Deck 20: Credit and Inventory Management

Question 1

Which one of the following will increase a firm's investment in accounts receivables?

A) An increase in the number of days for which credit is granted
B) A decrease in credit sales
C) An increase in cash sales
D) A decrease in the average collection period
E) A decrease in average daily credit sales

Answer 1

An increase in the number of days for which credit is granted

Question 2

Assume you put your purchases on your credit card and then take advantage of any cash discounts offered. Which one of these credit terms do you prefer?

A) 1/10, net 20
B) 2/5, net 30
C) 2/10, net 30
D) 1/15, net 45
E) 2/15, net 30

Answer 2

2/15, net 30

Question 3

The primary purpose of credit analysis is to:

A) determine the optimal credit period.
B) analyze the effects of granting a cash discount.
C) determine the optimal discount period, if any.
D) summarize the frequency and amount of sales by customer.
E) evaluate whether or not a customer will pay.

Answer 3

evaluate whether or not a customer will pay.

Question 4

Which one of the following factors most supports a longer credit period being offered to customers?

A) Higher consumer demand
B) Lower priced merchandise
C) Increased credit risk
D) More perishable merchandise
E) Increased competition

Question 5

A trade discount of 2/5th, EOM terms:

A) grants customers five days to pay after month end.
B) offers no credit to customers.
C) means the full amount is due by the 5ᵗʰ of the month following the month of sale.
D) means the invoice is overdue only after month-end.
E) means the full amount is due the last day of the month following the month of sale.

Question 6

Phil's Print Shop grants its customers the right to pay for their print jobs within 30 days of the ROG. Thus, the customers' credit period begins when they:

A) review and approve the print order.
B) renew their contract on a revolving print order.
C) reorder a previously approved print job.
D) receive their print jobs.
E) request a new job be printed.

Question 7

Which one of the following statements related to credit periods is correct?

A) Longer credit periods are granted for sales of perishable items.
B) Inexpensive goods tend to have longer credit periods.
C) Smaller accounts tend to have longer credit periods.
D) Sellers may offer different credit periods to different customers.
E) Newer products tend to have shorter credit periods.

Question 8

Any written proof that a customer owes you money for goods or services provided is referred to as a(n):

A) account document.
B) sales draft.
C) credit instrument.
D) commercial paper.
E) letter of debt.

Question 9

Jillian was recently hired to determine the probability that individual customers of a major retailer will fail to pay for their charge sales. Jillian's job best relates to which one of the following?

A) Terms of sale
B) Credit analysis
C) Collection policy
D) Payables policy
E) Customer service

Question 10

A firm's total investment in accounts receivables depends primarily on the firm's:

A) total sales and cash discount period.
B) cash to credit sales ratio.
C) bad debt ratio.
D) average collection period and amount of credit sales.
E) amount of credit sales and cash discount percentage.

Question 11

The period of time that extends from the day a credit sale is made until the day the bank credits the seller's account with the payment for that sale is known as the ________ period.

A) float
B) cash collection
C) sales
D) accounts receivable
E) discount

Question 12

Which one of the following statements is correct if you purchase an item with credit terms of  3/15, net 45?

A) If you pay within 3 days, you will receive a discount of 15 percent.
B) If you pay within 15 days, you will receive a discount of 3 percent.
C) If you do not pay within 15 days, you will be charged interest at a rate of 3 percent per month.
D) If you pay 3 percent of your purchases within 15 days, you will have 45 days to pay for the remainder.
E) One-third of your purchase is due in 15 days and the rest is due in 45 days.

Question 13

The terms of sale generally include all of the following except the:

A) credit period.
B) cash discount.
C) type of credit instrument.
D) discount period.
E) customer's credit capacity.

Question 14

Which one of these is frequently cited as an appropriate upper limit to the credit period offered by a seller?

A) The buyer's inventory period
B) The seller's inventory period
C) The seller's operating cycle
D) The buyer's operating cycle
E) The buyer's receivables period

Question 15

You need to charge your purchases and know that you will not be able to pay within the discount period. Which one of these credit terms is best-suited to you?

