Exam 18: Management of Accounts Receivable and Inventories

____ are the criteria the firm uses to screen credit applicants in order to determine which of its customers should be offered credit and how much.

The ____ is the inventory level at which an order should be placed for replenishment of an item.

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.)

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 net effect on Warren's pretax profits of offering a 2 percent cash discount.

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 data or vice versa, assume there are 365 days per year. If Bluegrass extends full credit to these (previously delinquent) customers, determine the total increase in credit-related costs.

What are the "five Cs of credit"and how are they used?

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

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

How can a company use its credit period to affect sales and inventory?

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

All the following are assumptions of the basic EOQ model except:

The likelihood that a customer will fail to repay credit extended ot it is referred to as:

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

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

Tool Mart sells 1400 electronic water pumps every year. These pumps cost $54.30 each. If annual inventory carrying costs are 12% and the cost of placing an order is $90, what is the total annual inventory costs?

The most widely known credit-reporting organization is:

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

Which of the following is(are) not related to the extension of credit to customers?

Cash discounts are offered for which of the following reasons? I. Speed up collection of accounts receivable II. Reduce a company's level of receivables investment and associated costs.

Seasonal datings are offered to specific retailers. These retailers: