 units of an item each year.The carrying cost per unit is $2.15 and the fixed costs per order are $69.What is the economic order quantity?

Accepted Answer

A) 374 units 
B) 421 units 
C) 497 units 
D) 537 units 
E) 623 units 
A) 374 units 
B) 421 units 
C) 497 units 
D) 537 units 
E) 623 units

Question 16

Which one of the five Cs of credit refers to the general economic situation in the customer's line of business?

Accepted Answer

A) capacity 
B) character 
C) conditions 
D) capital 
E) collateral 
A) capacity 
B) character 
C) conditions 
D) capital 
E) collateral

Question 17

Assume all suppliers to a large retail chain offer credit terms of 2/10,net 30.The retail chain consistently takes the 2 percent discount and pays in 60 days.When pressed on the issue,the retail chain tells the suppliers they can either accept the payments as they currently are or lose the business.Is this ethical?
 How might this impact a small supplier versus a large supplier?
 Explain.

Accepted Answer

This question can lead to a lively discu

Question 18

You are viewing a graph which compares costs with the amount of credit extended.Both the carrying costs and the opportunity costs of credit are depicted.What is the function called that represents the summation of these carrying and opportunity costs?

Accepted Answer

A) opportunity cost curve 
B) credit extension curve 
C) credit cost curve 
D) terms of sale graph 
E) optimal sales graph 
A) opportunity cost curve 
B) credit extension curve 
C) credit cost curve 
D) terms of sale graph 
E) optimal sales graph

Question 19

You are currently selling 72 units a month at a price of $210 a unit.Your variable cost of each unit is $130.If you switch from your current cash sales only policy to a net 30 policy you think your sales will increase to a total of 95 units per month.The monthly interest rate is 1.5 percent.What is the net present value of this proposed switch using the accounts receivable approach?

Accepted Answer

A) $104,557 
B) $114,829 
C) $134,822 
D) $136,516 
E) $141,520 
A) $104,557 
B) $114,829 
C) $134,822 
D) $136,516 
E) $141,520

Question 20

Which one of the following statements is correct if you purchase an item with credit terms of 1/5,net 15?

Accepted Answer

A) If you pay within 1 day, you will receive a 5 percent discount. 
B) If you pay within 5 days, you will receive a 1 percent discount. 
C) If you do not pay within 15 days, you will be charged interest at a 1.5 percent monthly rate. 
D) If you pay within 15 days, you will receive a 1/5th percent discount. 
E) You must pay the discounted amount within 15 days. 
A) If you pay within 1 day, you will receive a 5 percent discount. 
B) If you pay within 5 days, you will receive a 1 percent discount. 
C) If you do not pay within 15 days, you will be charged interest at a 1.5 percent monthly rate. 
D) If you pay within 15 days, you will receive a 1/5th percent discount. 
E) You must pay the discounted amount within 15 days.

Exam 20: Credit and Inventory Management

A 2/10,net 30 credit policy:

On average,your firm sells $38,700 of items on credit each day.The firm's average operating cycle is 49 days and it acquires and sells inventory,on average,every 17 days.What is the average accounts receivable balance?

All else equal,firms with (1)excess capacity,(2)low variable costs,and (3)repeat customers are more apt to offer liberal credit terms to their customers than are other firms.Explain why this tendency exists.

A firm's total investment in receivables depends primarily on the firm's:

Quest,Inc.,is considering a change in its cash-only sales policy.The new terms of sale would be one month.The required return is 1.6 percent per month.Based on the following information,what is the NPV of the new policy?

Inventory needs under a derived-demand inventory system are:

The EOQ model is designed to determine how much:

Which one of the following inventory-related costs is considered a shortage cost?

When evaluating the creditworthiness of a customer,the term character refers to the:

Which one of the following is a system for managing demand-dependent inventories that minimizes the inventory levels of a firm?

A firm sells 4,500 units of an item each year.The carrying cost per unit is $2.15 and the fixed costs per order are $69.What is the economic order quantity?

Which one of the five Cs of credit refers to the general economic situation in the customer's line of business?

You are viewing a graph which compares costs with the amount of credit extended.Both the carrying costs and the opportunity costs of credit are depicted.What is the function called that represents the summation of these carrying and opportunity costs?

Which one of the following statements is correct if you purchase an item with credit terms of 1/5,net 15?

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working With Financial Statements

Long-Term Financial Planning and Growth

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Project Analysis and Evaluation

Some Lessons From Capital Market History

Return, Risk, and the Security Market Line

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policy

Short-Term Finance and Planning

Cash and Liquidity Management

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Enterprise Risk Management

Options and Corporate Finance

Option Valuation

Mergers and Acquisitions

Leasing

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