A) 1/5, net 15
B) 2/5, net 30
C) 2/5, net 20
D) 1/10, net 45
E) 2/10, net 30

Question 16

Brown's Hardware offers a discount of two percent on their commercial accounts if payment is received within ten days. Otherwise, payment is due within 30 days. This credit offering is referred to as the:

A) terms of sale.
B) credit analysis.
C) collection policy.
D) payables policy.
E) collection float.

Question 17

Geoff Industries offers its credit customers a two percent discount if they pay within ten days. This discount is referred to as a ________ discount.

A) cash
B) purchase
C) collection
D) market
E) receivables

Question 18

Which one of the following statements is correct?

A) The credit period begins when the discount period ends.
B) The discount period is the length of time granted to a customer to pay for a purchase.
C) The credit period begins on the invoice date.
D) With terms of 2/10, net 30, the net credit period is 20 days.
E) With EOM dating, all sales are assumed to have occurred on the 15ᵗʰ of each month.

Question 19

Scott purchased a shovel, a rake, and a wheelbarrow from The Local Hardware Store yesterday. Today, the store issued a bill for these items and mailed it to Scott. What is the name given to this bill?

A) Ledger statement
B) Warranty
C) Indenture
D) Receipt
E) Invoice

Question 20

Town Hardware sells goods on credit with payment due 30 days after purchase. If payment is not received by the 30th day, the store mails a friendly reminder to the customer. If payment is not received by the 45th day, the store calls the customer and requests payment and also stops offering credit to that customer. These procedures are referred to as the store's:

A) customer service policy.
B) credit policy.
C) collection policy.
D) payables policy.
E) disbursements policy.

Question 21

You are an accounting intern and today you are compiling a spreadsheet with column headings of: Invoice number; Customer number; < 30 days; 31-60 days; 61-90 days; > 90 days. You will list every unpaid invoice with the amount owed entered into the appropriate column based on the number of days between the sale date and today. Once you have completed that, you will sort the report by customer number and total the amounts listed in each column. What is this report called?

A) Credit report
B) Aging schedule
C) Risk assessment report
D) Turnover delineation
E) Receivables consolidation report

Question 22

The basic factors to be evaluated in the credit evaluation process, the five Cs of credit, are:

A) conditions, control, cessation, capital, and capacity.
B) conditions, character, capital, control, and capacity.
C) capital, collateral, control, character, and capacity.
D) character, capacity, control, cessation, and collateral.
E) capacity, character, collateral, capital, and conditions.

Question 23

If you extend credit for a one-time sale to a new customer, you risk an amount equal to the:

A) sales price of the item sold.
B) variable cost of the item sold.
C) fixed cost of the item sold.
D) profit margin on the item sold.
E) fixed and variable costs of the item sold.

Question 24

The optimal amount of credit equates the incremental costs of carrying the increase in accounts receivable to the incremental:

A) decrease in the cash cycle.
B) benefit from decreasing the inventory level.
C) cash flows from increased sales.
D) increase in bad debts.
E) gain in net profits.

Question 25

When credit policy is at the optimal point, the:

A) total costs of granting credit will be maximized.
B) carrying costs of credit will be equal to zero.
C) opportunity cost of credit will be equal to zero.
D) carrying costs will equal the opportunity costs.
E) total costs will equal the opportunity costs.

Question 26

Assume you are viewing a graph that compares costs with the amount of credit extended. Both the carrying costs and the opportunity costs of credit are depicted. What is the function called that represents the summation of these carrying and opportunity costs?

A) Opportunity cost curve
B) Credit extension curve
C) Credit cost curve
D) Terms of sale graph
E) Optimal sales graph

Question 27

Which one of the following credit instruments is commonly used in international commerce?

A) Open account
B) Sight draft
C) Time draft
D) Banker's acceptance
E) Promissory note

Question 28

Assume that RSF is a wholly owned subsidiary of the Rolled Steel Company. RSF provides credit financing solely for large ticket items purchased from the Rolled Steel Company. Which one of the following terms describes RSF?

