Question 1

A ________________ is an instrument that is due and payable immediately upon receipt.

Accepted Answer

A)  Commercial draft. 
B)  Time draft. 
C)  Banker's acceptance. 
D)  Sight draft. 
E)  Trade acceptance. 
A)  Commercial draft. 
B)  Time draft. 
C)  Banker's acceptance. 
D)  Sight draft. 
E)  Trade acceptance. D

Question 2

Which one of the following is the correct sequence of events related to the cash flows from a credit sale?

Accepted Answer

A)  Customer mails cheques; The bank credits the firm's account; Credit sale is made; Firm deposits cheque in bank. 
B)  Credit sale is made; Customer mails cheques; The bank credits the firm's account; Firm deposits cheque in bank. 
C)  The bank credits the firm's account; Credit sale is made; Firm deposits cheque in bank; Customer mails cheques. 
D)  Credit sale is made; Customer mails cheques; Firm deposits cheque in bank; The bank credits the firm's account. 
E)  Credit sale is made; The bank credits the firm's account; Customer mails cheques; Firm deposits cheque in bank. 
A)  Customer mails cheques; The bank credits the firm's account; Credit sale is made; Firm deposits cheque in bank. 
B)  Credit sale is made; Customer mails cheques; The bank credits the firm's account; Firm deposits cheque in bank. 
C)  The bank credits the firm's account; Credit sale is made; Firm deposits cheque in bank; Customer mails cheques. 
D)  Credit sale is made; Customer mails cheques; Firm deposits cheque in bank; The bank credits the firm's account. 
E)  Credit sale is made; The bank credits the firm's account; Customer mails cheques; Firm deposits cheque in bank. D

Question 3

Which of the following would not be considered a carrying cost of credit?

Accepted Answer

A)  Suzie buys $200 of goods on credit but never pays her bill. 
B)  It requires 5 hours a week, to review potential new suppliers. 
C)  It costs $500 a week to employ Jack to call customers concerning their late payments. 
D)  Maxwell, Inc. requires an annual rate of return of 12% on its receivables. 
E)  It requires 5 hours a week, at an annual salary of $50,000, for the manager to approve credit applications. 
A)  Suzie buys $200 of goods on credit but never pays her bill. 
B)  It requires 5 hours a week, to review potential new suppliers. 
C)  It costs $500 a week to employ Jack to call customers concerning their late payments. 
D)  Maxwell, Inc. requires an annual rate of return of 12% on its receivables. 
E)  It requires 5 hours a week, at an annual salary of $50,000, for the manager to approve credit applications. B

Question 4

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. 
A)  Storage costs. 
B)  Insurance cost. 
C)  Cost of safety reserves. 
D)  Obsolescence cost. 
E)  Opportunity cost of capital used for inventory.

Question 5

A firm currently has a cash only credit policy. The firm is considering adopting a credit policy which will extend credit to customers for 45 days and grant the credit customers who pay in 15 days or less a discount.
The default rate and increase in sales are variables used in the analysis of this proposal that are outside of the control of the firm.

Accepted Answer

A) True 
 B)False

Question 6

Safety stock is defined as the:

Accepted Answer

A)  Minimum quantity for a replacement order. 
B)  Maximum level of inventory that exists when a replacement order is received. 
C)  Quantity specified as the reorder point when long delivery times exist. 
D)  Level of inventory that triggers a derived demand order when delivery time is involved. 
E)  Minimum level of inventory that a firm keeps on hand. 
A)  Minimum quantity for a replacement order. 
B)  Maximum level of inventory that exists when a replacement order is received. 
C)  Quantity specified as the reorder point when long delivery times exist. 
D)  Level of inventory that triggers a derived demand order when delivery time is involved. 
E)  Minimum level of inventory that a firm keeps on hand.

Question 7

You sell 28,000 units of an item each year. The carrying cost per unit is $.42 and the fixed costs per order are $52. What is the economic order quantity?

