Question 1

To minimize the possibility of running out of inventory, most companies add a to their inventory.

Accepted Answer

A) safety stock 
B) lead time stock level 
C) few days 
D) replenishment factor 
A) safety stock 
B) lead time stock level 
C) few days 
D) replenishment factor

Question 2

The types of inventories that manufacturing firms generally hold include all the following except:

Accepted Answer

A) raw materials 
B) working stock 
C) finished goods 
D) work-in-process 
A) raw materials 
B) working stock 
C) finished goods 
D) work-in-process

Question 3

The effect of a change in a firm's credit terms from "net 30" to "2/10, net 30" on its customer's balance sheets is likely to be

Accepted Answer

A) decreased accounts receivable 
B) increased accounts receivable 
C) decreased accounts payable 
D) increased accounts payable 
A) decreased accounts receivable 
B) increased accounts receivable 
C) decreased accounts payable 
D) increased accounts payable

Question 4

All of the following are reliable sources of the creditworthiness of a customer EXCEPT:

Accepted Answer

A) Credit reporting organizations 
B) Company's experience 
C) Banks 
D) General credit application 
A) Credit reporting organizations 
B) Company's experience 
C) Banks 
D) General credit application

Question 5

Lengthening the credit period is likely to result in all of the following except

Accepted Answer

A) higher sales 
B) more cash sales 
C) larger investment in receivables 
D) longer average collection period 
A) higher sales 
B) more cash sales 
C) larger investment in receivables 
D) longer average collection period

Question 6

What information could be used to judge the credit worthiness of a customer?

Accepted Answer

Information is available from

Question 7

The average collection period measures the:

Accepted Answer

A) number of days between when a typical credit sale is made and when the firm receives the payment 
B) number of days it takes a typical check to "clear" through the banking system 
C) number of days beyond the end of the credit period before a typical customer payment is received 
D) number of days before a typical account becomes delinquent 
A) number of days between when a typical credit sale is made and when the firm receives the payment 
B) number of days it takes a typical check to "clear" through the banking system 
C) number of days beyond the end of the credit period before a typical customer payment is received 
D) number of days before a typical account becomes delinquent

Question 8

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.In an effort to speed up the collection of receivables, Warren is considering offering a cash discount of 2 percent if customers pay their bills within 10 days.The firm expects 50 percent 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 percent.Determine the cost of the cash discounts to Warren.

Accepted Answer

A) $300,000 
B) $60,000 
C) $40,000 
D) $48,000 
A) $300,000 
B) $60,000 
C) $40,000 
D) $48,000

Question 9

Capacity, which is one of the traditional "five Cs" of credit analysis, refers to

Accepted Answer

A) the general economic climate and its effect on the applicant's ability to pay 
B) the willingness of the applicant to meet its financial obligations 
C) the financial strength of the applicant (i.e., net worth) 
D) the ability of an applicant to meet its financial obligations 
A) the general economic climate and its effect on the applicant's ability to pay 
B) the willingness of the applicant to meet its financial obligations 
C) the financial strength of the applicant (i.e., net worth) 
D) the ability of an applicant to meet its financial obligations

Question 10

In determining the creditworthiness of a customer from financial statements, the statements can indicate all of the following EXCEPT:

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 11

Covers, Inc.(CI) sells its stainless steel products on terms of "2/10, net 40." CI is considering granting credit to retailers with total assets as low as $500,000.Currently the lowest asset limit is $750,000.CI believes sales will increase $7 million from the new credit group but the average collection period for this new group will be 60 days versus the current average collection period of35 days.If management estimates that 20% of the new customers will take the cash discount but 4% of the new business will be written off as a bad-debt loss, should CI lower its credit standards? Assume Cl's variable cost ratio is 0.7 and its required pretax rate of return on receivables investment is 15%.

Accepted Answer

A) Yes, pretax profits increase $1,619,397 
B) Yes, pretax profits increase $1,703,397 
C) Yes, pretax profits increase $1,755,178 
D) No, Pretax profits will decrease 
A) Yes, pretax profits increase $1,619,397 
B) Yes, pretax profits increase $1,703,397 
C) Yes, pretax profits increase $1,755,178 
D) No, Pretax profits will decrease

Question 12

Willoughby Industries, Inc.is considering whether to discontinue offering credit to customers who are more than 10 days overdue on repaying the credit extended to them.Current annual credit sales are $10 million on credit terms of "net 30".Such a change in policy is expected to reduce sales by 10 percent, cut the firm's bad-debt losses from 5 to 3 percent, and reduce its average collection period from 72 days to 45 days.The firm's variable cost ratio is 0.70 (profit contribution ratio is 0.30) and its required pretax return (i.e., opportunity cost) on receivables investments is 25 percent.Determine the net effect of this credit tightening policy on the pretax profits of Willoughby.When converting from annual to daily data or vice versa, assume that there are 365 days per year.

