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Chap020 - Test Bank - Chapter 20
Finance (Harvard University)
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Chapter 20
Credit and Inventory Management
Multiple Choice Questions
1. Blackwell Brothers sells men's suits. The store offers a 1 percent discount if
payment is received within 10 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.
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2. Jillian was recently hired by a major retail store. Her job is to determine the
probability that individual customers 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
3. 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.
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4. Phil's Print Shop grants its customers the right to pay for their print jobs within
30 days of the date of service. This 30-day period is referred to as the:
A. payables period.
B. cash cycle.
C. transactions period.
D. credit period.
E. disbursement period.
5. 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. warrant
y
C. indentur
e
D. receip
t
E. invoic
e
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6. Geoff Industries offers its credit customers a 2 percent discount if they pay
within 10 days. This discount is referred to as a:
A. cash
discount.
B. purchase
discount.
C. collection
discount.
D. market
discount.
E. receivables
discount.
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7. 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.
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8. You are viewing a graph which 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
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9. 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
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10.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. character, capacity, capital, collateral, and
conditions.
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11.Roger's Home Appliances offers credit to customers it deems worthy of this
privilege. To determine if a customer is worthy, the firm computes a numerical
value which is used to estimate 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.
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12.You have recently been hired as an accounting intern for Jefferson Mills. The
job that you have been assigned for today is to compile a spreadsheet that has
six columns. The column headings are: Invoice #; Customer name; < 30 days;
31-60 days; 61-90 days; > 90 days. You are to list every unpaid invoice by
customer name with the amount owed entered into the appropriate column
for the number of days between the sale date and today. Once you have
completed that, you are to sort the report by customer name and then 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
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13.Bill is in charge of the inventory for Home Builder's Supply. As an inventory item
gets low, he is to restock the item by a quantity that minimizes the total
inventory costs for that item. 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
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14.Allison has developed a set of procedures for determining the amount of each
raw material that she needs to have in inventory if she is to keep her firm's
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
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15.Which one of the following is a system for managing demand-dependent
inventories that minimizes the inventory levels of a firm?
A. just-in-time
inventory
B. turnover
planning
C. net working capital
planning
D. inventory
scoring
E. inventory
ranking
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16.The terms of sale generally include which of the following?
I. type of credit instrument
II. cash discount
III. credit period
IV. discount period
A. I and III
only
B. II and IV
only
C. III and IV
only
D. II, III, and IV
only
E. I, II, III, and IV
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17.What is the primary purpose of credit analysis?
A. determine the optimal credit
period
B. establish the effectiveness of granting a cash
discount
C. determine the optimal discount period, if
any
D. access the frequency and amount of sales by
customer
E. evaluate whether or not a customer will
pay
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18.The period of time that extends from the day a credit sale is made until the day
the bank credits a firm's account with the payment for that sale is known as the
_____ period.
A. floa
t
B. cash
collection
C. sales
D. accounts
receivable
E. discoun
t
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19.Which one of the following will increase a firm's investment in accounts
receivables?
A. a decrease 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. an increase in average daily credit
sales
20.A firm's total investment in 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.
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21.Which one of the following time periods is included in the accounts receivable
period but not in the cash collection period?
A. the period of time between the receipt of a check and the availability of
those funds
B. time it takes a firm to process incoming
receipts
C. period of time a check is in the
mail
D. the amount of time that it takes a bank to credit a firm's account for a
deposit made
E. period of time it takes an invoice to reach a customer by
mail
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22.Which one of the following statements is correct if you purchase an item with
credit terms of 1/5, net 15?
A. If you pay within 1 day, you will receive a 5 percent
discount.
B. If you pay within 5 days, you will receive a 1 percent
discount.
C. If you do not pay within 15 days, you will be charged interest at a 1.5
percent monthly rate.
D. If you pay within 15 days, you will receive a 1/5th percent
discount.
E. You must pay the discounted amount within 15
days.
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23.You are doing some comparison shopping. Five stores offer the product you
want at basically the same price. Which one of the following stores offers the
best credit terms if you plan on taking the discount?
A. store
A
B. store
B
C. store C
D. store
D
E. store E
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24.You are doing some comparison shopping. Five stores offer the product you
want at basically the same price. Which one of the following stores offers the
best credit terms if you plan to forego the discount?
A. store
A
B. store
B
C. store C
D. store
D
E. store E
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25.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 15 th of each
month.
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26.Which two of the following are the key considerations for a seller who is
establishing the length of the credit period being offered to a customer?
I. seller's operating cycle
II. customer's operating cycle
III. seller's inventory period
IV. customer's inventory period
A. I and
II
B. II and
III
C. III and IV
D. II and IV
E. I and IV
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27.Which one of the following factors tends to favor longer credit periods?
A. high consumer
demand
B. lower priced
merchandise
C. increased credit
risk
D. merchandise with low collateral
value
E. increased
competition
28.Which one of the following statements is correct in regards to credit periods?
A. Perishable items tend to have longer credit
periods.
B. Items with low markups tend to have longer credit
periods.
C. Smaller accounts tend to have longer credit
periods.
D. Different customers may be offered different credit periods by the same
firm.
E. Newer products tend to have shorter credit
periods.
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29.A cash discount of 2/5, net 30:
A. grants customers 30 days to pay after the discount period
expires.
B. offers customers a maximum of 30 days
credit.
C. grants free credit for a period of 30
days.
D. charges a higher price to a cash customer than to a customer who pays in 2
days.
E. grants customers 2 days to pay if they want the 5 percent
discount.
30.Under credit terms of 1/5, net 15, customers should:
A. always pay on the 15th
day.
B. take the 5 percent 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.
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31.A 2/10, net 30 credit policy:
A. is an expensive form of short-term credit if a buyer foregoes 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 a firm's investment in receivables as compared to a
straight net 30 policy.
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32.The Green Hornet offers a trade discount with terms of 2/5, EOM. Assume you
purchase an item on credit from The Green Hornet on Monday, November 3.
What is the invoice date for this purchase?
A. November
3
B. November
5
C. November
7
D. November
8
E. November
30
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33.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
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34.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. generally has a built-in interest
cost.
D. is payable immediately upon
receipt.
E. is a formal bid for a
project.
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35.Which of the following statements correctly reflect the effects of granting
credit to customers?
I. Total revenues may increase if both the quantity sold and the price per unit
increase when credit is granted.
II. A firm's cash cycle generally increases if credit is granted, all else equal.
III. Both the cost of default and the cost of discounts must be considered before
granting credit.
IV. A firm may have to increase its long-term borrowing if it decides to grant
credit to its customers.
A. I, II, and III
only
B. II, III, and IV
only
C. I, III, and IV
only
D. I, II, and IV
only
E. I, II, III, and IV
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36.You are considering switching from an all cash credit policy to a net 30 credit
policy. You do not expect the switch to affect either your sales quantity or your
sales price. Ignoring interest and assuming that every month has 30 days, your
net present value of the switch will be equal to:
A. zero
.
B. your selling price per
unit.
C. your selling price per unit multiplied by
-1.
D. your selling price per unit multiplied by
-30.
E. your total monthly sales multiplied by
-1.
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37.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.
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38.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.
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39.If you extend credit for a one-time sale to a new customer you risk an amount
equal to:
A. the sales price of the item
sold.
B. the variable cost of the item
sold.
C. the fixed cost of the item
sold.
D. the profit margin on the item
sold.
E. zero
.
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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 credit policy for new customers is to extend the
maximum amount of credit you will ever be willing to offer as an enticement
to get their business.
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41.Which of the following are frequently used as sources of information when
trying to ascertain the creditworthiness of a customer?
I. payment history with similar firms
II. credit reports
III. financial statements
IV. information provided by a bank
A. I and III
only
B. II and IV
only
C. I and II
only
D. I, II, and III
only
E. I, II, III, and IV
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42.When evaluating the creditworthiness of a customer, the term character refers
to the:
A. nature of the cash flows of the customer's
business.
B. customer's financial
resources.
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.
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43.Which one of the five Cs of credit refers to a firm's financial reserves?
A. characte
r
B. capacit
y
C. collatera
l
D. condition
s
E. capita
l
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44.Which one of the five Cs of credit refers to the general economic situation in
the customer's line of business?
A. capacit
y
B. characte
r
C. condition
s
D. capita
l
E. collatera
l
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45.Which one of the following statements is correct?
A. An aging schedule helps identify those customers who are the most
delinquent.
B. The percentage of total receivables that falls within a certain time period on
an aging schedule will remain constant over time even if the firm has
seasonal sales.