A) Credit department
B) Parent company
C) Captive finance company
D) Credit union
E) Service unit

Question 29

A 2/10, net 30 credit policy:

A) is an expensive form of short-term credit if a buyer forgoes the discount.
B) provides cheap financing to the buyer for 30 days.
C) is an inexpensive means of reducing the seller's collection period if every customer takes the discount.
D) tends to have little effect on the seller's collection period.
E) tends to increase the seller's investment in receivables as compared to a straight net 30 policy.

Question 30

A conditional sales contract:

A) passes title to the goods sold to the buyer at the time the contract is signed.
B) normally calls for one lump sum payment on the contract payment date.
C) allows the seller to retain ownership of the goods sold until the customer has fully paid for the purchase.
D) is payable immediately upon receipt.
E) is a formal bid for a project.

Question 31

When considering a switch from an all-cash credit policy to a net 30 credit policy all of the following should be considered except the:

A) revenue effects.
B) effects on the variable costs.
C) cost of the discount.
D) probability of default.
E) change in the fixed costs.

Question 32

When evaluating the creditworthiness of a customer, the term capital refers to the:

A) type of goods the customer wishes to obtain.
B) customer's financial reserves.
C) types of assets the customer wants to pledge as collateral.
D) customer's willingness to pay bills in a timely fashion.
E) nature of the customer's line of work.

Question 33

Which one of these statements is correct?

A) A firm's cash cycle generally decreases when it switches from a cash to a credit policy, all else equal.
B) Most customers will forgo the discount and pay at the end of the credit period.
C) Total revenues generally decrease if both the quantity sold and the price per unit increase when credit is granted.
D) Only the cost of default should be considered before granting credit.
E) A firm may have to increase its long-term borrowing if it decides to grant credit to its customers.

Question 34

Which of the following characteristics are most associated with a firm that adopts a liberal credit policy?

A) Mostly one-time customers and excess capacity
B) Low carrying costs and full production
C) Low carrying costs and high variable costs
D) Low variable costs and predominately repeat customers
E) Excess capacity and high variable costs

Question 35

Under credit terms of 1/5, net 15, customers should:

A) Always pay on the 15th day.
B) take the discount and pay immediately.
C) take the discount and pay on the day following the day of sale.
D) either take the discount or pay on the 15th day.
E) both take the discount and pay on the 15th day.

Question 36

The Painted House offers credit terms of 2/10ᵗʰ, EOM. Assume you purchase an item on credit from this store on Monday, November 3. When is payment due for this purchase if you do not take the discount?

A) November 3
B) November 13
C) November 30
D) December 31
E) December 10

Question 37

Which one of the five Cs of credit refers to the general economic situation in the customer's line of business?

A) Capacity
B) Character
C) Conditions
D) Capital
E) Collateral

Question 38

Roger's Home Appliances offers credit to customers it deems qualified based on a numerical value that estimates the probability that the customer will default if credit is granted to them. The process of computing this numerical value is referred to as:

A) credit scoring.
B) Credit capacity.
C) receipts assessment.
D) conditions for credit.
E) consumer analysis.

Question 39

Which one of the five Cs of credit refers to a customer's willingness to pay its bills?

A) Character
B) Capacity
C) Collateral
D) Conditions
E) Capital

Question 40

Which one of the following statements is correct?

A) If the majority of a firm's new customers become repeat customers, then there is a strong argument against extending credit even if the default rate is low.
B) A customer's past payment history reveals little information in relation to his or her future tendency to pay.
C) A suggested policy for offering credit to new customers is to limit the amount of their initial credit purchase.
D) The risk of issuing credit is the same for a new customer as it is for an existing customer.
E) The recommended policy for new customers is to extend an offer of a high credit limit as an enticement to get their business.

Question 41

Which two of the following are the key elements in determining the break-even default rate on a credit policy?

A) Credit price and cash price assuming a zero default rate
B) Required rate of return and percentage discount for cash customers
C) Variable cost per unit and required rate of return
D) Sales price and variable cost per unit for credit customers
E) Credit price and discount rate for cash customers

Question 42

Inventory needs under a derived-demand inventory system are:

A) primarily dependent upon the competitive demands placed on a firm's suppliers.
B) based on the anticipated demand for the finished product.
C) based on minimizing the cost of restocking inventory.
D) held constant over time.
E) determined by a Kanban system.