Accepted Answer

A)  1,862 units 
B)  1,907 units 
C)  2,414 units 
D)  2,507 units 
E)  2,633 units 
A)  1,862 units 
B)  1,907 units 
C)  2,414 units 
D)  2,507 units 
E)  2,633 units

Question 8

You are currently selling 75 units a month at a price of $495 a unit. Your variable cost of each unit is $360. If you switch from your current cash sales only policy to a net 30 policy you think your sales will increase by 20 percent. Your monthly interest rate is 1 percent. What is the net present value of this proposed switch using the accounts receivable approach?

Accepted Answer

A)  $159,975 
B)  $164,250 
C)  $167,809 
D)  $171,114 
E)  $174,211 
A)  $159,975 
B)  $164,250 
C)  $167,809 
D)  $171,114 
E)  $174,211

Question 9

Average annual sales/average collection period correctly specifies the level of the firm's receivables balance.

Accepted Answer

A) True 
 B)False

Question 10

Which one of the following statements is correct concerning a factor that influences the length of the credit period?

Accepted Answer

A)  Perishable items tend to have longer credit periods. 
B)  Items with low markups tend to have longer credit periods. 
C)  Smaller accounts tend to have longer credit periods. 
D)  One firm may offer different credit terms to different customers. 
E)  Newer products tend to have shorter credit periods. 
A)  Perishable items tend to have longer credit periods. 
B)  Items with low markups tend to have longer credit periods. 
C)  Smaller accounts tend to have longer credit periods. 
D)  One firm may offer different credit terms to different customers. 
E)  Newer products tend to have shorter credit periods.

Question 11

A typical first step in the collection of an overdue account is to ________________.

Accepted Answer

A)  Employ a collection agency. 
B)  Send the customer an aging schedule. 
C)  Make a telephone call to the customer. 
D)  Take legal action against the customer. 
E)  Call the customer's bank. 
A)  Employ a collection agency. 
B)  Send the customer an aging schedule. 
C)  Make a telephone call to the customer. 
D)  Take legal action against the customer. 
E)  Call the customer's bank.

Question 12

A firm offers credit terms of 1/5, net 15. What is the effective annual rate on the credit extended if a customer foregoes the discount on a $2,000 purchase?

Accepted Answer

A)  27.70% 
B)  31.23% 
C)  36.00% 
D)  44.31% 
E)  47.98% 
A)  27.70% 
B)  31.23% 
C)  36.00% 
D)  44.31% 
E)  47.98%

Question 13

Which of the following is the best definition of a terms of sale.

Accepted Answer

A)  A compilation of accounts receivable by the age of each account. 
B)  Wholly owned subsidiary that handles credit extension and receivables financing through commercial paper. 
C)  A discount given for a cash purchase. 
D)  Procedures followed by a firm in collecting accounts receivable. 
E)  Conditions on which a firm sells its goods and services for cash or credit. 
A)  A compilation of accounts receivable by the age of each account. 
B)  Wholly owned subsidiary that handles credit extension and receivables financing through commercial paper. 
C)  A discount given for a cash purchase. 
D)  Procedures followed by a firm in collecting accounts receivable. 
E)  Conditions on which a firm sells its goods and services for cash or credit.

Question 14

ABC Co. is considering granting credit to a new corporate customer. ABC is concerned about the new customer's credit history. ABC would likely find each of the following useful EXCEPT ________________.

Accepted Answer

A)  The customer's financial statements. 
B)  A Dun & Bradstreet report. 
C)  A Credited report. 
D)  A credit report from the customer's bank. 
E)  An aging of ABC's receivables. 
A)  The customer's financial statements. 
B)  A Dun & Bradstreet report. 
C)  A Credited report. 
D)  A credit report from the customer's bank. 
E)  An aging of ABC's receivables.

Question 15

Suppose your firm is offered terms of 2/10 net 30 on its purchases. Assuming that your firm intends to buy on credit, good cash management practice suggests that a rational purchaser should pay between 20 and 30 days days?