C. Normally firms call their delinquent customers prior to sending them a past
due letter.
D. A constant average collection period over a period of time is cause for
concern.
E. It is common practice when a customer files for bankruptcy to sell that
customer's receivable at face value.
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46.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
47.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 drilling
press
E. a partially built modular
home
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48.Which one of the following inventory-related costs is considered a shortage
cost?
A. storage costs
B. insurance
cost
C. cost of safety
reserves
D. obsolescence
cost
E. opportunity cost of capital used for inventory
purchases
49.The ABC approach to inventory management is based on the concept that:
A. inventory should arrive just in time to be
used.
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 the inventory items probably represents a large
percentage of the inventory cost.
E. one-third of a year's inventory need should be on hand, another third should
be on order, and the last third should not be ordered yet.
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50.The EOQ model is designed to determine how much:
A. total inventory a firm needs in any one
year.
B. total inventory costs will be for any one given
year.
C. inventory should be purchased at a
time.
D. inventory will be sold per
day.
E. a firm loses in sales per day when an inventory item is
depleted.
51.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.
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52.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.
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53.Which one of the following items is most likely a derived-demand inventory
item?
A. cereal ready to be bagged and shipped to
stores
B. tires held in inventory by an auto
maker
C. shoes on display in a retail
store
D. toys ready to be shipped to toy
stores
E. wheat harvested by a
farmer
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54.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.
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55.A just-in-time inventory system:
I. when implemented properly reduces the cost of inventory to zero.
II. increases the inventory turnover rate.
III. is sufficient to handle immediate production needs.
IV. minimizes the costs of holding inventory.
A. I and III
only
B. II and IV
only
C. I, II, and IV
only
D. II, III, and IV
only
E. I, II, III, and IV
56.The incremental investment in receivables under the accounts receivable
approach is equal to:
A. P - vQ′.
B. PQ′.
C. PQ + v(Q′ - Q).
D. P(Q′ - Q).
E. PQ(Q′ - Q).
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57.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 variable
cost of the sold items.
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. foregoing cash discounts is a method of obtaining inexpensive short-term
financing.
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.
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58.Which two of the following are the key elements in determining whether or not
a switch from a no-credit policy to a credit policy is advisable?
I. variable cost per unit
II. cash discount percentage
III. credit price
IV. default rate
A. I and III
only
B. II and IV
only
C. II and III
only
D. I and IV
only
E. III and IV
only
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59.On average, your firm sells $38,700 of items on credit each day. The firm's
average operating cycle is 49 days and it acquires and sells inventory, on
average, every 17 days. What is the average accounts receivable balance?
A. $657,90
0
B. $848,00
0
C. $1,238,40
0
D. $1,315,50
0
E. $1,896,30
0
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60.The Winter Store just purchased $48,300 of goods from its supplier with credit
terms of 2/10, net 25. What is the discounted price?
A. $43,47
0
B. $46,20
9
C. $47,33
4
D. $47,92
9
E. $48,30
0
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61.Today, October 12, Nadine's Fashions purchased $511 worth of merchandise
from a supplier. The credit terms are 1/5, net 20. By what day does Nadine's
have to make the payment to receive the discount? Note: October has 31 days.
A. October
13
B. October
15
C. October
17
D. October
27
E. November
1
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62.A supplier grants your firm credit terms of 2/10, net 40. What is the effective
annual rate of the discount if the firm purchases $4,800 worth of
merchandise?
A. 27.24
percent
B. 26.57
percent
C. 28.80
percent
D. 29.03
percent
E. 29.27
percent
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63.Cape May Products currently sells 650 units a month at a price of $59 a unit.
The firm believes it can increase its sales by an additional 125 units if it
switches to a net 30 credit policy. The monthly interest rate is 0.35 percent and
the variable cost per unit is $38. What is the incremental cash inflow from the
proposed credit policy switch?
A. $77
4
B. $2,62
5
C. $4,75
0
D. $5,69
0
E. $7,37
5
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64.Polly's Home Accents currently sells 320 units a month at a price of $59 a unit.
Polly thinks she can increase her sales by an additional 55 units if she switches
to a net 30 credit policy. The monthly interest rate is 0.4 percent and the
variable cost per unit is $32. What is the net present value of the proposed
credit policy switch?
A. $350,61
0
B. $350,89
5
C. $426,50
7
D. $621,92
9
E. $821,13
5
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65.Currently, Glasgow Importers sells 280 units a month at a price of $729 a unit.
The firm believes it can increase its sales by an additional 40 units if it switches
to a net 30 credit policy. The monthly interest rate is 0.5 percent and the
variable cost per unit is $480. What is the net present value of the proposed
credit policy switch?
A. $213,360
B. $9,240
C. $190,20
0
D. $1,287,52
0
E. $1,768,68
0
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66.Currently, The Toy Box sells 465 units a month at an average price of $42 a unit.
The company thinks it can increase sales by an additional 130 units a month if
it switches to a net 30 credit policy. The monthly interest rate is 0.4 percent and
the variable cost per unit is $21. What is the incremental cash inflow of the
proposed credit policy switch?
A. $2,12
0
B. $2,73
0
C. $2,76
0
D. $2,81
0
E. $5,07
0
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67.Preston Milled Products currently sells a product with a variable cost per unit of
$21 and a unit selling price of $40. At the present time, the firm only sells on a
cash basis with monthly sales of 2,800 units. The monthly interest rate is 0.5
percent. What is the switch break-even point if the firm switched to a net 30
credit policy? Assume the selling price per unit and the variable costs per unit
remain constant.
A. 2,830
units
B. 2,910
units
C. 3,333
units
D. 3,414
units
E. 3,526
units
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68.Saucier & Co. currently sells 2,100 units a month for total monthly sales of
$86,500. The company is considering replacing its current cash only credit
policy with a net 30 policy. The variable cost per unit is $18 and the monthly
interest rate is 1.2 percent. What is the switch break-even level of sales?
Assume the selling price per unit and the variable costs per unit remain
constant.
A. 1,943
units
B. 2,117
units
C. 2,145
units
D. 2,406
units
E. 2,548
units
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69.The Cellar Door currently sells 9,620 units a month for total monthly sales of
$316,000. The company is considering replacing its current cash only credit
policy with a net 30 policy. The variable cost per unit is $15 and the monthly
interest rate is 1.5 percent. What is the switch break-even level of sales?
A. 9,711
units
B. 9,779
units
C. 9,814
units
D. 9,957
units
E. 9,889
units
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70.You have the opportunity to make a one-time sale if you will give a new
customer 30 days to pay. You suspect there is a 10 percent chance this person
will never pay you. The sales price of the item the customer wants to buy is
$289. Your variable cost on that item is $156 and your monthly interest rate is
1.75 percent. Should you grant credit to this customer? Why or why not?
A. yes; because the NPV of the potential sale is
$113.05
B. yes; because the NPV of the potential sale is
$99.63
C. no; because the NPV of the potential sale is $133.00
D. no; because the NPV of the potential sale is
-113.05
E. no; because the NPV of the potential sale is $89.65
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71.You are considering renting a kiosk in the local mall for a period of three
months. Any sale you make will be a one-time sale. There is only a 79 percent
chance you will collect payment on a credit sale. The product you want to sell
has a variable cost of $3.88 and a sales price of $4.99. The monthly interest
rate is 1.5 percent. Should you offer people 30 days to pay? Why or why not?
A. yes; because the NPV of a credit sale is
$0.09.
B. yes; because the NPV of a credit sale is
$0.03.
C. no; because the NPV of a credit sale is $0.08.
D. no; because the NPV of a credit sale is $0.02.
E. It doesn't matter because the NPV of a credit sale is approximately
zero.
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72.You are trying to attract new customers that you feel could become repeat
customers. The average selling price of your products is $69 each with a $41
per unit variable cost. The monthly interest rate is 1.5 percent. Your experience
tells you that 8 percent of these customers will never pay their bill. What is the
value of a new customer who does not default on his or her bill?
A. $1,73
3
B. $1,86
7
C. $2,61
7
D. $4,81
7
E. $8,86
7
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73.You are trying to attract new customers that you feel could become repeat
customers. The average price of your product is $619 per unit with a $435
variable cost per unit. The monthly interest rate is 1.8 percent. Your experience
tells you that 9 percent of these customers will never pay their bill. Should you
offer credit terms of net 30 to attract these potential customers? Why or why
not?
A. yes; because the NPV of extending credit is
$8,867
B. yes; because the NPV of extending credit is
$9,787
C. yes; because the NPV of extending credit is
$128
D. no; because the NPV of extending credit is $459
E. It doesn't matter because the NPV of extending credit is
zero.