Question 43

Which one of the following inventory items is probably the most liquid?

A) A custom made set of kitchen cabinets
B) Metal cabinets for dishwashers
C) Wheat stored in a grain silo
D) A customized drill press
E) A partially built modular home

Question 44

A particular inventory manager orders items only in quantities that minimize inventory costs. What is this restocking quantity called?

A) Short order quantity
B) Refill unit quantity
C) Economic order quantity
D) Minimum stock level
E) Re-order limit

Question 45

Which one of the following statements is correct?

A) Firms may opt to refuse additional credit to a delinquent customer.
B) Seasonal sales have little, if any, impact on aging schedule percentages.
C) Normally, firms call their delinquent customers prior to sending them a past due letter.
D) If a firm wishes to sell a delinquent receivable, it must do so prior to the customer filing for bankruptcy.
E) Expected decreases in the average collection period are a cause of concern.

Question 46

Which one of the following items is most likely a derived-demand inventory item?

A) Wrenches held in inventory by a hardware store
B) Tires held in inventory by a tractor manufacturer
C) Shoes on display in a retail store
D) Toys just received by a toy store
E) Wheat harvested by a farmer

Question 47

At the optimal order quantity size, the:

A) total cost of holding inventory is fully offset by the restocking costs.
B) carrying costs are equal to zero.
C) restocking costs are equal to zero.
D) total costs equal the carrying costs.
E) carrying costs equal the restocking costs.

Question 48

On average, CT Motors has daily credit sales of $42,390, an inventory period of 53 days, and a collection period of 26 days. What is the average accounts receivable balance?

A) $757,900
B) $968,810
C) $1,102,140
D) $1,015,500
E) $896,300

Question 49

Which one of the following inventory-related costs is considered a shortage cost?

A) Storage costs
B) Insurance cost
C) Loss of customer goodwill
D) Theft cost
E) Opportunity cost of capital used for inventory purchases

Question 50

The incremental investment in receivables under the accounts receivable approach is equal to:

A) P − νQ'.
B) PQ'.
C) PQ + ν(Q' − Q).
D) P(Q' − Q).
E) PQ(Q' − Q).

Question 51

The accounts receivable approach to credit policy supports the theory that:

A) a firm's risk of offering credit to a new customer is limited to the cost of the items sold.
B) the best credit policy is an all-cash policy.
C) the cost of offering credit to a new customer is the same as the cost of offering credit to an existing customer.
D) increasing receivables guarantees increasing profits.
E) the default risk of a credit policy is the same as the default risk under an all cash-policy if your customers remain the same.

Question 52

Which one of the following is a characteristic of a just-in-time inventory system?

A) High level of dependence on supplier performance
B) Low inventory turnover rates
C) Long inventory periods
D) Unusually high inventory levels
E) Large, infrequent re-orders of raw materials

Question 53

The ABC approach to inventory management is based on the concept that:

A) inventory should arrive at the time it is needed in the manufacturing process.
B) the inventory period should be constant for all inventory items.
C) basic inventory items that are essential to production and also inexpensive should be ordered in small quantities only.
D) a small percentage of inventory items represents a large percentage of inventory cost.
E) one-third of a year's inventory needs should be on hand, another third should be on order, and the last third should be unordered.

Question 54

The EOQ model is designed to minimize:

A) production costs.
B) inventory obsolescence.
C) the carrying costs of inventory.
D) the costs of replenishing inventory.
E) the total costs of holding inventory.

Question 55

Which one of the following inventory items is probably the least liquid?

A) Plywood held in inventory by a home builder
B) A wheel barrow held in inventory by a garden center
C) A partially assembled interior for a new vehicle
D) A set of tires owned by an automobile manufacturer
E) A toy owned by a retail toy store

Question 56

The EOQ model is designed to determine how much:

A) total inventory a firm needs during any one year.
B) total inventory costs will be for any one given year.
C) inventory should be purchased at one time.
D) inventory will be sold per day.
E) a firm loses in sales per day when an inventory item is depleted.

Question 57

Turner's offers credit terms of net 30 with payments received an average of 2.8 days past their due date. Annual credit sales are $2.38 million. What is the average book value of accounts receivable? Assume a 365-day year.

