ch21
Student: _______________________________________________________________________________________
Multiple Choice Questions
1. The conditions under which a firm sells its goods and services for cash or credit are called the:
A.
B.
C.
D.
E.
terms of sale.
credit analysis.
collection policy.
payables policy.
collection float.
2. The process of determining the likelihood that customers will not pay is called:
A.
B.
C.
D.
E.
the terms of sale.
credit analysis.
the collection policy.
the payables policy.
disbursement analysis.
3. The procedures a firm follows in the pursuit of customer payments are referred to as the firm's
_____ policy.
A.
B.
C.
D.
E.
sales
credit
collection
payables
disbursements
4. The length of time for which credit is granted to a firm's customers is called the:
A.
B.
C.
D.
E.
payables period.
operating cycle.
transactions period.
credit period.
disbursement period.
5. The bill for goods or services provided by the seller to the purchaser is called a(n):
A.
B.
C.
D.
E.
ledger statement.
warranty.
indenture.
indemnity statement.
invoice.
6. A discount given to buyers as an inducement for prompt payment is called a(n) _____ discount.
A.
B.
C.
D.
E.
cash
purchase
collection
market
receivables
7. The basic evidence of indebtedness is called the:
A.
B.
C.
D.
E.
account document.
sales draft.
credit instrument.
commercial paper.
letter of debt.
8. A graphical representation of the sum of the carrying costs and the opportunity costs of a chosen
credit policy is called the:
A.
B.
C.
D.
E.
opportunity cost curve.
credit extension curve.
credit cost curve.
terms of sale graph.
economic order quantity graph.
9. A captive finance company is:
A.
B.
C.
D.
a wholly-owned subsidiary that handles the credit function for the parent firm.
controlled disbursements company which controls the accounts payables for the parent firm.
a wholly-owned subsidiary which handles all the long-term debt obligations of the parent firm.
a loan company which provides financing strictly to a particular industry, such as retail furniture
stores.
E. a consumer loan company which operates in one clearly defined and limited geographic area.
10. The basic factors to be evaluated in the credit evaluation process, the five Cs of credit, are:
A.
B.
C.
D.
E.
conditions, control, cessation, capital, and capacity.
conditions, character, capital, control, and capacity.
capital, collateral, control, character, and capacity.
character, capacity, control, cessation, and collateral.
character, capacity, capital, collateral, and conditions.
11. What is the process of quantifying the likelihood of default when granting consumer credit called?
A.
B.
C.
D.
E.
credit scoring
credit capacity
receipts assessment
conditions for credit
consumer analysis
12. A compilation of a firm's accounts receivables segmented by the length of time each account has
remained unpaid is called a(n):
A.
B.
C.
D.
E.
credit report.
aging schedule.
risk assessment report.
turnover delineation.
receivables consolidation and consistency report.
13. What is the restocking quantity that minimizes a firm's total inventory cost called?
A.
B.
C.
D.
E.
short order quantity
refill unit quantity
economic order quantity
minimum stock level
re-order limit
14. The procedures used to determine inventory levels for demand-dependent inventory types such as
work-in-progress and raw materials are called:
A.
B.
C.
D.
E.
first-in, first-out methods.
the Baumol model.
net working capital planning.
economic order procedures.
materials requirements planning.
15. Which one of the following is a system for managing demand-dependent inventories that minimizes
the inventory holdings of a firm?
A.
B.
C.
D.
E.
just-in-time inventory
turnover planning
net working capital planning
inventory scoring
inventory ranking
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.
B.
C.
D.
E.
I and III only
II and IV only
III and IV only
II, III, and IV only
I, II, III, and IV
17. What is the primary purpose of credit analysis?
A.
B.
C.
D.
determine the optimal credit period
establish the effectiveness of granting a cash discount
determine the optimal discount period, if any
access the frequency and amount of sales by customer
E. evaluate whether or not a customer will pay
18. The period of time which extends from the day a credit sale is made until the bank credits a firm's
account with the payment for that sale is known as the _____ period.
A.
B.
C.
D.
E.
float
cash collection
sales
accounts receivable
credit
19. Which one of the following will increase a firm's investment in accounts receivables?
A.
B.
C.
D.
E.
a decrease in the number of days for which credit is granted
a decrease in credit sales
an increase in cash sales
a decrease in the average collection period
an increase in average daily credit sales
20. A firm's total investment in receivables depends primarily on the firm's:
A.
B.
C.
D.
E.
total sales and cash discount period.
cash to credit sales ratio.
bad debt ratio.
average collection period and amount of credit sales.
amount of credit sales and cash discount percentage.
21. Which one of the following time periods is included in the accounts receivable period but not in the
cash collection period?
A.
B.
C.
D.
E.
the period of time between the receipt of a check and the availability of those funds
time it takes a firm to process incoming receipts
period of time a check is in the mail
the amount of time that it takes a bank to credit a firm's account for a deposit made
period of time it takes an invoice to reach a customer by mail
22. Which one of the following statements is correct if you purchase an item with credit terms of 1/5,
net 15?