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74.A firm sells 4,500 units of an item each year. The carrying cost per unit is $2.15
and the fixed costs per order are $69. What is the economic order quantity?
A. 374
units
B. 421
units
C. 497
units
D. 537
units
E. 623
units
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75.The best-selling pair of roller skates The Teen Store offers sells for $79.99 a pair.
The store consistently sells 5,700 pairs of these roller skates every year. The
fixed costs to order more skates is $68 and the carrying costs are $1.95 per pair.
What is the economic order quantity?
A. 446
pairs
B. 515
pairs
C. 529
pairs
D. 631
pairs
E. 648
pairs
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76.One of the best selling items L.T. Ten offers sells for $9.99 a unit. The variable
cost per unit is $6.38 and the carrying cost per unit is $1.12. The firm sells
6,500 of these units each year. The fixed cost to order this item is $75. What is
the economic order quantity?
A. 690
units
B. 747
units
C. 933
units
D. 1,157
units
E. 1,260
units
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77.Each year you sell 950 units of a product at a price of $899 each. The variable
cost per unit is $575 and the carrying cost per unit is $16.90. You have been
buying 100 units at a time. Your fixed cost of ordering is $60. What is the
economic order quantity?
A. 82
units
B. 95
units
C. 105
units
D. 113
units
E. 124
units
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78.Weisbrough United currently has a cash sales only policy. Under this policy, the
firm sells 410 units a month at a price of $219 a unit. The variable cost per unit
is $140 and the carrying cost per unit is $3.30. The monthly interest rate is 1.3
percent. The firm believes it can increase its sales to 475 units a month if it
institutes a net 30 credit policy. What is the net present value of the switch
using the one-shot approach?
A. $255,59
0
B. $296,11
0
C. $298,47
0
D. $302,23
3
E. $305,90
2
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79.Under the current cash sales only policy Blue Bird, Inc., will sell 215 units a
month at a price of $469 each. The variable cost per unit is $305 and the
monthly interest rate is 1.7 percent. Based on a recent survey, the firm believes
it can sell an additional 36 units per month if it offers a net 30 credit policy.
What is the net present value of the switch using the one-shot approach?
A. $212,80
6
B. $231,54
3
C. $235,47
9
D. $248,94
6
E. $251,11
8
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80.Under your current cash sales only policy you sell 132 units a month for a total
sales value of $9,900. Your variable cost per unit is $44 and your monthly
interest rate is 1 percent. Based on a recent survey, you believe that you can
sell an additional 25 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. $65,97
6
B. $66,50
0
C. $69,08
1
D. $70,22
4
E. $73,56
6
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81.You are currently selling 72 units a month at a price of $210 a unit. Your
variable cost of each unit is $130. If you switch from your current cash sales
only policy to a net 30 policy you think your sales will increase to a total of 95
units per month. The monthly interest rate is 1.5 percent. What is the net
present value of this proposed switch using the accounts receivable approach?
A. $104,55
7
B. $114,82
9
C. $134,82
2
D. $136,51
6
E. $141,52
0
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82.Your current sales consist of 32 units per month at a price of $225 a unit. You
are weighing the pros and cons of switching to a net 30 credit policy from your
current cash only policy. If you decide to switch your credit policy you also plan
to increase the sales price to $240 a unit. If you make the switch you do not
expect your total monthly sales quantity to change but you do expect a 3
percent default rate. The monthly interest rate is 1.5 percent. What is the net
present value of the proposed credit policy switch?
A. $6,72
7
B. $6,89
3
C. $7,96
5
D. $9,44
0
E. $9,48
1
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83.Your current sales consist of 45 units per month at a price of $390 a unit. You
are weighing the pros and cons of switching to a net 30 credit policy from your
current cash only policy. If you decide to switch your credit policy you also plan
to increase the sales price to $410 a unit. The monthly interest rate is 1.4
percent. What is the break-even default rate of the proposed switch?
A. 3.55
percent
B. 3.68
percent
C. 4.29
percent
D. 4.71
percent
E. 4.88
percent
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84.The Green Hornet sells earnings forecasts for international securities. Its credit
terms are 2/10, net 30. Based on experience, 55 percent of all customers will
take the discount. The firm sells 2,700 forecasts every month at a price of
$1,100 each. What is the firm's average balance sheet amount in accounts
receivable?
A. $940,27
4
B. $1,408,27
2
C. $1,855,23
3
D. $1,867,01
2
E. $1,915,38
7
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85.A firm offers terms of 2/9, net 41. What effective annual interest rate does the
firm earn when a customer does not take the discount?
A. 18.67
percent
B. 20.45
percent
C. 23.37
percent
D. 25.34
percent
E. 25.92
percent
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86.Music City, Inc. has an average collection period of 62 days. Its average daily
investment in receivables is $50,000. What are the annual credit sales?
A. $268,40
7
B. $277,10
9
C. $294,35
5
D. $325,89
3
E. $767,12
3
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87.The Turn It Up Corporation sells on credit terms of net 30. Its accounts are, on
average, 6 days past due. Annual credit sales are $7 million. What is the
company's balance sheet amount in accounts receivable?
A. $690,41
1
B. $723,33
3
C. $851,66
7
D. $915,40
7
E. $923,59
3
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88.Keep M Flying is a wholesaler that stocks engine components and test
equipment for the commercial aircraft industry. A new customer has placed an
order for eight high-bypass turbine engines, which increase fuel economy. The
variable cost is $1.7 million per unit, and the credit price is $2.1 million each.
Credit is extended for one period. Based on historical experience, payment for
about 1 out of every 240 such orders is never collected. The required return is
3.2 percent per period. What is the NPV per unit if this is a one-time order?
A. $316,40
7
B. $321,81
9
C. $326,40
5
D. $334,29
0
E. $351,05
6
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89.Quest, Inc., is considering a change in its cash-only sales policy. The new terms
of sale would be one month. The required return is 1.6 percent per month.
Based on the following information, what is the NPV of the new policy?
A. $28,75
0
B. $32,50
0
C. $35,00
0
D. $38,25
0
E. $40,00
0
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90.Cohen Industrial Products uses 2,100 switch assemblies per week and then
reorders another 2,100. The relevant carrying cost per switch assembly is $18,
and the fixed order cost is $300. What is the EOQ?
A. 1,279.8
4
B. 1,809.9
7
C. 1,907.8
8
D. 2,278.4
2
E. 2,698.1
5
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91.Roger's Store begins each week with 150 phasers in stock. This stock is
depleted each week and reordered. The carrying cost per phaser is $48 per
year and the fixed order cost is $70. What is the optimal number of orders that
should be placed each year?
A. 48.6
9
B. 51.7
1
C. 54.2
0
D. 61.1
0
E. 64.5
0
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92.The Dilana Corporation is considering a change in its cash-only policy. The new
terms would be net one period. The required return is 2 percent per period.
What is the NPV of the new policy given the following information?
A. $230,880
B. $118,420
C. $311,50
8
D. $328,99
7
E. $388,34
0
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93.The Cycle Shoppe has decided to offer credit to its customers during the spring
selling season. Sales are expected to be 330 bicycles. The average cost to the
shop of a bicycle is $300. The owner knows that only 93 percent of the
customers will be able to make their payments. To identify the remaining 7
percent, she is considering subscribing to a credit agency. The initial charge for
this service is $540, with an additional charge of $6 per individual report. What
is the amount of the net savings from subscribing to the credit agency?
A. $3,79
0
B. $3,92
0
C. $4,08
0
D. $4,41
0
E. $4,95
0
Essay Questions
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94.Which do you feel is the more appropriate upper limit for the credit period that
a seller offers to a buyer: the buyer's operating cycle or the buyer's inventory
period?
95.Assume all suppliers to a large retail chain offer credit terms of 2/10, net 30.
The retail chain consistently takes the 2 percent discount and pays in 60 days.
When pressed on the issue, the retail chain tells the suppliers they can either
accept the payments as they currently are or lose the business. Is this ethical?
How might this impact a small supplier versus a large supplier? Explain.
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96.Why might firms forego discounts offered by their suppliers even though it is
costly to do so? What steps might a firm pursue to be able to take these
discounts?
97.All else equal, firms with (1) excess capacity, (2) low variable costs, and (3)
repeat customers are more apt to offer liberal credit terms to their customers
than are other firms. Explain why this tendency exists.
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Chapter 20 Credit and Inventory Management Answer Key
Multiple Choice Questions
1.