Accepted Answer

A) -$863,014 
B) $145,753 
C) -$70,000 
D) $300,000 
A) -$863,014 
B) $145,753 
C) -$70,000 
D) $300,000

Question 13

In trying to collect on past-due accounts, the firm may use several methods.List them.

Accepted Answer

A firm may:
1.Send notices or letters in

Question 14

Possible sources of relevant information about a credit applicant include

Accepted Answer

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

Question 15

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 16

All other things being equal, the application of a seasonal dating to the terms of credit offered by the firms below would be expected to generate additional sales for each firm except

Accepted Answer

A) a Christmas novelty manufacturer 
B) an agricultural implements manufacturer 
C) a wholesale frozen food supplier 
D) a swimsuit manufacturer 
A) a Christmas novelty manufacturer 
B) an agricultural implements manufacturer 
C) a wholesale frozen food supplier 
D) a swimsuit manufacturer

Question 17

How does an optimal credit extension policy impact a company's accounts receivables?

Accepted Answer

An optimal credit extension policy requi

Question 18

Whirlwind Company sells to retail appliance stores on credit terms of net 30.Annual credit sales are $182,500,000 spread evenly throughout the year and its accounts average 20 days overdue.The firm's variable cost ratio is 0.70.Determine Whirlwind's average investment in receivables.(Assume 365 days per year an all calculations.)

Accepted Answer

A) $17,500,000 
B) $25,000,000 
C) $15,000,000 
D) cannot be determined from the information provided 
A) $17,500,000 
B) $25,000,000 
C) $15,000,000 
D) cannot be determined from the information provided

Question 19

The objective of offering seasonal datings to customers is to

Accepted Answer

A) encourage customers to place their orders prior to the peak selling period 
B) speed up the collection of accounts receivable 
C) increase the firm's inventory storage costs 
D) reduce the number of bad checks received from customers 
A) encourage customers to place their orders prior to the peak selling period 
B) speed up the collection of accounts receivable 
C) increase the firm's inventory storage costs 
D) reduce the number of bad checks received from customers

Question 20

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.In an effort to speed up the collection of receivables, Warren is considering offering a cash discount of 2 percent if customers pay their bills within 10 days.The firm expects 50 percent 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 percent.Determine Warren's pretax earnings on the funds released from the reduction in receivables.(Assume a 365 day year.)

Accepted Answer

A) $1,479,452 
B) $236,712 
C) $266,667 
D) $1,082,191 
A) $1,479,452 
B) $236,712 
C) $266,667 
D) $1,082,191

Exam 18: The Management of Accounts Receivable and Inventories

To minimize the possibility of running out of inventory, most companies add a to their inventory.

The types of inventories that manufacturing firms generally hold include all the following except:

The effect of a change in a firm's credit terms from "net 30" to "2/10, net 30" on its customer's balance sheets is likely to be

All of the following are reliable sources of the creditworthiness of a customer EXCEPT:

Lengthening the credit period is likely to result in all of the following except

What information could be used to judge the credit worthiness of a customer?

The average collection period measures the:

Capacity, which is one of the traditional "five Cs" of credit analysis, refers to

In determining the creditworthiness of a customer from financial statements, the statements can indicate all of the following EXCEPT:

In trying to collect on past-due accounts, the firm may use several methods.List them.

Possible sources of relevant information about a credit applicant include

All other things being equal, the application of a seasonal dating to the terms of credit offered by the firms below would be expected to generate additional sales for each firm except

How does an optimal credit extension policy impact a company's accounts receivables?

The objective of offering seasonal datings to customers is to

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

A: The Time Value of Money

Fixed-Income Securities: Characteristics and Valuation

Common Stock: Characteristics, Valuation, and Issuance

Analysis of Risk and Return

Capital Budgeting and Cash Flow Analysis

Capital Budgeting: Decision Criteria and Real Option Considerations

A: Capital Budgeting: Decision Criteria and Real Option Considerations

Capital Budgeting and Risk

The Cost of Capital, Capital Structure, and Dividend Policy

Capital Structure Concepts

Capital Structure Management in Practice

A: Capital Structure Management in Practice

Dividend Policy

Working Capital Management

The Management of Cash and Marketable Securities

Lease and Intermediate-Term Financing

Financing with Derivatives

A: Financing with Derivatives

Risk Management

International Financial Management

Corporate Restructuring

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