A.
B.
C.
D.
E.
If you pay within 1 day, you will receive a 5 percent discount.
If you pay within 5 days, you will receive a 1 percent discount.
If you do not pay within 15 days, you will be charged interest at a 1.5 percent monthly rate.
If you pay within 15 days, you will receive a 1/5th percent discount.
You must pay the discounted amount within 15 days.
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.
B.
C.
D.
E.
store A
store B
store C
store D
store E
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 do not plan on
taking advantage of the discount?
A.
B.
C.
D.
E.
store A
store B
store C
store D
store E
25. Which one of the following statements is correct concerning the credit period?
A.
B.
C.
D.
E.
The credit period begins when the discount period ends.
The discount period is the length of time granted to a customer to pay for a purchase.
The credit period begins on the invoice date.
With terms of 2/10, net 30, the net credit period is 20 days.
With EOM dating, all sales are assumed to have occurred on the 15th of each month.
26. Which two of the following are the key considerations when setting the length of the credit period
for a customer?
I. seller's operating cycle
II. customer's operating cycle
III. seller's inventory period
IV. customer's inventory period
A.
B.
C.
D.
E.
I and II
II and III
III and IV
II and IV
I and IV
27. Which one of the following factors tends to favor longer credit periods?
A.
B.
C.
D.
E.
high consumer demand
lower priced merchandise
increased credit risk
merchandise with low collateral value
increased competition
28. Which one of the following statements is correct concerning credit periods?
A.
B.
C.
D.
E.
Perishable items tend to have longer credit periods.
Items with low markups tend to have longer credit periods.
Smaller accounts tend to have longer credit periods.
A firm may offer different credit terms to different customers.
Newer products tend to have shorter credit periods.
29. A cash discount of 3/15, net 45:
A.
B.
C.
D.
E.
grants customers 45 days to pay after the discount period expires.
discourages customers from paying early.
grants free credit for a period of 45 days.
charges higher prices if a customer pays cash at the time of purchase.
grants customers 45 days to pay if they forfeit the discount.
30. Under credit terms of 2/10, net 25, customers should:
A. always pay on the 25th day.
B. take the 10 percent discount and pay immediately.
C. take the discount and pay on the 2nd day.
D. either take the discount or pay on the 25th day.
E. both take the discount and pay on the 25th day.
31. A 2/10, net 30 credit policy:
A.
B.
C.
D.
E.
is an expensive form of short-term credit if a buyer foregoes the discount.
provides cheap financing to the buyer for 30 days.
is an inexpensive means of reducing the seller's collection period if everyone takes the discount.
tends to have little effect on the seller's collection period due to the high effective interest rate.
tends to increase a firm's investment in receivables as compared to a straight net 30 policy.
32. Tressler's offers trade discount with terms of 2/5, EOM. When are invoices with these terms due?
A.
B.
C.
D.
E.
Invoices are due on the last day of the month in which the purchase occurred.
Invoices are due on the last day of the month following the month of purchase.
Invoices are due five days after the purchase date.
Invoices are due on the 5th of the month following the month of purchase.
Invoices are due on the 5th of the month following the month of purchase if you want the discount,
otherwise, the invoices are due at the end of the month following the month of purchase.
33. Which one of the following credit instruments is commonly used in international commerce?
A.
B.
C.
D.
E.
open account
sight draft
time draft
banker's acceptance
promissory note
34. A conditional sales contract:
A.
B.
C.
D.
E.
passes title to the goods sold to the buyer at the time the contract is signed.
normally calls for one lump sum payment on the contract payment date.
generally has a built in interest cost.
is payable immediately upon receipt.
is a formal bid for a project.
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 borrowing if it decides to grant credit to its customers.
A.
B.
C.
D.
E.
I, II, and III only
II, III, and IV only
I, III, and IV only
I, II, and IV only
I, II, III, and IV
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.
B.
C.
D.
E.
zero.
your selling price per unit.
your selling price per unit multiplied by -1.
your selling price per unit multiplied by -30.
your total monthly sales multiplied by -1.
37. The optimal amount of credit would equate the incremental costs of carrying the increase in
accounts receivable to the incremental:
A.
B.
C.
D.
E.
decrease in the cash cycle.
benefit from decreasing the inventory level.
cash flows from increased sales.
increase in bad debts.
gain in net profits.
38. When credit policy is at the optimal point, the:
A.
B.
C.
D.
E.
total costs of granting credit will be maximized.
carrying costs of credit will be equal to zero.
opportunity cost of credit will be equal to zero.
carrying costs will equal the opportunity costs.
total costs will equal the opportunity costs.
39. If you extend credit to a one-time new customer you risk an amount equal to:
A.
B.
C.
D.