A) $213,874
B) $223,333
C) $211,667
D) $215,407
E) $223,593

Question 58

Allison has developed a set of procedures for determining the amount of each raw material she needs to have in inventory if she is to keep the assembly lines operating efficiently. These procedures are commonly referred to by which one of the following terms?

A) First-in, first-out method
B) The Baumol model
C) Net working capital planning
D) Economic order procedures
E) Materials requirements planning

Question 59

Music City has an average collection period of 34.6 days and an average daily investment in receivables of $71,407. What are the annual credit sales given a 365-day year?

A) $668,407
B) $577,109
C) $753,282
D) $625,893
E) $767,123

Question 60

A just-in-time inventory system:

A) eliminates all inventory costs.
B) reduces the inventory turnover rate.
C) averages long-term inventory needs.
D) focuses on immediate production needs.
E) maximizes inventory costs.

Question 61

Assume a sales price of $119 per unit, a $76 per unit variable cost, an average default rate of 3 percent, and a monthly interest rate of 1.25 percent. What is the net present value of a new repeat customer who never defaults on his or her payment?

A) $5,733
B) $3,364
C) $2,617
D) $8,817
E) $9,520

Question 62

Currently, Glasgow Importers sells 855 units a month at a price of $39 a unit. By switching to a net 30 credit policy, sales should increase to 950 units while the price remains constant. The monthly interest rate is .61 percent and the variable cost per unit is $8. What is the net present value of the proposed credit policy switch?

A) $513,360
B) $516,892
C) $490,200
D) $537,520
E) $448,682

Question 63

Cape May Products currently sells 487 units a month at a price of $79 a unit. The firm believes it can increase its sales by an additional 42 units if it switches to a net 30 credit policy. The monthly interest rate is .25 percent and the variable cost per unit is $31.50. What is the incremental cash inflow from the proposed credit policy switch?

A) $1,774
B) $1,995
C) $2,746
D) $3,318
E) $3,375

Question 64

Home Accents currently sells 219 units a month at a price of $46 a unit. If it switches to a net 30 credit policy, monthly sales are expected to increase by 28 units. The monthly interest rate is .57 percent and the variable cost per unit is $21. What is the net present value of the proposed credit policy switch?

A) $112,145
B) $108,895
C) $106,507
D) $586,799
E) $621,135

Question 65

Today, October 12, Nadine's Fashions purchased merchandise from a supplier. The credit terms are 2/10, net 30. By what day does Nadine's have to make the payment to receive the discount? Assume a 30-day month.

A) October 12
B) October 14
C) October 22
D) October 27
E) November 12

Question 66

The Cycle Shoppe has decided to offer credit to its customers during the spring selling season. Sales are expected to be 64 bikes with an average cost of $329 each. Four percent of customers are expected to default. To help identify those individuals, the shop is considering subscribing to a credit agency. The initial charge for their services is $250 with an additional charge of $7.50 per individual report. What is the amount of the net savings from subscribing to the credit agency?

A) $108
B) $92
C) $84
D) $112
E) $103

Question 67

The Dilana Corporation is considering a change in its cash-only policy. The new terms would be net one period. The required return is 1.5 percent per period. The firm has current sales of 3,500 units per month at a price of $71 per unit. The new policy is expected to increase sales to 3,550 units at a price of $71 per unit. The cost per unit is constant at $38. What is the incremental cash inflow of the new policy?

A) $1,880
B) $1,420
C) $1,500
D) $1,995
E) $1,650

Question 68

Assume all sales are one-time credit sales with a probability of collection of 96 percent. The variable cost per unit is $1.67, the sales price per unit is $4.99, and the monthly interest rate is 1.35 percent. What is the NPV of a credit sale of one item?

A) $3.18
B) $2.87
C) $3.38
D) $2.92
E) $3.06

Question 69

Quest is considering a change in its cash-only sales policy. The new terms of sale would be net one month. The required return is .98 percent per month. Currently, the firm sells 420 units per month at $736 per unit. Under the new policy, the firm expects sales of 475 units also at $736 per unit. The variable cost per unit is $426. What is the NPV of switching?