Blackwell Brothers sells men's suits. The store offers a 1 percent discount if
payment is received within 10 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.
Refer to section 20.1
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-01 How firms manage their receivables and the basic
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components of a firm's credit policies.
Section: 20.1
Topic: Terms of sale
2.
Jillian was recently hired by a major retail store. Her job is to determine the
probability that individual customers 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
Refer to section 20.1
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-01 How firms manage their receivables and the basic
components of a firm's credit policies.
Section: 20.1
Topic: Credit analysis
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3.
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 45 th 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.
Refer to section 20.1
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-01 How firms manage their receivables and the basic
components of a firm's credit policies.
Section: 20.1
Topic: Collection policy
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4.
Phil's Print Shop grants its customers the right to pay for their print jobs
within 30 days of the date of service. This 30-day period is referred to as
the:
A. payables
period.
B. cash cycle.
C. transactions
period.
D. credit
period.
E. disbursement
period.
Refer to section 20.2
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-01 How firms manage their receivables and the basic
components of a firm's credit policies.
Section: 20.2
Topic: Credit period
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5.
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. warrant
y
C. indentur
e
D. receip
t
E. invoic
e
Refer to section 20.2
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-01 How firms manage their receivables and the basic
components of a firm's credit policies.
Section: 20.2
Topic: Invoice
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6.
Geoff Industries offers its credit customers a 2 percent discount if they pay
within 10 days. This discount is referred to as a:
A. cash
discount.
B. purchase
discount.
C. collection
discount.
D. market
discount.
E. receivables
discount.
Refer to section 20.2
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-01 How firms manage their receivables and the basic
components of a firm's credit policies.
Section: 20.2
Topic: Cash discounts
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7.
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.
Refer to section 20.2
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-01 How firms manage their receivables and the basic
components of a firm's credit policies.
Section: 20.2
Topic: Credit instruments
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8.
You are viewing a graph which 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
Refer to section 20.4
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.4
Topic: Credit cost curve
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9.
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
Refer to section 20.4
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.4
Topic: Captive finance company
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10.
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. character, capacity, capital, collateral, and
conditions.
Refer to section 20.5
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.5
Topic: Five Cs of credit
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11.
Roger's Home Appliances offers credit to customers it deems worthy of this
privilege. To determine if a customer is worthy, the firm computes a
numerical value which is used to estimate 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.
Refer to section 20.5
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.5
Topic: Credit scoring
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12.
You have recently been hired as an accounting intern for Jefferson Mills. The
job that you have been assigned for today is to compile a spreadsheet that
has six columns. The column headings are: Invoice #; Customer name; < 30
days; 31-60 days; 61-90 days; > 90 days. You are to list every unpaid invoice
by customer name with the amount owed entered into the appropriate
column for the number of days between the sale date and today. Once you
have completed that, you are to sort the report by customer name and then
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
Refer to section 20.6
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.6
Topic: Aging schedule
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13.
Bill is in charge of the inventory for Home Builder's Supply. As an inventory
item gets low, he is to restock the item by a quantity that minimizes the total
inventory costs for that item. 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
Refer to section 20.8
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-04 How to determine the costs of carrying inventory and
the optimal inventory level.
Section: 20.8
Topic: Economic reorder quantity
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14.
Allison has developed a set of procedures for determining the amount of
each raw material that she needs to have in inventory if she is to keep her
firm's 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
Refer to section 20.8
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-04 How to determine the costs of carrying inventory and
the optimal inventory level.
Section: 20.8
Topic: Materials requirements planning
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15.
Which one of the following is a system for managing demand-dependent
inventories that minimizes the inventory levels of a firm?
A. just-in-time
inventory
B. turnover
planning
C. net working capital
planning
D. inventory
scoring
E. inventory
ranking
Refer to section 20.8
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-04 How to determine the costs of carrying inventory and
the optimal inventory level.
Section: 20.8
Topic: Just-In-Time inventory
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16.
The terms of sale generally include which of the following?
I. type of credit instrument
II. cash discount
III. credit period
IV. discount period
A. I and III
only
B. II and IV
only
C. III and IV
only
D. II, III, and IV
only
E. I, II, III, and IV
Refer to section 20.1
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-01 How firms manage their receivables and the basic
components of a firm's credit policies.
Section: 20.1
Topic: Terms of sale
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17.
What is the primary purpose of credit analysis?
A. determine the optimal credit
period
B. establish the effectiveness of granting a cash
discount
C. determine the optimal discount period, if
any
D. access the frequency and amount of sales by
customer
E. evaluate whether or not a customer will
pay
Refer to section 20.1
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-01 How firms manage their receivables and the basic
components of a firm's credit policies.
Section: 20.1
Topic: Credit analysis
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18.
The period of time that extends from the day a credit sale is made until the
day the bank credits a firm's account with the payment for that sale is known
as the _____ period.
A. floa
t
B. cash
collection
C. sales
D. accounts
receivable
E. discoun
t
Refer to section 20.1
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-01 How firms manage their receivables and the basic
components of a firm's credit policies.
Section: 20.1
Topic: Accounts receivable period
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19.
Which one of the following will increase a firm's investment in accounts
receivables?
A. a decrease 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. an increase in average daily credit
sales
Refer to section 20.1
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 20-01 How firms manage their receivables and the basic
components of a firm's credit policies.
Section: 20.1
Topic: Investment in receivables
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20.
A firm's total investment in 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.
Refer to section 20.1
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 20-01 How firms manage their receivables and the basic
components of a firm's credit policies.
Section: 20.1
Topic: Investment in receivables
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21.
Which one of the following time periods is included in the accounts
receivable period but not in the cash collection period?
A. the period of time between the receipt of a check and the availability of
those funds
B. time it takes a firm to process incoming
receipts
C. period of time a check is in the
mail
D. the amount of time that it takes a bank to credit a firm's account for a
deposit made
E. period of time it takes an invoice to reach a customer by
mail
Refer to section 20.1
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-01 How firms manage their receivables and the basic
components of a firm's credit policies.
Section: 20.1
Topic: Investment in receivables
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22.
Which one of the following statements is correct if you purchase an item
with credit terms of 1/5, net 15?
A. If you pay within 1 day, you will receive a 5 percent
discount.
B. If you pay within 5 days, you will receive a 1 percent
discount.
C. If you do not pay within 15 days, you will be charged interest at a 1.5
percent monthly rate.
D. If you pay within 15 days, you will receive a 1/5th percent
discount.
E. You must pay the discounted amount within 15
days.
Refer to section 20.2
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 20-01 How firms manage their receivables and the basic
components of a firm's credit policies.
Section: 20.2
Topic: Terms of sale
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23.
You are doing some comparison shopping. Five stores offer the product you
want at basically the same price. Which one of the following stores offers the
best credit terms if you plan on taking the discount?
A. store
A
B. store
B
C. store C
D. store
D
E. store E
Refer to section 20.2
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 20-01 How firms manage their receivables and the basic
components of a firm's credit policies.
Section: 20.2
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Topic: Terms of sale
24.
You are doing some comparison shopping. Five stores offer the product you
want at basically the same price. Which one of the following stores offers the
best credit terms if you plan to forego the discount?
A. store
A
B. store
B
C. store C
D. store
D
E. store E
Refer to section 20.2
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 20-01 How firms manage their receivables and the basic
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components of a firm's credit policies.
Section: 20.2
Topic: Terms of sale
25.
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 15 th of
each month.
Refer to section 20.2
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-01 How firms manage their receivables and the basic
components of a firm's credit policies.
Section: 20.2
Topic: Credit period
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26.
Which two of the following are the key considerations for a seller who is
establishing the length of the credit period being offered to a customer?
I. seller's operating cycle
II. customer's operating cycle
III. seller's inventory period
IV. customer's inventory period
A. I and
II
B. II and
III
C. III and IV
D. II and IV
E. I and IV
Refer to section 20.2
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-01 How firms manage their receivables and the basic
components of a firm's credit policies.
Section: 20.2
Topic: Credit period
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27.
Which one of the following factors tends to favor longer credit periods?
A. high consumer
demand
B. lower priced
merchandise
C. increased credit
risk
D. merchandise with low collateral
value
E. increased
competition
Refer to section 20.2
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-01 How firms manage their receivables and the basic
components of a firm's credit policies.
Section: 20.2
Topic: Credit period
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28.
Which one of the following statements is correct in regards to credit
periods?
A. Perishable items tend to have longer credit
periods.
B. Items with low markups tend to have longer credit
periods.
C. Smaller accounts tend to have longer credit
periods.
D. Different customers may be offered different credit periods by the same
firm.
