Deck 20: Credit and Inventory Management

Question 1

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

Answer 1

False

Question 2

The following statement pertains to credit policy: The cost of sales will initially be delayed when a credit policy is first adopted.

Answer 2

False

Question 3

One effect of granting credit to customers is that total revenues may increase if both the quantity sold and the price per unit increase when credit is granted.

Answer 3

True

Question 4

When ABC Co. makes a sale of inventory on credit to XYZ Co., then cash is paid to ABC and a payable is created for ABC.

Question 5

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

Question 6

One effect of granting credit to customers is that both the cost of default and the cost of discounts must be considered before granting credit.

Question 7

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

Question 8

The following statement pertains to credit policy: A firm that begins to offer credit to its customers may in fact increase its total revenue as a result of the credit offering.

Question 9

The total investment in receivables mainly depends on the amount of credit sales and the average collection period.

Question 10

All else equal, the credit period offered to a firm's customers is likely to be shorter when (A) the seller operates in a marginally competitive market, and (B) the size of the account is large.

Question 11

One effect of granting credit to customers is that a firm may have to increase its borrowing if it decides to grant credit to its customers.

Question 12

One effect of granting credit to customers is that a firm's cash cycle generally increases if credit is granted, all else equal.

Question 13

Credit sales/Accounts receivable turnover correctly specifies the level of the firm's receivables balance.

Question 14

One of the most important factors influencing the length of the credit period offered by the seller is the operating cycle of the seller.

Question 15

The total investment in receivables mainly depends on the total amount of cash sales and the cash discount amount.

Question 16

ABC Co. is considering giving a 2% cash discount to its customers who pay within 10 days(the firm currently offers no discount). If it institutes this policy, it is likely that the buyers will be able to reduce their cost of goods sold, and buyers who do not take the discount will be using an expensive source of financing.

Question 17

The fact that auto parts stores face shorter credit periods than florists is consistent with the factors listed as influences on credit period in the text.

Question 18

When ABC Co. makes a sale of inventory on credit to XYZ Co., then a receivable is created for ABC

and XYZ's inventory is increased.

Question 19

The following statement pertains to credit policy: A customer who forfeits a cash discount is accepting a high cost for credit financing.

Question 20

The following statement pertains to credit policy: A seller must have a source of financing sufficient to cover any accounts receivable balance created by introducing a credit policy.

Question 21

A conditional sales contract passes title to the goods sold to the buyer at the time the contract is signed.

Question 22

An increase in consumer demand for the product will tend to lead to longer credit periods.

Question 23

Collection procedures to be followed is an element of the terms of sale.

Question 24

A conditional sales contract is payable immediately upon receipt.

Question 25

Default risk should be considered when deciding whether or not you should offer credit to customers.

Question 26

The delay in revenue collection should be considered when deciding whether or not you should offer credit to customers.

Question 27

Your own firm's short-term financing cost should be considered when deciding whether or not you should offer credit to customers.

Question 28

Relatively standardized products tend to have relatively short credit periods.

Question 29

The terms of sale establish how the firm proposes to purchase its goods or services.

Question 30

An increase in product perishability will tend to lead to longer credit periods.

Question 31

Perishable products tend to have relatively short credit periods.

Question 32

Bradley Mfg. changed its credit terms from 2/10 net 30 to 2/10 net 40. It is reasonable to assume that the firm's ACP will be increased by this action.

Question 33

An increase in competition among sellers of the product will tend to lead to longer credit periods.

Question 34

High-demand products tend to have relatively short credit periods.

Question 35

Relatively expensive products tend to have relatively short credit periods.

Question 36

An increase in product cost will tend to lead to longer credit periods.

Question 37

A cash discount should be considered when deciding whether or not you should offer credit to customers.

Question 38

Bradley Mfg. changed its credit terms from 2/10 net 30 to 2/10 net 40. In doing so, the firm has lowered the effective annual cost of credit for their customers.

Question 39

Receivables period is a term that is used interchangeably to refer to the length of time it takes for the firm to collect on a sale.

Question 40

It would be common for a firm which has adhered to a cash sales policy to experience a sudden and significant, but short-term, decrease in cash receipts immediately following the time the firm converts to a credit policy.

Question 41

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?

Question 42

A commonly used method of analyzing the creditworthiness of a potential customer is to review their payment history with other firms.

Question 43

A commonly used method of analyzing the creditworthiness of a potential customer is to analyze their financial statements.

Question 44

One company's raw materials may be another's finished goods.

Question 45

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 discount period and credit price are variables used in the analysis of this proposal that are outside of the control of the firm.

Question 46

The percentage cost of credit varies with the discount percent.

Question 47

A commonly used method of analyzing the creditworthiness of a potential customer is to review their credit report.

Question 48

The percentage cost of credit varies with the price of the item purchased.

Question 49

It would be common for a firm which has adhered to a cash sales policy to experience an increase in production output immediately following the time the firm converts to a credit policy.

Question 50

The percentage cost of credit varies length of the discount period.

Question 51

A commonly used method of analyzing the creditworthiness of a potential customer is to ask your bank for assistance in acquiring credit information on the potential customer if they are a business firm.

