Question 1

Explain how inventory is managed under an ABC inventory system.

Accepted Answer

With an ABC system the items that represent the largest percentage of inventory value are classified as "A" items.Because of their cost,these items are monitored closely and purchased primarily as needed,with minimal,if any,units kept as extra stock.Items of low value are classified as "C" items.These tend to be basic commodity items that are bought in bulk and kept on hand at all times."B" items fall between these two extremes and are managed accordingly.

Question 2

The EOQ model assumes inventory:

Accepted Answer

A) is held at a constant level. 
B) is sold at a steady rate until it is depleted. 
C) will be available just as it is needed for production. 
D) has seasonal fluctuations. 
E) can be delivered immediately upon order. 
A) is held at a constant level. 
B) is sold at a steady rate until it is depleted. 
C) will be available just as it is needed for production. 
D) has seasonal fluctuations. 
E) can be delivered immediately upon order. B

Question 3

The length of the credit period offered by a firm is influenced by all of the following except the:

Accepted Answer

A) level of consumer demand. 
B) buyer's operating cycle. 
C) standardization of the goods being sold. 
D) FTC guidelines for trade credit. 
E) customer type. 
A) level of consumer demand. 
B) buyer's operating cycle. 
C) standardization of the goods being sold. 
D) FTC guidelines for trade credit. 
E) customer type. D

Question 4

A&M Hardware assumes new customers will default 8 percent of the time but if they don't default,they will become repeat customers who always pay their bills.Assume the average sale is $383 with a variable cost of $260,and a monthly required return of 1.65 percent.What is the NPV of extending credit for one month to a new customer?

Accepted Answer

A) $5,589.09 
B) $6,103.47 
C) $6,598.18 
D) $5,748.09 
E) $6,858.18 
A) $5,589.09 
B) $6,103.47 
C) $6,598.18 
D) $5,748.09 
E) $6,858.18

Question 5

When analyzing the NPV of a decision to switch from a cash-only sales policy to a credit policy with an early payment discount,the firm is least apt to consider the:

Accepted Answer

A) size of the discount. 
B) length of the credit period. 
C) firm's variable costs. 
D) expected change in sales. 
E) fixed salaries of the sales force. 
A) size of the discount. 
B) length of the credit period. 
C) firm's variable costs. 
D) expected change in sales. 
E) fixed salaries of the sales force.

Question 6

Credit analysis is best described as the process of:

Accepted Answer

A) collecting an accounts receivable. 
B) determining the optimal credit terms. 
C) establishing the length of the credit period. 
D) setting the amount of discount to be granted. 
E) determining the probability that a customer will not pay. 
A) collecting an accounts receivable. 
B) determining the optimal credit terms. 
C) establishing the length of the credit period. 
D) setting the amount of discount to be granted. 
E) determining the probability that a customer will not pay.

Question 7

The decision to grant credit should consider all the following except the:

Accepted Answer

A) delay in revenues from granting credit. 
B) immediate costs of granting credit. 
C) probability of nonpayment. 
D) cost of short-term borrowing. 
E) fixed costs incurred during the credit period. 
A) delay in revenues from granting credit. 
B) immediate costs of granting credit. 
C) probability of nonpayment. 
D) cost of short-term borrowing. 
E) fixed costs incurred during the credit period.

Question 8

The EOQ model considers all the following except the:

Accepted Answer

A) cost of the inventory. 
B) carrying cost. 
C) fixed cost of an order. 
D) restocking cost. 
E) annual sales units. 
A) cost of the inventory. 
B) carrying cost. 
C) fixed cost of an order. 
D) restocking cost. 
E) annual sales units.

Question 9

The reorder point considers all the following except the:

Accepted Answer

A) safety stock. 
B) variable costs per unit. 
C) delivery time. 
D) minimum desired inventory level. 
E) rate of sales. 
A) safety stock. 
B) variable costs per unit. 
C) delivery time. 
D) minimum desired inventory level. 
E) rate of sales.

Question 10

All the following can provide credit information about a customer except:

Accepted Answer

A) the customer's financial statements. 
B) credit reports. 
C) the customer's current payment history with the seller. 
D) the amount of goods the customer desires to purchase. 
E) banks. 
A) the customer's financial statements. 
B) credit reports. 
C) the customer's current payment history with the seller. 
D) the amount of goods the customer desires to purchase. 
E) banks.

Question 11

To collect on the accounts receivable due to the firm,a firm can do all the following except:

Accepted Answer

A) send a delinquency letter of past due status to the customer. 
B) make personal contact by telephone. 
C) employ a collection agency. 
D) take legal action against the customer as necessary. 
E) forcibly remove property from the buyer's premises. 
A) send a delinquency letter of past due status to the customer. 
B) make personal contact by telephone. 
C) employ a collection agency. 
D) take legal action against the customer as necessary. 
E) forcibly remove property from the buyer's premises.

Question 12

Delta Distributors has accounts receivable of $2,750,000 and average daily credit sales of $118,280.The firm offers credit terms of 2/10,net 30.On average,what is the firm's accounts receivable period?

