Question 1

What are seasonal datings as applied to credit terms?

Accepted Answer

The answer of What are seasonal datings as applied to...

Question 2

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

Accepted Answer

A)  Compensating balances 
B)  Cash discounts 
C)  Quantity discounts 
D)  Compensating balances and quantity discounts

Question 3

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

Accepted Answer

A)  I only 
B)  II only 
C)  Both I and II 
D)  Neither I nor II

Question 4

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? Why or why not? 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

Question 5

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

Accepted Answer

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

Question 6

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% of sales). When converting from annual to daily data or vice versa, assume there are 365 days per year. Determine Mace's average collection period.

Accepted Answer

A)  88 days 
B)  44 days 
C)  74 days 
D)  60 days

Question 7

Tool Mart sells 1,400 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 optimal ordering frequency?

Accepted Answer

A)  37 days 
B)  32 days 
C)  40 days 
D)  51 days

Question 8

Traditional discussion of guidelines for examining credit worthiness include "the five Cs of credit." Which of the following is not one of the "five Cs"?

Accepted Answer

A)  Capacity 
B)  Cooperation 
C)  Character 
D)  Conditions

Question 9

Tool Mart sells 1,400 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?

Accepted Answer

A)  $1,923 
B)  $1,281 
C)  $3,406 
D)  $3,762

Question 10

A numerical credit scoring system may rate all except which of the following?

Accepted Answer

A)  D&B credit rating 
B)  Location of the business 
C)  Financial characteristics of the applicant 
D)  Current ratio of the applicant

Question 11

Cycles de Oro produces 120,000 high-tek bikes a year and orders the brake assembly from IKON for $15.40 each. The order cost is $84, and Cycles estimates its inventory carrying costs are 15%. What is its total ordering cost per year?

Accepted Answer

A)  $7,968 
B)  $3,412 
C)  $4,118 
D)  $6,437

Question 12

For the firm with a seasonal sales pattern, offering seasonal datings to its customers is likely to result in ____.

Accepted Answer

A)  increased sales 
B)  higher inventory investment and warehousing costs 
C)  lower receivables investment cost 
D)  an offer of a cash discount

Question 13

____ are useful in monitoring the status and composition of a firm's accounts receivable.

Accepted Answer

A)  Numerical credit scoring systems 
B)  Aging of accounts schedules 
C)  Seasonal datings 
D)  Aging of accounts schedules and seasonal datings

Question 14

Describe how an aging of accounts is a useful monitoring technique for accounts receivable.

Accepted Answer

The answer of Describe how an aging of accounts is...

Question 15

Which of the following is the most widely known credit-reporting organization?

Accepted Answer

A)  Phelps Credit Services 
B)  Dun & Bradstreet Credit Services 
C)  Equitable Credit Services 
D)  Creditreport.com

Question 16

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

Question 17

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

Question 18

____ refers to the applicant's financial strength, particularly with respect to net worth.

Accepted Answer

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

Question 19

All except which of the following are assumptions of the basic EOQ model?

Accepted Answer

A)  Annual demand is known with certainty 
B)  Ordering costs fluctuate 
C)  Demand is uniform throughout the year 
D)  Orders are filled instantaneously

Question 20

All except which of the following are components of carrying costs?

Accepted Answer

A)  Insurance 
B)  Storage costs 
C)  Handling costs 
D)  Set-up costs

Exam 21: The Management of Accounts Receivable and Inventories