E. Newer products tend to have shorter credit
periods.
Refer to section 20.2
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-01 How firms manage their receivables and the basic
components of a firm's credit policies.
Section: 20.2
Topic: Credit period
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29.
A cash discount of 2/5, net 30:
A. grants customers 30 days to pay after the discount period
expires.
B. offers customers a maximum of 30 days
credit.
C. grants free credit for a period of 30
days.
D. charges a higher price to a cash customer than to a customer who pays in
2 days.
E. grants customers 2 days to pay if they want the 5 percent
discount.
Refer to section 20.2
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 20-01 How firms manage their receivables and the basic
components of a firm's credit policies.
Section: 20.2
Topic: Cash discounts
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30.
Under credit terms of 1/5, net 15, customers should:
A. always pay on the 15th
day.
B. take the 5 percent 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.
Refer to section 20.2
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 20-01 How firms manage their receivables and the basic
components of a firm's credit policies.
Section: 20.2
Topic: Cash discounts
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31.
A 2/10, net 30 credit policy:
A. is an expensive form of short-term credit if a buyer foregoes 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 a firm's investment in receivables as compared to a
straight net 30 policy.
Refer to section 20.2
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-01 How firms manage their receivables and the basic
components of a firm's credit policies.
Section: 20.2
Topic: Cost of credit
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32.
The Green Hornet offers a trade discount with terms of 2/5, EOM. Assume
you purchase an item on credit from The Green Hornet on Monday,
November 3. What is the invoice date for this purchase?
A. November
3
B. November
5
C. November
7
D. November
8
E. November
30
Refer to section 20.2
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 20-01 How firms manage their receivables and the basic
components of a firm's credit policies.
Section: 20.2
Topic: Trade discount
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33.
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
Refer to section 20.2
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-01 How firms manage their receivables and the basic
components of a firm's credit policies.
Section: 20.2
Topic: Credit instruments
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34.
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. generally has a built-in interest
cost.
D. is payable immediately upon
receipt.
E. is a formal bid for a
project.
Refer to section 20.2
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-01 How firms manage their receivables and the basic
components of a firm's credit policies.
Section: 20.2
Topic: Credit instruments
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35.
Which of the following statements correctly reflect the effects of granting
credit to customers?
I. Total revenues may increase if both the quantity sold and the price per unit
increase when credit is granted.
II. A firm's cash cycle generally increases if credit is granted, all else equal.
III. Both the cost of default and the cost of discounts must be considered
before granting credit.
IV. A firm may have to increase its long-term borrowing if it decides to grant
credit to its customers.
A. I, II, and III
only
B. II, III, and IV
only
C. I, III, and IV
only
D. I, II, and IV
only
E. I, II, III, and IV
Refer to section 20.3
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.3
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Topic: Credit policy effects
36.
You are considering switching from an all cash credit policy to a net 30 credit
policy. You do not expect the switch to affect either your sales quantity or
your sales price. Ignoring interest and assuming that every month has 30
days, your net present value of the switch will be equal to:
A. zero
.
B. your selling price per
unit.
C. your selling price per unit multiplied by
-1.
D. your selling price per unit multiplied by
-30.
E. your total monthly sales multiplied by
-1.
Refer to section 20.3
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.3
Topic: Evaluating credit policy
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37.
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.
Refer to section 20.4
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.4
Topic: Optimal amount of credit
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38.
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.
Refer to section 20.4
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.4
Topic: Optimal credit policy
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39.
If you extend credit for a one-time sale to a new customer you risk an
amount equal to:
A. the sales price of the item
sold.
B. the variable cost of the item
sold.
C. the fixed cost of the item
sold.
D. the profit margin on the item
sold.
E. zero
.
Refer to section 20.5
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.5
Topic: Credit analysis
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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 credit policy for new customers is to extend the
maximum amount of credit you will ever be willing to offer as an
enticement to get their business.
Refer to section 20.5
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.5
Topic: Credit analysis
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41.
Which of the following are frequently used as sources of information when
trying to ascertain the creditworthiness of a customer?
I. payment history with similar firms
II. credit reports
III. financial statements
IV. information provided by a bank
A. I and III
only
B. II and IV
only
C. I and II
only
D. I, II, and III
only
E. I, II, III, and IV
Refer to section 20.5
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.5
Topic: Credit information
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42.
When evaluating the creditworthiness of a customer, the term character
refers to the:
A. nature of the cash flows of the customer's
business.
B. customer's financial
resources.
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.
Refer to section 20.5
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.5
Topic: Five Cs of credit
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43.
Which one of the five Cs of credit refers to a firm's financial reserves?
A. characte
r
B. capacit
y
C. collatera
l
D. condition
s
E. capita
l
Refer to section 20.5
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.5
Topic: Five Cs of credit
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44.
Which one of the five Cs of credit refers to the general economic situation in
the customer's line of business?
A. capacit
y
B. characte
r
C. condition
s
D. capita
l
E. collatera
l
Refer to section 20.5
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.5
Topic: Five Cs of credit
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45.
Which one of the following statements is correct?
A. An aging schedule helps identify those customers who are the most
delinquent.
B. The percentage of total receivables that falls within a certain time period
on an aging schedule will remain constant over time even if the firm has
seasonal sales.
C. Normally firms call their delinquent customers prior to sending them a
past due letter.
D. A constant average collection period over a period of time is cause for
concern.
E. It is common practice when a customer files for bankruptcy to sell that
customer's receivable at face value.
Refer to section 20.6
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.6
Topic: Collection policy
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46.
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
Refer to section 20.7
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 20-03 The types of inventory and inventory management
systems used by firms.
Section: 20.7
Topic: Inventory types
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47.
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 drilling
press
E. a partially built modular
home
Refer to section 20.7
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 20-03 The types of inventory and inventory management
systems used by firms.
Section: 20.7
Topic: Inventory types
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48.
Which one of the following inventory-related costs is considered a shortage
cost?
A. storage costs
B. insurance
cost
C. cost of safety
reserves
D. obsolescence
cost
E. opportunity cost of capital used for inventory
purchases
Refer to section 20.7
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-04 How to determine the costs of carrying inventory and
the optimal inventory level.
Section: 20.7
Topic: Inventory costs
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49.
The ABC approach to inventory management is based on the concept that:
A. inventory should arrive just in time to be
used.
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 the inventory items probably represents a large
percentage of the inventory cost.
E. one-third of a year's inventory need should be on hand, another third
should be on order, and the last third should not be ordered yet.
Refer to section 20.8
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-03 The types of inventory and inventory management
systems used by firms.
Section: 20.8
Topic: Inventory management techniques
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50.
The EOQ model is designed to determine how much:
A. total inventory a firm needs in any one
year.
B. total inventory costs will be for any one given
year.
C. inventory should be purchased at a
time.
D. inventory will be sold per
day.
E. a firm loses in sales per day when an inventory item is
depleted.
Refer to section 20.8
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-04 How to determine the costs of carrying inventory and
the optimal inventory level.
Section: 20.8
Topic: Economic order quantity
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51.
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.
Refer to section 20.8
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-04 How to determine the costs of carrying inventory and
the optimal inventory level.
Section: 20.8
Topic: Economic order quantity
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52.
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.
Refer to section 20.8
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-04 How to determine the costs of carrying inventory and
the optimal inventory level.
Section: 20.8
Topic: Economic order quantity
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53.
Which one of the following items is most likely a derived-demand inventory
item?
A. cereal ready to be bagged and shipped to
stores
B. tires held in inventory by an auto
maker
C. shoes on display in a retail
store
D. toys ready to be shipped to toy
stores
E. wheat harvested by a
farmer
Refer to section 20.8
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-03 The types of inventory and inventory management
systems used by firms.
Section: 20.8
Topic: Derived-demand inventory
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54.
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.
Refer to section 20.8
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-03 The types of inventory and inventory management
systems used by firms.
Section: 20.8
Topic: Derived-demand inventory
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55.
A just-in-time inventory system:
I. when implemented properly reduces the cost of inventory to zero.
II. increases the inventory turnover rate.
III. is sufficient to handle immediate production needs.
IV. minimizes the costs of holding inventory.
A. I and III
only
B. II and IV
only
C. I, II, and IV
only
D. II, III, and IV
only
E. I, II, III, and IV
Refer to section 20.8
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 20-03 The types of inventory and inventory management
systems used by firms.
Section: 20.8
Topic: Just-In-Time inventory
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56.