Accepted Answer

A) 19.47 days 
B) 23.25 days 
C) 37.14 days 
D) 20.00 days 
E) 18.64 days 
A) 19.47 days 
B) 23.25 days 
C) 37.14 days 
D) 20.00 days 
E) 18.64 days

Question 13

Uptown Markets recently did an analysis of its credit policy and considered several different options.Once the analysis was completed and reviewed,the firm adopted the most optimal policy.The president then stated: "Now,that's done.So we don't ever have to go through that process again." Do you agree? Justify your answer.

Accepted Answer

You should not agree.The optimal credit

Question 14

One characteristic of a conditional sales contract is that the:

Accepted Answer

A) seller retains legal ownership until the buyer completes payment for the goods. 
B) buyer is compensated for its opportunity costs. 
C) seller receives a prepayment in full. 
D) invoice is paid in one lump sum at the end of the credit period. 
E) ownership of the goods changes to the buyer immediately upon delivery. 
A) seller retains legal ownership until the buyer completes payment for the goods. 
B) buyer is compensated for its opportunity costs. 
C) seller receives a prepayment in full. 
D) invoice is paid in one lump sum at the end of the credit period. 
E) ownership of the goods changes to the buyer immediately upon delivery.

Question 15

At the optimal inventory level,the:

Accepted Answer

A) inventory is held to its daily minimum level. 
B) inventory is maintained at a level equal to one week's production needs. 
C) carrying costs equal the restocking costs. 
D) inventory opportunity costs are zero. 
E) shortage costs are eliminated. 
A) inventory is held to its daily minimum level. 
B) inventory is maintained at a level equal to one week's production needs. 
C) carrying costs equal the restocking costs. 
D) inventory opportunity costs are zero. 
E) shortage costs are eliminated.

Question 16

All the following are one of the "Five C's of Credit" except:

Accepted Answer

A) capability. 
B) capacity. 
C) capital. 
D) character. 
E) conditions. 
A) capability. 
B) capacity. 
C) capital. 
D) character. 
E) conditions.

Question 17

The three components of credit policy are:

Accepted Answer

A) collection policy,credit analysis,and interest rate determination. 
B) collection policy,credit analysis,and terms of the sale. 
C) collection policy,interest rate determination,and repayment analysis. 
D) credit analysis,repayment analysis,and terms of the sale. 
E) interest rate determination,repayment analysis,and terms of sale. 
A) collection policy,credit analysis,and interest rate determination. 
B) collection policy,credit analysis,and terms of the sale. 
C) collection policy,interest rate determination,and repayment analysis. 
D) credit analysis,repayment analysis,and terms of the sale. 
E) interest rate determination,repayment analysis,and terms of sale.

Question 18

Windshield glass purchased by an automaker and sitting on a shelf ready for use is classified as:

Accepted Answer

A) finished goods inventory. 
B) raw materials. 
C) assembly materials. 
D) work-in-progress. 
E) partial-goods inventory. 
A) finished goods inventory. 
B) raw materials. 
C) assembly materials. 
D) work-in-progress. 
E) partial-goods inventory.

Question 19

The total restocking cost is calculated as:

Accepted Answer

A) Fixed cost per order × Number of orders. 
B) Order size × Variable cost per unit. 
C) Carrying costs + Fixed costs. 
D) Number of orders × Variable cost per unit. 
E) Fixed cost per unit × Average inventory. 
A) Fixed cost per order × Number of orders. 
B) Order size × Variable cost per unit. 
C) Carrying costs + Fixed costs. 
D) Number of orders × Variable cost per unit. 
E) Fixed cost per unit × Average inventory.

Question 20

When credit is granted by one firm to another firm this gives rise to a(n):

Accepted Answer

A) accounts receivable and is called consumer credit. 
B) credit due and is called an installment note. 
C) accounts receivable and is called trade credit. 
D) trade receivable and is called an installment note. 
E) trade receivable and is called a secured loan. 
A) accounts receivable and is called consumer credit. 
B) credit due and is called an installment note. 
C) accounts receivable and is called trade credit. 
D) trade receivable and is called an installment note. 
E) trade receivable and is called a secured loan.

Exam 28: Credit and Inventory Management

Explain how inventory is managed under an ABC inventory system.

The EOQ model assumes inventory:

The length of the credit period offered by a firm is influenced by all of the following except the:

When analyzing the NPV of a decision to switch from a cash-only sales policy to a credit policy with an early payment discount,the firm is least apt to consider the:

Credit analysis is best described as the process of:

The decision to grant credit should consider all the following except the:

The EOQ model considers all the following except the:

The reorder point considers all the following except the:

All the following can provide credit information about a customer except:

To collect on the accounts receivable due to the firm,a firm can do all the following except:

Delta Distributors has accounts receivable of $2,750,000 and average daily credit sales of $118,280.The firm offers credit terms of 2/10,net 30.On average,what is the firm's accounts receivable period?

One characteristic of a conditional sales contract is that the:

At the optimal inventory level,the:

All the following are one of the "Five C's of Credit" except:

The three components of credit policy are:

Windshield glass purchased by an automaker and sitting on a shelf ready for use is classified as:

The total restocking cost is calculated as:

When credit is granted by one firm to another firm this gives rise to a(n):

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements and Cash Flow

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

Lessons From Market History

Return, risk, and 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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