Question 1

The Turn It Up Corporation sells on credit terms of net 30.Its accounts are,on average,6 days past due.Annual credit sales are $7 million.What is the company's balance sheet amount in accounts receivable?

Accepted Answer

A) $690,411 
B) $723,333 
C) $851,667 
D) $915,407 
E) $923,593

Question 2

Which one of the following inventory items is probably the least liquid?

Accepted Answer

A) plywood held in inventory by a home builder 
B) a wheel barrow held in inventory by a garden center 
C) a partially assembled interior for a new vehicle 
D) a set of tires owned by an automobile manufacturer 
E) a toy owned by a retail toy store

Question 3

The period of time that extends from the day a credit sale is made until the day the bank credits a firm's account with the payment for that sale is known as the _____ period.

Accepted Answer

A) float 
B) cash collection 
C) sales 
D) accounts receivable 
E) discount

Question 4

Cape May Products currently sells 650 units a month at a price of $59 a unit.The firm believes it can increase its sales by an additional 125 units if it switches to a net 30 credit policy.The monthly interest rate is 0.35 percent and the variable cost per unit is $38.What is the incremental cash inflow from the proposed credit policy switch?

Accepted Answer

A) $774 
B) $2,625 
C) $4,750 
D) $5,690 
E) $7,375

Question 5

The best-selling pair of roller skates The Teen Store offers sells for $79.99 a pair.The store consistently sells 5,700 pairs of these roller skates every year.The fixed costs to order more skates is $68 and the carrying costs are $1.95 per pair.What is the economic order quantity?

Accepted Answer

A) 446 pairs 
B) 515 pairs 
C) 529 pairs 
D) 631 pairs 
E) 648 pairs

Question 6

You have the opportunity to make a one-time sale if you will give a new customer 30 days to pay.You suspect there is a 10 percent chance this person will never pay you.The sales price of the item the customer wants to buy is $289.Your variable cost on that item is $156 and your monthly interest rate is 1.75 percent.Should you grant credit to this customer? Why or why not?

Accepted Answer

A) yes; because the NPV of the potential sale is $113.05 
B) yes; because the NPV of the potential sale is $99.63 
C) no; because the NPV of the potential sale is -$133.00 
D) no; because the NPV of the potential sale is -113.05 
E) no; because the NPV of the potential sale is -$89.65

Question 7

Polly's Home Accents currently sells 320 units a month at a price of $59 a unit.Polly thinks she can increase her sales by an additional 55 units if she switches to a net 30 credit policy.The monthly interest rate is 0.4 percent and the variable cost per unit is $32.What is the net present value of the proposed credit policy switch?

Accepted Answer

A) $350,610 
B) $350,895 
C) $426,507 
D) $621,929 
E) $821,135

Question 8

Bill is in charge of the inventory for Home Builder's Supply.As an inventory item gets low,he is to restock the item by a quantity that minimizes the total inventory costs for that item.What is this restocking quantity called?

Accepted Answer

A) short order quantity 
B) refill unit quantity 
C) economic order quantity 
D) minimum stock level 
E) re-order limit

Question 9

Which do you feel is the more appropriate upper limit for the credit period that a seller offers to a buyer:
 the buyer's operating cycle or the buyer's inventory period?

Accepted Answer

The answer of Which do you feel is the more...

Question 10

Allison has developed a set of procedures for determining the amount of each raw material that she needs to have in inventory if she is to keep her firm's assembly lines operating efficiently.These procedures are commonly referred to by which one of the following terms?

Accepted Answer

A) first-in, first-out method 
B) the Baumol model 
C) net working capital planning 
D) economic order procedures 
E) materials requirements planning

Question 11

A cash discount of 2/5,net 30:

Accepted Answer

A) grants customers 30 days to pay after the discount period expires. 
B) offers customers a maximum of 30 days credit. 
C) grants free credit for a period of 30 days. 
D) charges a higher price to a cash customer than to a customer who pays in 2 days. 
E) grants customers 2 days to pay if they want the 5 percent discount.

Question 12

Under the current cash sales only policy Blue Bird,Inc.,will sell 215 units a month at a price of $469 each.The variable cost per unit is $305 and the monthly interest rate is 1.7 percent.Based on a recent survey,the firm believes it can sell an additional 36 units per month if it offers a net 30 credit policy.What is the net present value of the switch using the one-shot approach?

Accepted Answer

A) $212,806 
B) $231,543 
C) $235,479 
D) $248,946 
E) $251,118

Question 13

If you extend credit for a one-time sale to a new customer you risk an amount equal to:

Accepted Answer

A) the sales price of the item sold. 
B) the variable cost of the item sold. 
C) the fixed cost of the item sold. 
D) the profit margin on the item sold. 
E) zero.

Question 14

Which one of the following factors tends to favor longer credit periods?

Accepted Answer

A) high consumer demand 
B) lower priced merchandise 
C) increased credit risk 
D) merchandise with low collateral value 
E) increased competition

Question 15

Assume that RSF is a wholly-owned subsidiary of the Rolled Steel Company.RSF provides credit financing solely for large ticket items purchased from the Rolled Steel Company.Which one of the following terms describes RSF?

Accepted Answer

A) credit department 
B) parent company 
C) captive finance company 
D) credit union 
E) service unit

Question 16

You are considering renting a kiosk in the local mall for a period of three months.Any sale you make will be a one-time sale.There is only a 79 percent chance you will collect payment on a credit sale.The product you want to sell has a variable cost of $3.88 and a sales price of $4.99.The monthly interest rate is 1.5 percent.Should you offer people 30 days to pay? Why or why not?

Accepted Answer

A) yes; because the NPV of a credit sale is $0.09. 
B) yes; because the NPV of a credit sale is $0.03. 
C) no; because the NPV of a credit sale is -$0.08. 
D) no; because the NPV of a credit sale is -$0.02. 
E) It doesn't matter because the NPV of a credit sale is approximately zero.

Question 17

Music City,Inc.has an average collection period of 62 days.Its average daily investment in receivables is $50,000.What are the annual credit sales?

Accepted Answer

A) $268,407 
B) $277,109 
C) $294,355 
D) $325,893 
E) $767,123

Exam 20: Credit and Inventory Management