The incremental investment in receivables under the accounts receivable
approach is equal to:
A. P - vQ′.
B. PQ′.
C. PQ + v(Q′ - Q).
D. P(Q′ - Q).
E. PQ(Q′ - Q).
Refer to section 20.A
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.A
Topic: Accounts receivable approach
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57.
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 variable
cost of the sold items.
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. foregoing cash discounts is a method of obtaining inexpensive short-term
financing.
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.
Refer to section 20.A
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.A
Topic: Accounts receivable approach
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58.
Which two of the following are the key elements in determining whether or
not a switch from a no-credit policy to a credit policy is advisable?
I. variable cost per unit
II. cash discount percentage
III. credit price
IV. default rate
A. I and III
only
B. II and IV
only
C. II and III
only
D. I and IV
only
E. III and IV
only
Refer to section 20.A
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.A
Topic: NPV of switch
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59.
On average, your firm sells $38,700 of items on credit each day. The firm's
average operating cycle is 49 days and it acquires and sells inventory, on
average, every 17 days. What is the average accounts receivable balance?
A. $657,90
0
B. $848,00
0
C. $1,238,40
0
D. $1,315,50
0
E. $1,896,30
0
Accounts receivable balance = $38,700 × (49 - 17) = $1,238,400
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 20-01 How firms manage their receivables and the basic
components of a firm's credit policies.
Section: 20.1
Topic: Accounts receivable balance
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60.
The Winter Store just purchased $48,300 of goods from its supplier with
credit terms of 2/10, net 25. What is the discounted price?
A. $43,47
0
B. $46,20
9
C. $47,33
4
D. $47,92
9
E. $48,30
0
Discounted price = $48,300 × (1 - 0.02) = $47,334
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 20-01 How firms manage their receivables and the basic
components of a firm's credit policies.
Section: 20.2
Topic: Accounts receivable discount
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61.
Today, October 12, Nadine's Fashions purchased $511 worth of merchandise
from a supplier. The credit terms are 1/5, net 20. By what day does Nadine's
have to make the payment to receive the discount? Note: October has 31
days.
A. October
13
B. October
15
C. October
17
D. October
27
E. November
1
End of discount period = October 12 + 5 days = October 17
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 20-01 How firms manage their receivables and the basic
components of a firm's credit policies.
Section: 20.2
Topic: Accounts receivable discount
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62.
A supplier grants your firm credit terms of 2/10, net 40. What is the effective
annual rate of the discount if the firm purchases $4,800 worth of
merchandise?
A. 27.24
percent
B. 26.57
percent
C. 28.80
percent
D. 29.03
percent
E. 29.27
percent
Days in period = 40 - 10 = 30; Periods per year = 365/30 = 12.166667
Interest rate for 30 days = [0.02 × $4,800]/[(1 - 0.02) × $4,800] = 0.0195578
Effective annual rate = (1 + .01955780195578)12.166667 - 1 = 26.57 percent
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 20-01 How firms manage their receivables and the basic
components of a firm's credit policies.
Section: 20.2
Topic: Accounts receivable discount
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63.
Cape May Products currently sells 650 units a month at a price of $59 a unit.
The firm believes it can increase its sales by an additional 125 units if it
switches to a net 30 credit policy. The monthly interest rate is 0.35 percent
and the variable cost per unit is $38. What is the incremental cash inflow
from the proposed credit policy switch?
A. $77
4
B. $2,62
5
C. $4,75
0
D. $5,69
0
E. $7,37
5
Incremental cash flow = ($59 - $38) (125) = $2,625
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.3
Topic: Credit policy switch
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64.
Polly's Home Accents currently sells 320 units a month at a price of $59 a
unit. Polly thinks she can increase her sales by an additional 55 units if she
switches to a net 30 credit policy. The monthly interest rate is 0.4 percent
and the variable cost per unit is $32. What is the net present value of the
proposed credit policy switch?
A. $350,61
0
B. $350,89
5
C. $426,50
7
D. $621,92
9
E. $821,13
5
NPV of switch = - [($59 × 320) + ($32 × 55)] + [($59 - $32) × 55]/0.004 =
$350,610
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.3
Topic: Credit policy switch
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65.
Currently, Glasgow Importers sells 280 units a month at a price of $729 a
unit. The firm believes it can increase its sales by an additional 40 units if it
switches to a net 30 credit policy. The monthly interest rate is 0.5 percent
and the variable cost per unit is $480. What is the net present value of the
proposed credit policy switch?
A. $213,360
B. $9,240
C. $190,20
0
D. $1,287,52
0
E. $1,768,68
0
NPV = - [($729 × 280) + ($480 × 40)] + [($729 - $480) × 40]/0.005 =
$1,768,680
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.3
Topic: Credit policy switch
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66.
Currently, The Toy Box sells 465 units a month at an average price of $42 a
unit. The company thinks it can increase sales by an additional 130 units a
month if it switches to a net 30 credit policy. The monthly interest rate is 0.4
percent and the variable cost per unit is $21. What is the incremental cash
inflow of the proposed credit policy switch?
A. $2,12
0
B. $2,73
0
C. $2,76
0
D. $2,81
0
E. $5,07
0
Incremental cash flow = ($42 - $21) (130) = $2,730
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.3
Topic: Credit policy switch
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67.
Preston Milled Products currently sells a product with a variable cost per unit
of $21 and a unit selling price of $40. At the present time, the firm only sells
on a cash basis with monthly sales of 2,800 units. The monthly interest rate
is 0.5 percent. What is the switch break-even point if the firm switched to a
net 30 credit policy? Assume the selling price per unit and the variable costs
per unit remain constant.
A. 2,830
units
B. 2,910
units
C. 3,333
units
D. 3,414
units
E. 3,526
units
Break-even point = Q′ - 2,800 = ($40 × 2,800)/{[($40 - $21)/0.005] - $21} = 30
units
Q′ = 2,800 + 30 = 2,830 units
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 20-03 The types of inventory and inventory management
systems used by firms.
Section: 20.3
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Topic: Switch break-even point
68.
Saucier & Co. currently sells 2,100 units a month for total monthly sales of
$86,500. The company is considering replacing its current cash only credit
policy with a net 30 policy. The variable cost per unit is $18 and the monthly
interest rate is 1.2 percent. What is the switch break-even level of sales?
Assume the selling price per unit and the variable costs per unit remain
constant.
A. 1,943
units
B. 2,117
units
C. 2,145
units
D. 2,406
units
E. 2,548
units
Break-even point = Q′ - 2,100 = ($86,500)/{[(($86,500/2,100) - $18)/0.012] $18} = 45 units; Q′ = 2,100 + 45 = 2,145 units
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.3
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Topic: Switch break-even point
69.
The Cellar Door currently sells 9,620 units a month for total monthly sales of
$316,000. The company is considering replacing its current cash only credit
policy with a net 30 policy. The variable cost per unit is $15 and the monthly
interest rate is 1.5 percent. What is the switch break-even level of sales?
A. 9,711
units
B. 9,779
units
C. 9,814
units
D. 9,957
units
E. 9,889
units
Break-even point = Q′ - 9,620 = ($316,000)/{[(($316,000/9,620) - $15)/0.015]
- $15} = 269 units; Q′ = 9,620 + 269 = 9,889 units
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.3
Topic: Switch break-even point
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70.
You have the opportunity to make a one-time sale if you will give a new
customer 30 days to pay. You suspect there is a 10 percent chance this
person will never pay you. The sales price of the item the customer wants to
buy is $289. Your variable cost on that item is $156 and your monthly
interest rate is 1.75 percent. Should you grant credit to this customer? Why
or why not?
A. yes; because the NPV of the potential sale is
$113.05
B. yes; because the NPV of the potential sale is
$99.63
C. no; because the NPV of the potential sale is $133.00
D. no; because the NPV of the potential sale is
-113.05
E. no; because the NPV of the potential sale is $89.65
NPV = -$156 + {[1 - 0.10] × [$289/(1 + 0.0175)]} = $99.63
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.5
Topic: One-time sale
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71.
You are considering renting a kiosk in the local mall for a period of three
months. Any sale you make will be a one-time sale. There is only a 79
percent chance you will collect payment on a credit sale. The product you
want to sell has a variable cost of $3.88 and a sales price of $4.99. The
monthly interest rate is 1.5 percent. Should you offer people 30 days to pay?
Why or why not?
A. yes; because the NPV of a credit sale is
$0.09.
B. yes; because the NPV of a credit sale is
$0.03.
C. no; because the NPV of a credit sale is $0.08.
D. no; because the NPV of a credit sale is $0.02.
E. It doesn't matter because the NPV of a credit sale is approximately
zero.
