Question 1

Seasonal dating of accounts receivable:

Accepted Answer

A) is used by all firms that grant credit. 
B) sets the first date of the relevant season as the final due date for an invoice for seasonal goods. 
C) sets a relevant seasonal date as the invoice date for an earlier order. 
D) refers to firms that invoice every quarter for sales made in the prior three months. 
E) requires all purchasers of seasonal goods to have their purchases paid by the end of the prior season. 
A) is used by all firms that grant credit. 
B) sets the first date of the relevant season as the final due date for an invoice for seasonal goods. 
C) sets a relevant seasonal date as the invoice date for an earlier order. 
D) refers to firms that invoice every quarter for sales made in the prior three months. 
E) requires all purchasers of seasonal goods to have their purchases paid by the end of the prior season.

Question 2

Since the credit decision usually includes riskier customers,the decision should adjust for this by:

Accepted Answer

A) determining the probability of nonpayment and reducing the expected cash flows accordingly. 
B) discounting the net cash flows at a lower discount rate. 
C) discounting the cash inflows at a higher discount rate. 
D) increasing the variable cost per unit. 
E) decreasing the variable cost per unit. 
A) determining the probability of nonpayment and reducing the expected cash flows accordingly. 
B) discounting the net cash flows at a lower discount rate. 
C) discounting the cash inflows at a higher discount rate. 
D) increasing the variable cost per unit. 
E) decreasing the variable cost per unit.

Question 3

Jensen's Boat Works total costs of holding inventory is $8,400 when its order sizes are optimized.If the firm places 46 orders a year,what is the fixed cost per order?

Accepted Answer

A) $106.87 
B) $101.15 
C) $91.30 
D) $87.62 
E) $79.08 
A) $106.87 
B) $101.15 
C) $91.30 
D) $87.62 
E) $79.08

Question 4

A commercial draft typically:

Accepted Answer

A) specifies the payment amount and payment due date. 
B) specifies that the purchaser use the seller's bank as the guarantor. 
C) requires payment prior to the delivery of the goods. 
D) is signed upon delivery of the goods. 
E) involves a lien on the purchasers' current assets. 
A) specifies the payment amount and payment due date. 
B) specifies that the purchaser use the seller's bank as the guarantor. 
C) requires payment prior to the delivery of the goods. 
D) is signed upon delivery of the goods. 
E) involves a lien on the purchasers' current assets.

Question 5

The basic assumption of the ABC approach to inventory management is that:

Accepted Answer

A) inventory should be divided dependent on the type of cash or credit sale anticipated. 
B) most items are ordered,stocked,and sold in a relatively short period of time. 
C) firms should receive A customer's order Before incurring inventory Costs. 
D) a small portion of inventory represents a large portion of inventory costs. 
E) firms should Always Be Consistent in the amount of inventory ordered. 
A) inventory should be divided dependent on the type of cash or credit sale anticipated. 
B) most items are ordered,stocked,and sold in a relatively short period of time. 
C) firms should receive A customer's order Before incurring inventory Costs. 
D) a small portion of inventory represents a large portion of inventory costs. 
E) firms should Always Be Consistent in the amount of inventory ordered.

Question 6

Neilson's is a new firm that sells a product with a variable cost of $62 a unit.The firm has a monthly required return of 1.8 percent.The firm wants to offer all new customers 30 days of credit and expects that if it does so,that 12 percent will default on payment while the others become repeat customers.What is the minimum price the firm could charge to break-even on an NPV basis?

Accepted Answer

A) $82.15 
B) $74.09 
C) $63.27 
D) $98.14 
E) $78.40 
A) $82.15 
B) $74.09 
C) $63.27 
D) $98.14 
E) $78.40

Question 7

All of these are carrying costs of inventory except:

Accepted Answer

A) storage costs. 
B) insurance. 
C) restocking costs. 
D) theft. 
E) the opportunity cost of capital. 
A) storage costs. 
B) insurance. 
C) restocking costs. 
D) theft. 
E) the opportunity cost of capital.