Question 52

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 percentage discount to be given to cash customers

Question 53

Inventory turnover is a term that is used interchangeably to refer to the length of time it takes for the firm to collect on a sale.

Question 54

The three basic types of inventory may be quite different in terms of their liquidity.

Question 55

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.

Question 56

It would be common for a firm which has adhered to a cash sales policy to experience an increase in accounts payable immediately following the time the firm converts to a credit policy.

Question 57

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 credit price.

Question 58

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 rate of default.

Question 59

The percentage cost of credit varies with length of the credit period.

Question 60

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.

Question 61

Green Enterprises builds custom cabinets for new homes. The demand for these cabinets is an independent demand.

Question 62

Currently, your firm sells 440 units a month at a price of $90 a unit. You think you can increase your sales by an additional 200 units if you switch to a net 30 credit policy. The monthly interest rate is.7 percent and your variable cost per unit is $55. What is the incremental cash inflow of the proposed credit policy switch?

A) $7,000
B) $9,000
C) $11,000
D) $16,000
E) $18,000

Question 63

Your company is considering granting credit to a new customer. The price per unit is $165 and the variable cost per unit is $150. The chance of default is 8% and the monthly interest rate is 0.8%. The customer will pay in 30 days if they do not default. If the customer does not default, they will buy one unit every month forever. What is the NPV of granting credit?

A) -$17,025
B) -$133
C) $1,147
D) $1,575
E) $1,725

Question 64

On average your firm sells $26,500 of items on credit each day. Your average operating cycle is 51 days and your firm acquires and sells inventory on average every 19 days. What is your average accounts receivable balance?

A) $503,500
B) $848,000
C) $1,012,500
D) $1,315,500
E) $1,855,000

Question 65

All else equal, a firm that holds safety stocks of inventory will have a lower level of average inventory than a firm that does not.

Question 66

Under your current cash sales only policy you sell 280 units a month at a price of $35. Your variable cost per unit is $21 and your monthly interest rate is 1 percent. Based on a recent survey, you believe that you can sell an additional 85 units per month if you offer a net 30 credit policy. What is the net present value of the switch using the one-shot approach?

A) $107,415
B) $108,236
C) $110,050
D) $113,333
E) $115,647

Question 67

On average your firm sells $43,209 of items on credit each day. Your average inventory period is 32 days and your operating cycle is 57 days. What is your average accounts receivable balance?

A) $432,090
B) $878,406
C) $1,080,225
D) $1,382,688
E) $2,462,913

Question 68

Assume the customer will either pay in 30 days or will default.

What is the incremental cash flow per month from switching the credit policy?

A) $30
B) $60
C) $120
D) $180
E) $240

Question 69

Green Enterprises builds custom cabinets for new homes. The demand for these cabinets is a derived demand.

Question 70

All else equal, a firm that holds safety stocks of inventory will have a lower economic order quantity (EOQ) than a firm that does not.

Question 71

Under your current cash sales only policy you sell 680 units a month for a total sales value of $101,320. Your variable cost per unit is $77 and your monthly interest rate is 1 percent. Based on a recent survey, you believe that you can sell an additional 275 units per month if you offer a net 30 credit policy. What is the net present value of the proposed switch using the accounts receivable approach?

A) $987,406
B) $1,006,203
C) $1,413,281
D) $1,605,997
E) $1,857,505

Question 72

Also assume that the customer will either pay in 30 days or will default.

What is the NPV of switching?

A) $8,193
B) $10,134
C) $13,375
D) $14,700
E) $16,537

Question 73

Green Enterprises builds custom cabinets for new homes. The demand for these cabinets is contingent upon the sale of new homes.

Question 74

An inventory item that becomes a part of another item is called derived demand inventory.

Question 75

Green Enterprises builds custom cabinets for new homes. The demand for these cabinets is based upon the production capability of Green Enterprises.

Question 76

You are trying to attract new customers that you feel could become repeat customers. The average price of the items you sell is $49 with a $35 variable cost. Your monthly interest rate is 1.2 percent. Your experience tells you that 5 percent of these customers will never pay their bill. What would be the net present value of this decision?

A) $979
B) $989
C) $1,023
D) $1,073
E) $1,108

Question 77

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

Question 78

Lemius Industries is considering a net 30-day credit policy, which it believes will increase sales by 25%. Currently Lemius sells 800 units a month at a retail price of $45 a unit and a variable cost of $32 each. Lemius has a required monthly rate of return of 1.75%. What is the net present value of this possible switch in credit policies?

A) $99,839
B) $103,897
C) $106,171
D) $118,971
E) $120,008

Question 79

Your firm currently sells 320 units a month at a price of $175 a unit. You think you can increase your sales by an additional 125 units if you switch to a net 30 credit policy. The monthly interest rate is.5 percent and your variable cost per unit is $94. What is the net present value of the proposed credit policy switch?

A) $1,506,500
B) $1,625,750
C) $1,875,000
D) $1,957,250
E) $2,092,750

Question 80

You just purchased $13,400 of goods from your supplier with credit terms of 2/5, net 20. What is the discounted price?

A) $10,720
B) $12,475
C) $12,730
D) $13,065
E) $13,132