NPV = -$3.88 + {0.79 × [$4.99/(1 + 0.015)]} = $0
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.5
Topic: One-time sale
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72.
You are trying to attract new customers that you feel could become repeat
customers. The average selling price of your products is $69 each with a $41
per unit variable cost. The monthly interest rate is 1.5 percent. Your
experience tells you that 8 percent of these customers will never pay their
bill. What is the value of a new customer who does not default on his or her
bill?
A. $1,73
3
B. $1,86
7
C. $2,61
7
D. $4,81
7
E. $8,86
7
PV = ($69 - $41)/0.015 = $1,867
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.5
Topic: Repeat sale
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73.
You are trying to attract new customers that you feel could become repeat
customers. The average price of your product is $619 per unit with a $435
variable cost per unit. The monthly interest rate is 1.8 percent. Your
experience tells you that 9 percent of these customers will never pay their
bill. Should you offer credit terms of net 30 to attract these potential
customers? Why or why not?
A. yes; because the NPV of extending credit is
$8,867
B. yes; because the NPV of extending credit is
$9,787
C. yes; because the NPV of extending credit is
$128
D. no; because the NPV of extending credit is $459
E. It doesn't matter because the NPV of extending credit is
zero.
NPV = -$435 + {[1 - 0.09] × [($619 - $435)/0.018]} = $8,867
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.5
Topic: Repeat sale
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74.
A firm sells 4,500 units of an item each year. The carrying cost per unit is
$2.15 and the fixed costs per order are $69. What is the economic order
quantity?
A. 374
units
B. 421
units
C. 497
units
D. 537
units
E. 623
units
EOQ = [(2 × 4,500 × $69)/$2.15]1/2 = 537 units
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 20-04 How to determine the costs of carrying inventory and
the optimal inventory level.
Section: 20.8
Topic: Economic order quantity
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75.
The best-selling pair of roller skates The Teen Store offers sells for $79.99 a
pair. The store consistently sells 5,700 pairs of these roller skates every year.
The fixed costs to order more skates is $68 and the carrying costs are $1.95
per pair. What is the economic order quantity?
A. 446
pairs
B. 515
pairs
C. 529
pairs
D. 631
pairs
E. 648
pairs
EOQ = [(2 × 5,700 × $68)/$1.95]1/2 = 631 pairs
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 20-04 How to determine the costs of carrying inventory and
the optimal inventory level.
Section: 20.8
Topic: Economic order quantity
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76.
One of the best selling items L.T. Ten offers sells for $9.99 a unit. The variable
cost per unit is $6.38 and the carrying cost per unit is $1.12. The firm sells
6,500 of these units each year. The fixed cost to order this item is $75. What
is the economic order quantity?
A. 690
units
B. 747
units
C. 933
units
D. 1,157
units
E. 1,260
units
EOQ = [(2 × 6,500 × $75)/$1.12]1/2 = 933 units
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 20-04 How to determine the costs of carrying inventory and
the optimal inventory level.
Section: 20.8
Topic: Economic order quantity
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77.
Each year you sell 950 units of a product at a price of $899 each. The variable
cost per unit is $575 and the carrying cost per unit is $16.90. You have been
buying 100 units at a time. Your fixed cost of ordering is $60. What is the
economic order quantity?
A. 82
units
B. 95
units
C. 105
units
D. 113
units
E. 124
units
EOQ = [(2 × 950 × $60)/$16.90]1/2 = 82 units
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 20-04 How to determine the costs of carrying inventory and
the optimal inventory level.
Section: 20.8
Topic: Economic order quantity
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78.
Weisbrough United currently has a cash sales only policy. Under this policy,
the firm sells 410 units a month at a price of $219 a unit. The variable cost
per unit is $140 and the carrying cost per unit is $3.30. The monthly interest
rate is 1.3 percent. The firm believes it can increase its sales to 475 units a
month if it institutes a net 30 credit policy. What is the net present value of
the switch using the one-shot approach?
A. $255,59
0
B. $296,11
0
C. $298,47
0
D. $302,23
3
E. $305,90
2
Monthly benefit = [($219 × 475)/1.013] - [$140 × 475] - [($219 - $140) × 410]
= $3,800.03; NPV of switch = $3,800.03 + ($3,800.03/0.013) = $296,110
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.A
Topic: One-shot approach
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79.
Under the current cash sales only policy Blue Bird, Inc., will sell 215 units a
month at a price of $469 each. The variable cost per unit is $305 and the
monthly interest rate is 1.7 percent. Based on a recent survey, the firm
believes it can sell an additional 36 units per month if it offers a net 30 credit
policy. What is the net present value of the switch using the one-shot
approach?
A. $212,80
6
B. $231,54
3
C. $235,47
9
D. $248,94
6
E. $251,11
8
Monthly benefit = {[$469 × (215 + 36)]/(1 + 0.017)} - {$305 × (215 + 36)} {($469 - $305) × 215} = $3,936.23; NPV of switch = $3,936.23 +
($3,936.23/0.017) = $235,479
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.A
Topic: One-shot approach
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80.
Under your current cash sales only policy you sell 132 units a month for a
total sales value of $9,900. Your variable cost per unit is $44 and your
monthly interest rate is 1 percent. Based on a recent survey, you believe that
you can sell an additional 25 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. $65,97
6
B. $66,50
0
C. $69,08
1
D. $70,22
4
E. $73,56
6
P = $9,900/132 = $75
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
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Section: 20.A
Topic: Accounts receivable approach
81.
You are currently selling 72 units a month at a price of $210 a unit. Your
variable cost of each unit is $130. If you switch from your current cash sales
only policy to a net 30 policy you think your sales will increase to a total of
95 units per month. The monthly interest rate is 1.5 percent. What is the net
present value of this proposed switch using the accounts receivable
approach?
A. $104,55
7
B. $114,82
9
C. $134,82
2
D. $136,51
6
E. $141,52
0
AACSB: Analytic
Blooms: Analyze
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Difficulty: 2 Medium
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.A
Topic: Accounts receivable approach
82.
Your current sales consist of 32 units per month at a price of $225 a unit. You
are weighing the pros and cons of switching to a net 30 credit policy from
your current cash only policy. If you decide to switch your credit policy you
also plan to increase the sales price to $240 a unit. If you make the switch
you do not expect your total monthly sales quantity to change but you do
expect a 3 percent default rate. The monthly interest rate is 1.5 percent.
What is the net present value of the proposed credit policy switch?
A. $6,72
7
B. $6,89
3
C. $7,96
5
D. $9,44
0
E. $9,48
1
d = ($240 - $225)/$240 = 0.0625
NPV = - ($225 × 32) + {($240 × 32) × [(0.0625 - 0.03)/0.015]} = $9,440
AACSB: Analytic
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Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.A
Topic: Discounts and default risk
83.
Your current sales consist of 45 units per month at a price of $390 a unit. You
are weighing the pros and cons of switching to a net 30 credit policy from
your current cash only policy. If you decide to switch your credit policy you
also plan to increase the sales price to $410 a unit. The monthly interest rate
is 1.4 percent. What is the break-even default rate of the proposed switch?
A. 3.55
percent
B. 3.68
percent
C. 4.29
percent
D. 4.71
percent
E. 4.88
percent
d = ($410 - $390)/$410 = 0.048780488
π = 0.048780488 - 0.014 (1 - 0.048780488) = 3.55 percent
AACSB: Analytic
Blooms: Analyze
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Difficulty: 2 Medium
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.A
Topic: Discounts and default risk
84.
The Green Hornet sells earnings forecasts for international securities. Its
credit terms are 2/10, net 30. Based on experience, 55 percent of all
customers will take the discount. The firm sells 2,700 forecasts every month
at a price of $1,100 each. What is the firm's average balance sheet amount
in accounts receivable?
A. $940,27
4
B. $1,408,27
2
C. $1,855,23
3
D. $1,867,01
2
E. $1,915,38
7
Average collection period = 0.55(10 days) + 0.45 (30 days) = 19 days
Average A/R = 2,700 ($1,100) (12/365) (19) = $1,855,233
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
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EOC: 20-3
Learning Objective: 20-01 How firms manage their receivables and the basic
components of a firm's credit policies.
Section: 20.2
Topic: Accounts receivable
85.
A firm offers terms of 2/9, net 41. What effective annual interest rate does
the firm earn when a customer does not take the discount?
A. 18.67
percent
B. 20.45
percent
C. 23.37
percent
D. 25.34
percent
E. 25.92
percent
EAR = [1 + (0.02/0.98)]365/(41 - 9) - 1 = 25.92 percent
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
EOC: 20-5
Learning Objective: 20-01 How firms manage their receivables and the basic
components of a firm's credit policies.
