Question 1

The primary goal of accounts receivable management should be ____.

Accepted Answer

A)  minimizing lost sales 
B)  maximizing shareholder wealth 
C)  increasing market share 
D)  minimizing receivables investment 
A)  minimizing lost sales 
B)  maximizing shareholder wealth 
C)  increasing market share 
D)  minimizing receivables investment

Question 2

Bluegrass Distilleries, Inc. refuses to extend credit to any wholesale distributors who have a history of being delinquent in repaying credit extended to them. This policy results in lost sales of $10 million annually. Based on experience with these types of customers, the firm estimates that the average collection period would be 90 days and that the bad-debt loss ratio would be 6%. The firm's variable cost ratio is 0.80, making its profit contribution ratio 0.20. Bluegrass Distilleries' required pretax return (i.e., opportunity cost) on receivables investments is 20%. When converting from annual to daily data or vice versa, assume there are 365 days per year. Assuming Bluegrass extends full credit to these (previously delinquent) customers, determine the total increase in credit-related costs.

Accepted Answer

A)  $1,000,000 
B)  $1,093,151 
C)  $400,000 
D)  $600,000 
A)  $1,000,000 
B)  $1,093,151 
C)  $400,000 
D)  $600,000

Question 3

Warren Motor Company sells $30 million of its products to wholesalers on terms of "net 30." Currently, the firm's average collection period is 48 days. To speed up the collection of receivables, Warren is considering offering a cash discount of 2% if customers pay their bills within 10 days. The firm expects 50% of its customers to take the discount and its average collection period to decline to 30 days. The firm's required pretax return (i.e., opportunity cost) on receivables investment is 16%. Determine the net effect on Warren's pretax profits of offering a 2% cash discount.

Accepted Answer

A)  $300,000 
B)  $236,712 
C)  -$63,288 
D)  -$236,712 
A)  $300,000 
B)  $236,712 
C)  -$63,288 
D)  -$236,712

Question 4

Which of the following is not an inventory-related cost?

Accepted Answer

A)  Ordering costs 
B)  Product advertising costs 
C)  Carrying costs 
D)  Stockout costs 
A)  Ordering costs 
B)  Product advertising costs 
C)  Carrying costs 
D)  Stockout costs

Question 5

In determining the creditworthiness of a customer from financial statements, the statements can indicate all except which of the following?

Accepted Answer

A)  Financial strength 
B)  Ability to repay credit obligations 
C)  Length of time needed to repay on credit 
D)  Proposed budgetary expenses for the near future 
A)  Financial strength 
B)  Ability to repay credit obligations 
C)  Length of time needed to repay on credit 
D)  Proposed budgetary expenses for the near future

Question 6

The credit policy variables a firm can use to exercise control over its level of receivables investment include ____.

Accepted Answer

A)  credit standards 
B)  credit terms 
C)  collection effort 
D)  credit standards, credit terms, and collection effort 
A)  credit standards 
B)  credit terms 
C)  collection effort 
D)  credit standards, credit terms, and collection effort

Question 7

Bluegrass Distilleries, Inc. refuses to extend credit to any wholesale distributors who have a history of being delinquent in repaying credit extended to them. This policy results in lost sales of $10 million annually. Based on experience with these types of customers, the firm estimates that the average collection period would be 90 days and that the bad-debt loss ratio would be 6%. The firm's variable cost ratio is 0.80, making its profit contribution ratio 0.20. Bluegrass Distilleries' required pretax return (i.e., opportunity cost) on receivables investments is 20%. When converting from annual to daily or vice versa, assume there are 365 days per year. If Bluegrass Distilleries extends credit to these (previously delinquent) customers, determine the increase in the investment in receivables.

Accepted Answer

A)  $27,397 
B)  $2,465,753 
C)  $111,111 
D)  $125,000 
A)  $27,397 
B)  $2,465,753 
C)  $111,111 
D)  $125,000

Question 8

Wallace Company sells $73 million of its products to retailers on credit terms of "net 30." Its average collection period is 55 days. To speed up the collection of receivables, the company is considering changing its credit terms to "2/10, net 30." The company expects 40% of its customers to take the cash discount and its average collection period to decline to 35 days. Wallace's required pretax rate of return on receivables investments is 15%. Determine the net effect on Wallace's pretax profits of the change in credit terms. (Assume 365 days per year in any calculations.)

Accepted Answer

A)  -$860,000 
B)  $600,000 
C)  $16,000 
D)  $584,000 
A)  -$860,000 
B)  $600,000 
C)  $16,000 
D)  $584,000

Question 9

The cost of funds invested in inventories is measured by the ____.

Accepted Answer

A)  cost of insuring the inventory 
B)  stockout costs 
C)  required rate of return 
D)  rate of interest on borrowed funds 
A)  cost of insuring the inventory 
B)  stockout costs 
C)  required rate of return 
D)  rate of interest on borrowed funds

Question 10

____ serves as a buffer between the various phases in the procurement-production-sales cycle of a manufacturing firm.

Accepted Answer

A)  Cash 
B)  Accounts receivable 
C)  Notes payable 
D)  Inventories 
A)  Cash 
B)  Accounts receivable 
C)  Notes payable 
D)  Inventories

Question 11

Technico manufactures about 800,000 solar calculators per year. The computer chips used in the calculator cost $4.80 each, and the cost of placing an order is $65. If the carrying costs are 16%, what is the EOQ for the chips?

Accepted Answer

A)  25,495 
B)  3,162 
C)  8, 229 
D)  11,637 
A)  25,495 
B)  3,162 
C)  8, 229 
D)  11,637

Question 12

The likelihood that a customer will fail to repay credit extended to it is referred to as ____.