Question 8

The first step in materials requirements planning is establishing the:

Accepted Answer

A) desired minimum raw materials inventory level. 
B) finished goods inventory level. 
C) cost of each order. 
D) delivery time required for each type of raw material. 
E) value of each inventory item as a percent of total inventory. 
A) desired minimum raw materials inventory level. 
B) finished goods inventory level. 
C) cost of each order. 
D) delivery time required for each type of raw material. 
E) value of each inventory item as a percent of total inventory.

Question 9

On September 1,a firm grants credit with terms of 2/10 net 30.The creditor:

Accepted Answer

A) must pay a penalty of 2/10 of one percent when payment is made later than October 1. 
B) must pay a penalty of 10 percent when payment is made later than 2 days after October 1. 
C) receives a discount of 2 percent when payment is made at least 10 days prior to October 1. 
D) receives a discount of 2 percent when payment is made on September 1 and pays a penalty of 10 percent if payment is made after October 1. 
E) receives a discount of 2 percent when payment is made within 10 days. 
A) must pay a penalty of 2/10 of one percent when payment is made later than October 1. 
B) must pay a penalty of 10 percent when payment is made later than 2 days after October 1. 
C) receives a discount of 2 percent when payment is made at least 10 days prior to October 1. 
D) receives a discount of 2 percent when payment is made on September 1 and pays a penalty of 10 percent if payment is made after October 1. 
E) receives a discount of 2 percent when payment is made within 10 days.

Question 10

Selling goods and services on credit is:

Accepted Answer

A) an investment in a customer. 
B) never necessary unless customers cannot pay for the goods. 
C) a decision independent of customers. 
D) permissible only if your bank lends the money. 
E) never a wise decision. 
A) an investment in a customer. 
B) never necessary unless customers cannot pay for the goods. 
C) a decision independent of customers. 
D) permissible only if your bank lends the money. 
E) never a wise decision.

Question 11

Lewis Companies sells 2,600 units a month for cash at a price of $299 a unit and a variable cost of $187 a unit.The firm estimates it can increase its sales by 200 units a month if it switches to a net 30 credit policy while keeping its price and costs at their current levels.If the monthly cost of capital is .85 percent,what is the NPV of switching?

Accepted Answer

A) $1,590,005 
B) $1,394,008 
C) $1,211,036 
D) $1,820,494 
E) $2,006,413 
A) $1,590,005 
B) $1,394,008 
C) $1,211,036 
D) $1,820,494 
E) $2,006,413

Question 12

Jaxon Markets currently has credit terms of net 30,an average collection period of 29 days,and average receivables of $211,410.The firm estimates that if it offered terms of 2/10,net 30 that 45 percent of its customers would pay on Day 10 with the remainder paying on average in 32 days.How much cash could the company free up from its accounts receivables if it switched its credit policy?

Accepted Answer

A) $38,762 
B) $50,301 
C) $64,219 
D) $58,336 
E) $65,009 
A) $38,762 
B) $50,301 
C) $64,219 
D) $58,336 
E) $65,009

Question 13

Assume Atlantic Fish sells 3,200 pounds of fish per month at a price of $2.90 a pound.The variable cost per pound is $2.22.Currently,the firm has a cash-only sales policy.The firm is considering changing to a net 30 credit policy.The monthly required return is 1.2 percent.What does the new level of sales need to be to break even on the switch?

Accepted Answer

A) 3,219.40 pounds 
B) 3,489.67 pounds 
C) 3,370.44 pounds 
D) 170.44 pounds 
E) 119.40 pounds 
A) 3,219.40 pounds 
B) 3,489.67 pounds 
C) 3,370.44 pounds 
D) 170.44 pounds 
E) 119.40 pounds

Question 14

The upper limit to the credit period is best expressed as the length of the:

Accepted Answer

A) seller's operating cycle. 
B) seller's cash cycle. 
C) seller's payables period. 
D) buyer's operating cycle. 
E) buyer's cash cycle. 
A) seller's operating cycle. 
B) seller's cash cycle. 
C) seller's payables period. 
D) buyer's operating cycle. 
E) buyer's cash cycle.

