Question 1

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 D

Question 2

Mace Auto Parts Company sells to retail auto supply stores on credit terms of "net 60". Annual credit sales are $300 million (spread evenly throughout the year) and its accounts average 28 days overdue. The firm's variable cost ratio is 0.75 (i.e., variable costs are 75 percent of sales). When converting from annual to daily data or vice versa, assume there are 365 days per year. Determine Mace's average investment in receivables.

Accepted Answer

A)  $ 821,918 
B)  $ 3,409,091 
C)  $72,328,767 
D)  $ 82,192 
A)  $ 821,918 
B)  $ 3,409,091 
C)  $72,328,767 
D)  $ 82,192 C

Question 3

The proportion of the total receivables volume a company never collects is the:

Accepted Answer

A)  bad-debt loss ratio 
B)  mismanaged accounts payable 
C)  uncollectable bills 
D)  recorded debts 
A)  bad-debt loss ratio 
B)  mismanaged accounts payable 
C)  uncollectable bills 
D)  recorded debts A

Question 4

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 5

The reorder point is

Accepted Answer

A)  the lead time multiplied by the daily usage plus safety stock 
B)  the EOQ plus safety stock 
C)  the lead time multiplied by the annual usage 
D)  a product of daily usage and the lead time 
A)  the lead time multiplied by the daily usage plus safety stock 
B)  the EOQ plus safety stock 
C)  the lead time multiplied by the annual usage 
D)  a product of daily usage and the lead time

Question 6

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 7

When an order is placed for an item that is manufactured internally within a company, ordering costs consist primarily of ____.

Accepted Answer

A)  storage and handling costs 
B)  deterioration costs 
C)  production set-up costs 
D)  carrying costs 
A)  storage and handling costs 
B)  deterioration costs 
C)  production set-up costs 
D)  carrying costs

Question 8

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 9

Relaxing (i.e., lowering) the firm's credit standards is likely to result in

Accepted Answer

A)  lower sales 
B)  smaller bad-debt losses 
C)  a shorter average collection period 
D)  possible higher pre-tax profits 
A)  lower sales 
B)  smaller bad-debt losses 
C)  a shorter average collection period 
D)  possible higher pre-tax profits

Question 10

Examples of credit-related marginal costs are all of the following EXCEP:

Accepted Answer

A)  Advertising costs associated with promoting the company's credit policy. 
B)  Opportunity costs associated with supporting a higher level of receivables. 
C)  Labor costs associated with checking new credit accounts and collecting receivables. 
D)  Bad-debt expenses. 
A)  Advertising costs associated with promoting the company's credit policy. 
B)  Opportunity costs associated with supporting a higher level of receivables. 
C)  Labor costs associated with checking new credit accounts and collecting receivables. 
D)  Bad-debt expenses.

Question 11

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

Accepted Answer

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

Question 12

What are seasonal datings as it applies to credit terms?

Accepted Answer

Seasonal datings are sometimes offered t

Question 13

A numerical credit scoring system may rate all of the following EXCEPT:

Accepted Answer

A)  D & B credit rating 
B)  location of the business 
C)  financial characteristics of the applicant 
D)  current ratio of the applicant 
A)  D & B credit rating 
B)  location of the business 
C)  financial characteristics of the applicant 
D)  current ratio of the applicant

Question 14

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 15

Traditional discussion of guidelines for examining credit worthiness include "the five Cs of credit". Each of the following is one of the "five Cs" except

Accepted Answer

A)  capacity 
B)  cooperation 
C)  character 
D)  conditions 
A)  capacity 
B)  cooperation 
C)  character 
D)  conditions

Question 16

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 17

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 past 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 percent. 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 percent. 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 18

The United Shoe Company (USC) does not extend credit to any retail shoe store with a "Fair" or "Limited" Dun and Bradstreet credit rating. As a result of this policy the company loses $36,500,000 in sales each year. Based on prior experience with these types of customers, USC estimates that the average collection period would be 120 days and the bad-debt loss ratio would be 10%. The firm's variable cost ratio is 0.75. USC's required pretax return on receivables investments is 18%. Determine the net change in pretax profits of extending credit to these retail shoe stores. (Assume 365 days per year in any calculations.)

Accepted Answer

A)  $9,125,000 
B)  $3,315,000 
C)  -$1,095,000 
D)  $2,160,000 
A)  $9,125,000 
B)  $3,315,000 
C)  -$1,095,000 
D)  $2,160,000

Question 19

RCMP has annual credit sales of $37 million. The credit terms are "net 30" and the current average collection period is 45 days. RCMP is considering changing its terms to 1/10, net 30 in an effort to reduce the average collection period. RCMP believes that 35% of its customers will take the discount, reducing the average collection period to 33 days. Should RCMP offer the discount? Assume the firm's required rate of return on its receivables investment is 14%.

Accepted Answer

A)  No, pretax profits decrease $88,700 
B)  Yes, pretax profits increase $53,600 
C)  Yes, pretax profits increase $40,801 
D)  No, pretax profits decrease $40,801 
A)  No, pretax profits decrease $88,700 
B)  Yes, pretax profits increase $53,600 
C)  Yes, pretax profits increase $40,801 
D)  No, pretax profits decrease $40,801

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 it's customers to take the discount and it's 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

Exam 18: Management of Accounts Receivable and Inventories

Possible sources of relevant information about a credit applicant include

The proportion of the total receivables volume a company never collects is the:

The average collection period measures the:

The reorder point is

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

When an order is placed for an item that is manufactured internally within a company, ordering costs consist primarily of ____.

The objective of offering seasonal datings to customers is to

Relaxing (i.e., lowering) the firm's credit standards is likely to result in

Examples of credit-related marginal costs are all of the following EXCEP:

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

What are seasonal datings as it applies to credit terms?

A numerical credit scoring system may rate all of the following EXCEPT:

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?

Traditional discussion of guidelines for examining credit worthiness include "the five Cs of credit". Each of the following is one of the "five Cs" except

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?

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

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

Capital Budgeting and Risk

The Cost of Capital

Capital Structure Concepts

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

Risk Management

International Financial Management

Corporate Restructuring

Continuous Compounding and Discounting

Mutually Exclusive Investments Having Unequal Lives

Breakeven Analysis

Bond Refunding Analysis

Taxes

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