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Section: 20.2
Topic: Terms of sale
86.
Music City, Inc. has an average collection period of 62 days. Its average daily
investment in receivables is $50,000. What are the annual credit sales?
A. $268,40
7
B. $277,10
9
C. $294,35
5
D. $325,89
3
E. $767,12
3
Annual credit sales = $50,000 (365/62) = $294,355
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
EOC: 20-6
Learning Objective: 20-01 How firms manage their receivables and the basic
components of a firm's credit policies.
Section: 20.1
Topic: Receivables turnover
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87.
The Turn It Up Corporation sells on credit terms of net 30. Its accounts are,
on average, 6 days past due. Annual credit sales are $7 million. What is the
company's balance sheet amount in accounts receivable?
A. $690,41
1
B. $723,33
3
C. $851,66
7
D. $915,40
7
E. $923,59
3
A/R = $7,000,000 [(30 + 6)/365] = $690,411
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
EOC: 20-8
Learning Objective: 20-01 How firms manage their receivables and the basic
components of a firm's credit policies.
Section: 20.1
Topic: Accounts receivable
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88.
Keep M Flying is a wholesaler that stocks engine components and test
equipment for the commercial aircraft industry. A new customer has placed
an order for eight high-bypass turbine engines, which increase fuel economy.
The variable cost is $1.7 million per unit, and the credit price is $2.1 million
each. Credit is extended for one period. Based on historical experience,
payment for about 1 out of every 240 such orders is never collected. The
required return is 3.2 percent per period. What is the NPV per unit if this is a
one-time order?
A. $316,40
7
B. $321,81
9
C. $326,40
5
D. $334,29
0
E. $351,05
6
NPV = -$1,700,000 + [1 - (1/240)] [$2,100,000]/(1 + 0.032) = $326,405
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
EOC: 20-9
Learning Objective: 20-01 How firms manage their receivables and the basic
components of a firm's credit policies.
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Section: 20.3
Topic: Credit policy
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89.
Quest, Inc., is considering a change in its cash-only sales policy. The new
terms of sale would be one month. The required return is 1.6 percent per
month. Based on the following information, what is the NPV of the new
policy?
A. $28,75
0
B. $32,50
0
C. $35,00
0
D. $38,25
0
E. $40,00
0
Benefit of switching = ($800 - $425) (1,150 - 1,110) = $15,000
Cost of switching = $800 (1,110) + $425 (1,150 - 1,110) = $905,000
New policy NPV = $15,000/0.016 - $905,000 = $32,500
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
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EOC: 20-10
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.3
Topic: Credit policy evaluation
90.
Cohen Industrial Products uses 2,100 switch assemblies per week and then
reorders another 2,100. The relevant carrying cost per switch assembly is
$18, and the fixed order cost is $300. What is the EOQ?
A. 1,279.8
4
B. 1,809.9
7
C. 1,907.8
8
D. 2,278.4
2
E. 2,698.1
5
EOQ = [(2 × 52 × 2,100 × 300)/$18]½ = 1,907.88
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
EOC: 20-11
Learning Objective: 20-04 How to determine the costs of carrying inventory and
the optimal inventory level.
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Section: 20.8
Topic: EOQ
91.
Roger's Store begins each week with 150 phasers in stock. This stock is
depleted each week and reordered. The carrying cost per phaser is $48 per
year and the fixed order cost is $70. What is the optimal number of orders
that should be placed each year?
A. 48.6
9
B. 51.7
1
C. 54.2
0
D. 61.1
0
E. 64.5
0
EOQ = [(2 × 52 × 150 × $70)/$48]1/2 = 150.83
Number of orders per year = 52(150)/150.83 = 51.71
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
EOC: 20-12
Learning Objective: 20-04 How to determine the costs of carrying inventory and
the optimal inventory level.
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Section: 20.8
Topic: Optimal order quantity
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92.
The Dilana Corporation is considering a change in its cash-only policy. The
new terms would be net one period. The required return is 2 percent per
period. What is the NPV of the new policy given the following information?
A. $230,880
B. $118,420
C. $311,50
8
D. $328,99
7
E. $388,34
0
Cash flow from old policy = ($71 - $36) (3,500) = $122,500
Cash flow from new policy = ($74 - $36) (3,560) = $135,280
Incremental cash flow = $135,280 - $122,500 = $12,780
NPV of new policy = - [$71(3,500) + $36(3,560 - 3,500)] + $12,780/0.02 =
$388,340
AACSB: Analytic
Blooms: Analyze
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Difficulty: 2 Medium
EOC: 20-14
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.5
Topic: Credit policy
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93.
The Cycle Shoppe has decided to offer credit to its customers during the
spring selling season. Sales are expected to be 330 bicycles. The average cost
to the shop of a bicycle is $300. The owner knows that only 93 percent of the
customers will be able to make their payments. To identify the remaining 7
percent, she is considering subscribing to a credit agency. The initial charge
for this service is $540, with an additional charge of $6 per individual report.
What is the amount of the net savings from subscribing to the credit
agency?
A. $3,79
0
B. $3,92
0
C. $4,08
0
D. $4,41
0
E. $4,95
0
Net savings = (330 × $300 × 0.07) - $540 - (330 × $6) = $4,410
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
EOC: 20-16
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.5
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Topic: Credit policy
Essay Questions
94.
Which do you feel is the more appropriate upper limit for the credit period
that a seller offers to a buyer: the buyer's operating cycle or the buyer's
inventory period?
The operating cycle is the sum of the inventory and accounts receivable
periods. The inventory period is probably the better target as an upper limit
for the seller's credit period since it is questionable whether or not the seller
should be financing the buyer's receivables. The credit period should
definitely not exceed the buyer's operating period as the seller would then
be financing all of the buyer's inventory and accounts receivables, plus other
aspects of the buyer's operations.
Feedback: Refer to section 20.2
AACSB: Reflective Thinking
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.2
Topic: Length of credit period
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95.
Assume all suppliers to a large retail chain offer credit terms of 2/10, net 30.
The retail chain consistently takes the 2 percent discount and pays in 60
days. When pressed on the issue, the retail chain tells the suppliers they can
either accept the payments as they currently are or lose the business. Is this
ethical? How might this impact a small supplier versus a large supplier?
Explain.
This question can lead to a lively discussion about the ethics of abusing the
credit period. Some students will argue that it is unethical for the large firm
to exercise its will against its suppliers. Most would argue that a supplier that
is also a relatively large firm will better be able to negotiate with the retail
chain and work out a more favorable arrangement than the current
situation. If a supplier is small, this account may be a significant proportion
of the supplier's total sales. In that case, the supplier may have no choice
other than accepting the terms as dictated by the retail chain or going out of
business. Whether or not the actions of the retail chain are ethical is
debatable, but this practice occurs fairly frequently.
Feedback: Refer to section 20.2
AACSB: Ethics
AACSB: Reflective Thinking
Blooms: Evaluate
Difficulty: 2 Medium
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.2
Topic: Ethics and the credit period
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96.
Why might firms forego discounts offered by their suppliers even though it is
costly to do so? What steps might a firm pursue to be able to take these
discounts?
Firms will forego discounts when there is insufficient cash flow to pay within
the discount period. It would be difficult to argue that this type of financing,
given the typically high cost of foregoing the discount, would be cheaper
than other financing sources available to the firm. However, it might be more
desirable than raising cash, say through secured inventory financing or
factoring receivables. As far as correcting the problem, the firm's
management needs to seriously review the firm's cash and liquidity policies
and make the changes required to improve the firm's liquidity and cash flow
situation.
Feedback: Refer to section 20.2
AACSB: Reflective Thinking
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 20-01 How firms manage their receivables and the basic
components of a firm's credit policies.
Section: 20.2
Topic: Discounts
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97.
All else equal, firms with (1) excess capacity, (2) low variable costs, and (3)
repeat customers are more apt to offer liberal credit terms to their
customers than are other firms. Explain why this tendency exists.
Firms with excess capacity are more apt to offer liberal credit terms as a
sales incentive as increased sales will also increase the capacity utilization
ratio. Firms with low variable costs extend credit more liberally as the cost to
do so is limited to the variable cost of the items sold. Finally, firms with
repeat customers gain familiarity with its customers' ability to pay, thereby
facilitating more liberal credit terms.
Feedback: Refer to section 20.5
AACSB: Reflective Thinking
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 20-02 How to analyze the decision by a firm to grant credit.
Section: 20.5
Topic: Liberal credit terms
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