Question 15

With an open account the formal instrument of credit is the:

Accepted Answer

A) purchase order. 
B) invoice. 
C) promissory note. 
D) banker's acceptance. 
E) secured loan document. 
A) purchase order. 
B) invoice. 
C) promissory note. 
D) banker's acceptance. 
E) secured loan document.

Question 16

Yesterday,Smiley Company sold $22,500 of merchandise on credit.The invoice was sent today with the terms,3/10 net 40.This customer normally pays on the net date.What is the effective rate of interest the customer is paying by not taking the discount? Assume a 365-day year.

Accepted Answer

A) 42.31 percent 
B) 44.86 percent 
C) 39.27 percent 
D) 40.54 percent 
E) 45.38 percent 
A) 42.31 percent 
B) 44.86 percent 
C) 39.27 percent 
D) 40.54 percent 
E) 45.38 percent

Question 17

Green Garden is a cash-only company.The company is considering switching to a 30-day credit policy with no discounts.What factors should the firm consider before making the switch?

Accepted Answer

The firm should consider the price it ca

Question 18

Determining the optimal credit policy is based on a trade-off between the carrying costs of granting credit and the:

Accepted Answer

A) lost profits from refusing credit. 
B) cash flows delayed from granting credit. 
C) opportunity cost of the delayed payments. 
D) variable costs associated with the delayed payments. 
E) present value of uncollected sales. 
A) lost profits from refusing credit. 
B) cash flows delayed from granting credit. 
C) opportunity cost of the delayed payments. 
D) variable costs associated with the delayed payments. 
E) present value of uncollected sales.

Question 19

Lemoyne mailed an invoice today in the amount of $1,268 with terms of 2/7 net 30.What is the cost of credit to the customer if they pay on the last day of the credit period? Assume a 365-day year.

Accepted Answer

A) 41.02 percent 
B) 39.62 percent 
C) 37.80 percent 
D) 37.56 percent 
E) 39.40 percent 
A) 41.02 percent 
B) 39.62 percent 
C) 37.80 percent 
D) 37.56 percent 
E) 39.40 percent

Question 20

Baked Potatoes has total annual sales of 846,000 units,a carrying cost per unit of $1.64 per year,and restocking costs of $31 per order.Each inventory item has an average cost of $2.39.What is the average dollar value of the firm's inventory if it always orders the most economical quantity?

Accepted Answer

A) $6,758 
B) $7,008 
C) $7,409 
D) $6,218 
E) $6,411 
A) $6,758 
B) $7,008 
C) $7,409 
D) $6,218 
E) $6,411

Exam 28: Credit and Inventory Management

Seasonal dating of accounts receivable:

Since the credit decision usually includes riskier customers,the decision should adjust for this by:

Jensen's Boat Works total costs of holding inventory is $8,400 when its order sizes are optimized.If the firm places 46 orders a year,what is the fixed cost per order?

A commercial draft typically:

The basic assumption of the ABC approach to inventory management is that:

All of these are carrying costs of inventory except:

The first step in materials requirements planning is establishing the:

On September 1,a firm grants credit with terms of 2/10 net 30.The creditor:

Selling goods and services on credit is:

The upper limit to the credit period is best expressed as the length of the:

With an open account the formal instrument of credit is the:

Yesterday,Smiley Company sold $22,500 of merchandise on credit.The invoice was sent today with the terms,3/10 net 40.This customer normally pays on the net date.What is the effective rate of interest the customer is paying by not taking the discount? Assume a 365-day year.

Green Garden is a cash-only company.The company is considering switching to a 30-day credit policy with no discounts.What factors should the firm consider before making the switch?

Determining the optimal credit policy is based on a trade-off between the carrying costs of granting credit and the:

Lemoyne mailed an invoice today in the amount of $1,268 with terms of 2/7 net 30.What is the cost of credit to the customer if they pay on the last day of the credit period? Assume a 365-day year.

Baked Potatoes has total annual sales of 846,000 units,a carrying cost per unit of $1.64 per year,and restocking costs of $31 per order.Each inventory item has an average cost of $2.39.What is the average dollar value of the firm's inventory if it always orders the most economical quantity?

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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