A) $1,228,750
B) $1,407,246
C) $1,335,021
D) $1,238,250
E) $1,056,784

Question 70

Winters' just purchased $42,911 of goods from its supplier with credit terms of 1/5, net 25. What is the discounted price?

A) $40,765
B) $41,209
C) $42,482
D) $42,911
E) $43,300

Question 71

A firm offers credit terms of 2/15, net 45. What effective annual interest rate does the firm earn when a customer forgoes the discount?

A) 18.67 percent
B) 20.45 percent
C) 23.37 percent
D) 25.34 percent
E) 27.86 percent

Question 72

Saucier Co. currently sells 1,208 units a month for total monthly sales of $209,600. The firm is considering replacing its current cash only credit policy with a net 30 policy. The variable cost per unit is $106 and the monthly interest rate is .71 percent. What is the new sales quantity at the switch break-even level of sales? Assume the selling price per unit and the variable costs per unit remain constant.

A) 1,143 units
B) 1,267 units
C) 1,230 units
D) 1,306 units
E) 1,148 units

Question 73

The Green Hornet offers credit terms of 2/5, net 20. Based on experience, 93 percent of all customers will take the discount. The firm sells 487 units each month at a price of $649 each. What is the average book value of accounts receivable? Assume a 365-day year.

A) $60,274
B) $68,272
C) $62,866
D) $67,012
E) $65,387

Question 74

A supplier grants credit terms of 1/5, net 30. What is the effective annual rate of the discount on a purchase of $5,000?

A) 17.24 percent
B) 15.80 percent
C) 18.80 percent
D) 19.03 percent
E) 12.27 percent

Question 75

The Cellar Door currently sells 1,849 units a month for total monthly sales of $627,800. The company is considering replacing its current cash only credit policy with a net 30 policy. The variable cost per unit is $214 and the monthly interest rate is .87 percent. What is the new sales quantity at the switch break-even level of sales?

A) 1,711 units
B) 1,779 units
C) 1,814 units
D) 1,957 units
E) 1,893 units

Question 76

A new customer has placed an order for a turbine engine that has a variable cost of $1.12 million per unit and a credit sales price of $1.64 million. Credit is extended for one period. Based on historical experience, payment for about 1 out of every 178 such orders is never collected. The required return is 2.1 percent per period. What is the NPV per unit if this is a one-time order?

A) $516,407
B) $421,819
C) $477,244
D) $534,290
E) $351,056

Question 77

Assume an average selling price of $547 per unit, a variable cost per unit of $339, a monthly interest rate of 1.1 percent, and a default rate of 3.1 percent. What is the NPV of extending credit for 30 days to all who are expected to become repeat customers?

A) $17,984
B) $19,787
C) $12,304
D) $18,662
E) $13,609

Question 78

New Products currently sells a product with a variable cost per unit of $23 and a unit selling price of $49. At the present time, the firm only sells on a cash basis with monthly sales of 733 units. The monthly interest rate is .48 percent. What is the value of Q' at the switch break-even point if the firm adopted a net 30 credit policy? Assume the selling price per unit and the variable costs per unit remain constant.

A) 739.66 units
B) 736.34 units
C) 728.47 units
D) 740.29 units
E) 743.18 units

Question 79

You can make a one-time sale if you will grant a new customer 30 days to pay.  This customer wants to purchase an item with a sales price of $499 and a variable cost of $287. You estimate the probability of default at 33 percent. The monthly interest rate is .98 percent. Should you grant credit to this customer? Why or why not?

A) Yes; because the NPV of the potential sale is $33.05
B) Yes; because the NPV of the potential sale is $44.09
C) Yes; because the NPV of the potential sale is $13.02
D) No; because the NPV of the potential sale is −$13.05
E) No; because the NPV of the potential sale is −$2.65

Question 80

Currently, Tanner's sells 69 units a month at an average price of $499 a unit. The company thinks it can increase sales by an additional 32 units a month if it switches to a net 30 credit policy. The monthly interest rate is .48 percent and the variable cost per unit is $216. What is the incremental cash inflow of the proposed credit policy switch?

A) $10,120
B) $9,056
C) $12,760
D) $17,810
E) $15,968