Accepted Answer

A) True 
 B)False

Question 16

Cindy's Toys has an average inventory of 1,800 teething rings. The carrying cost per unit per year is 5'. Cindy places an order for 3,600 teething rings on the first of each month and the order cost is $25. What are the total restocking costs under the current system?

Accepted Answer

A)  $45 
B)  $90 
C)  $150 
D)  $164 
E)  $300 
A)  $45 
B)  $90 
C)  $150 
D)  $164 
E)  $300

Question 17

The restocking quantity that minimizes the firm's total inventory costs is called the:

Accepted Answer

A)  Shortage cost quantity. 
B)  Carrying cost quantity. 
C)  Economic order quantity. 
D)  Speculation quantity. 
E)  Special-order quantity. 
A)  Shortage cost quantity. 
B)  Carrying cost quantity. 
C)  Economic order quantity. 
D)  Speculation quantity. 
E)  Special-order quantity.

Question 18

Taylor and Swanson currently sells on a cash basis only. The firm is considering switching to a 30-day credit policy. When analyzing the cost benefit of this switching policy, the firm should consider the change in the level of sales.

Accepted Answer

A) True 
 B)False

Question 19

One of the primary products your firm offers sells for $24.99 a unit. The variable cost per unit is $14.42 and the carrying cost per unit is $.74. You sell 7,320 of these units each year. The fixed cost to order this item is $50. What is the economic order quantity?

Accepted Answer

A)  982 units 
B)  995 units 
C)  1,013 units 
D)  1,069 units 
E)  1,111 units 
A)  982 units 
B)  995 units 
C)  1,013 units 
D)  1,069 units 
E)  1,111 units

Question 20

On average, manufacturing firms hold a greater proportion of total assets in the form of inventories than retailers.

Accepted Answer

A) True 
 B)False

Exam 20: Credit and Inventory Management

A ________________ is an instrument that is due and payable immediately upon receipt.

Which one of the following is the correct sequence of events related to the cash flows from a credit sale?

Which of the following would not be considered a carrying cost of credit?

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

Safety stock is defined as the:

You sell 28,000 units of an item each year. The carrying cost per unit is $.42 and the fixed costs per order are $52. What is the economic order quantity?

Average annual sales/average collection period correctly specifies the level of the firm's receivables balance.

Which one of the following statements is correct concerning a factor that influences the length of the credit period?

A typical first step in the collection of an overdue account is to ________________.

A firm offers credit terms of 1/5, net 15. What is the effective annual rate on the credit extended if a customer foregoes the discount on a $2,000 purchase?

Which of the following is the best definition of a terms of sale.

ABC Co. is considering granting credit to a new corporate customer. ABC is concerned about the new customer's credit history. ABC would likely find each of the following useful EXCEPT ________________.

Suppose your firm is offered terms of 2/10 net 30 on its purchases. Assuming that your firm intends to buy on credit, good cash management practice suggests that a rational purchaser should pay between 20 and 30 days days?

Cindy's Toys has an average inventory of 1,800 teething rings. The carrying cost per unit per year is 5'. Cindy places an order for 3,600 teething rings on the first of each month and the order cost is $25. What are the total restocking costs under the current system?

The restocking quantity that minimizes the firm's total inventory costs is called the:

Taylor and Swanson currently sells on a cash basis only. The firm is considering switching to a 30-day credit policy. When analyzing the cost benefit of this switching policy, the firm should consider the change in the level of sales.

One of the primary products your firm offers sells for $24.99 a unit. The variable cost per unit is $14.42 and the carrying cost per unit is $.74. You sell 7,320 of these units each year. The fixed cost to order this item is $50. What is the economic order quantity?

On average, manufacturing firms hold a greater proportion of total assets in the form of inventories than retailers.

Introduction to Corporate Finance

Financial Statements, Cash Flow, and Taxes

Working With Financial Statements

Long-Term Financial Planning and Corporate 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

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 Dividend Policy

Short-Term Finance and Planning

Cash and Liquidity Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Enterprise Risk Management

Options and Corporate Securities

Behavioural Finance: Implications for Financial Management

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