Accepted Answer

A)  default risk 
B)  maturity risk 
C)  bad-debt loss ratio 
D)  opportunity cost 
A)  default risk 
B)  maturity risk 
C)  bad-debt loss ratio 
D)  opportunity cost

Question 13

What is the optimal length of one inventory cycle for a firm that has an economic order quantity of 750 units, average daily demand of 68 units, and a price of $30 per unit?

Accepted Answer

A)  25 days 
B)  11 days 
C)  2.7 days 
D)  331 days 
A)  25 days 
B)  11 days 
C)  2.7 days 
D)  331 days

Question 14

The ____ measures the promptness with which customers repay their credit obligations.

Accepted Answer

A)  bad-debt loss ratio 
B)  average collection period 
C)  credit term 
D)  cash discount 
A)  bad-debt loss ratio 
B)  average collection period 
C)  credit term 
D)  cash discount

Question 15

Haulsee Inc. builds 800,000 golf carts a year and purchases the electronic motors for these carts for $370 each. Ordering costs are $540, and Haulsee's inventory carrying costs average 14% of the inventory value. What is the optimal ordering frequency?

Accepted Answer

A)  0.70 days 
B)  1.86 days 
C)  5.18 days 
D)  8.64 days 
A)  0.70 days 
B)  1.86 days 
C)  5.18 days 
D)  8.64 days

Question 16

Seasonal datings are offered to specific retailers. These retailers ____.

Accepted Answer

A)  do not have the capacity to make sales without seasonal dating 
B)  do not have the ability to finance a buildup of inventory in advance of the peak selling period 
C)  are known to be credit-risky 
D)  are considered a distributive subsidiary of the parent company 
A)  do not have the capacity to make sales without seasonal dating 
B)  do not have the ability to finance a buildup of inventory in advance of the peak selling period 
C)  are known to be credit-risky 
D)  are considered a distributive subsidiary of the parent company

Question 17

All except which of the following are reliable sources of the creditworthiness of a customer?

Accepted Answer

A)  Credit- reporting organizations 
B)  The company's own experience with the customer 
C)  Banks 
D)  A general credit application 
A)  Credit- reporting organizations 
B)  The company's own experience with the customer 
C)  Banks 
D)  A general credit application

Question 18

Which of the following is not a cost related to the extension of credit to customers?

Accepted Answer

A)  Bad-debt losses 
B)  Cash discounts 
C)  Quantity discounts 
D)  Collection costs 
A)  Bad-debt losses 
B)  Cash discounts 
C)  Quantity discounts 
D)  Collection costs

Question 19

Accounts receivable consists of the credit of the business. It can take the form of which of the following?
I. Trade credit
II. Consumer credit

Accepted Answer

A)  I only 
B)  II only 
C)  Both I and II 
D)  Neither I nor II 
A)  I only 
B)  II only 
C)  Both I and II 
D)  Neither I nor II

Question 20

Possible sources of relevant information about a credit applicant include ____.

Accepted Answer

A)  financial statements submitted by the applicant 
B)  credit reporting organizations 
C)  The U.S. Department of Commerce 
D)  the applicant's financial statements and credit reporting agencies 
A)  financial statements submitted by the applicant 
B)  credit reporting organizations 
C)  The U.S. Department of Commerce 
D)  the applicant's financial statements and credit reporting agencies

Exam 21: The Management of Accounts Receivable and Inventories

The primary goal of accounts receivable management should be ____.

Which of the following is not an inventory-related cost?

In determining the creditworthiness of a customer from financial statements, the statements can indicate all except which of the following?

The credit policy variables a firm can use to exercise control over its level of receivables investment include ____.

The cost of funds invested in inventories is measured by the ____.

____ serves as a buffer between the various phases in the procurement-production-sales cycle of a manufacturing firm.

Technico manufactures about 800,000 solar calculators per year. The computer chips used in the calculator cost $4.80 each, and the cost of placing an order is $65. If the carrying costs are 16%, what is the EOQ for the chips?

The likelihood that a customer will fail to repay credit extended to it is referred to as ____.

What is the optimal length of one inventory cycle for a firm that has an economic order quantity of 750 units, average daily demand of 68 units, and a price of $30 per unit?

The ____ measures the promptness with which customers repay their credit obligations.

Haulsee Inc. builds 800,000 golf carts a year and purchases the electronic motors for these carts for $370 each. Ordering costs are $540, and Haulsee's inventory carrying costs average 14% of the inventory value. What is the optimal ordering frequency?

Seasonal datings are offered to specific retailers. These retailers ____.

All except which of the following are reliable sources of the creditworthiness of a customer?

Which of the following is not a cost related to the extension of credit to customers?

Accounts receivable consists of the credit of the business. It can take the form of which of the following? I. Trade credit II. Consumer credit

Possible sources of relevant information about a credit applicant include ____.

The Role and Objective of Financial Management

The Domestic and International Financial Marketplace

Evaluation of Financial Performance

Financial Planning and Forecasting

The Time Value of Money

Continuous Compounding and Discounting

Fixed Income Securities: Characteristics and Valuation

Common Stock: Characteristics, Valuation, and Issuance

Analysis of Risk and Return

Capital Budgeting and Cash Flow Analysis

Mutually Exclusive Investments Having Unequal Lives

Capital Budgeting: Decision Criteria and Real Option Considerations

Capital Budgeting and Risk

The Cost of Capital

Capital Structure Concepts

Breakeven Analysis

Capital Structure Management in Practice

Dividend Policy

Working Capital Policy and Short-Term Financing

The Management of Cash and Marketable Securities

Lease and Intermediate Term Financing

Financing With Derivatives

Bond Refunding Analysis

Risk Management

International Financial Management

Corporate Restructuring

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