E.
the sales price of the item sold.
the variable cost of the item sold.
the fixed cost of the item sold.
the profit margin on the item sold.
zero.
40. Which one of the following statements is correct?
A. If the majority of your 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 is not indicative of their future payment history.
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 you are willing
to ever extend to that customer as their initial credit limit.
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.
B.
C.
D.
E.
I and III only
II and IV only
I and II only
I, II, and III only
I, II, III, and IV
42. When evaluating the creditworthiness of a customer, the term character refers to the:
A.
B.
C.
D.
E.
nature of the cash flows of the customer's business.
customer's financial resources.
types of assets the customer wants to pledge as collateral.
customer's willingness to pay bills in a timely fashion.
nature of the customer's line of work.
43. Which one of the five Cs of credit refers to a firm's financial reserves?
A.
B.
C.
D.
E.
character
capacity
collateral
conditions
capital
44. Which one of the five Cs of credit refers to the general economic situation in the customer's line of
business?
A.
B.
C.
D.
E.
capacity
character
conditions
capital
collateral
45. Which one of the following statements is correct?
A. An aging schedule helps identify which customers are the most delinquent.
B. The percentage of total receivables that fall 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.
46. Which one of the following inventory items is probably the least liquid?
A.
B.
C.
D.
E.
bricks held in inventory by a home builder
a garden tractor held in inventory by a home improvements retail outlet
a partially assembled motor for a tractor
cut logs owned by a timber mill
satellite radio systems held in inventory by a car manufacturer
47. Which one of the following inventory items is probably the most liquid?
A.
B.
C.
D.
E.
a custom made set of kitchen cabinets
metal cabinets for dishwashers
corn held in a storage facility
customized drilling press
a partially built new home
48. Which one of the following inventory-related costs is considered a shortage cost?
A.
B.
C.
D.
E.
storage costs
insurance cost
cost of safety reserves
obsolescence cost
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.
50. The economic order quantity model is designed to determine how much:
A.
B.
C.
D.
E.
total inventory a firm needs in any one year.
total inventory costs will be for any one year.
inventory should be purchased at a time.
inventory will be sold per day.
a firm loses in sales per day when an inventory item is depleted.
51. At the optimal order quantity size, the:
A.
B.
C.
D.
E.
total cost of holding inventory is fully offset by the restocking costs.
carrying costs are equal to zero.
restocking costs are equal to zero.
the total costs equal the carrying costs.
the carrying costs equal the restocking costs.
52. The economic order quantity model is designed to minimize:
A.
B.
C.
D.
E.
production costs.
inventory obsolescence.
the carrying costs of inventory.
the costs of replenishing inventory.
the total costs of holding inventory.
53. Which one of the following items is most likely a derived-demand inventory item?
A.
B.
C.
D.
E.
cereal ready to be bagged and shipped to stores
steering wheels used by an auto manufacturer
shoes on display in a retail store
toys ready to be shipped to toy stores
wheat harvested by a farmer
54. Inventory needs under a derived-demand inventory system are:
A.
B.
C.
D.
E.
55.
primarily dependent upon the competitive demands placed on a firm's suppliers.
based on the anticipated demand for the finished product.
based on minimizing the cost of restocking inventory.
held constant over time.
determined by a kanban system.
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.
B.
C.
D.
E.
I and III only
II and IV only
I, II, and IV only
II, III, and IV only
I, II, III, and IV
56. The incremental investment in receivables under the accounts receivable approach is equal to:
A.
B.
C.
D.
E.
57. The accounts receivable approach supports the theory that:
A. your risk of offering credit to a new customer is limited to your cost of the items sold.
B. the best credit policy is an all-cash policy.
C. the cost of offering credit to a new customer is the same as the cost of offering credit to an existing
customer.
D. 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.
58. Which two of the following are the key elements in determining whether or not a switch from a nocredit policy to a credit policy is advisable?
I. variable cost per unit
II. cash discount percentage
III. credit price
IV. default rate
A.
B.
C.
D.
E.
I and III only
II and IV only
II and III only
I, II, and IV only
II, III, and IV only
59. On average your firm sells $26,500 of items on credit each day. Your average operating cycle is 51
days and your firm acquires and sells inventory on average every 19 days. What is your average
accounts receivable balance?
A. $503,500
B. $848,000
C. $1,012,500
D. $1,315,500
E. $1,855,000
60. You just purchased $8,700 of goods from your supplier with credit terms of 3/10, net 30. What is the
discounted price?
A.
B.
C.
D.
E.
$6,090
$6,960
$7,830
$8,439
$8,911
61. Today, August 5, Solomon, Inc. bought $22,000 worth of merchandise from a supplier. The credit
terms are 2/8, net 25. By what day does Solomon, Inc. have to make the payment to receive the
discount?
A.
B.
C.
D.
E.
August 7
August 13
August 22
August 28
August 30
62. Your supplier grants you credit terms of 2/10, net 35. What is the effective annual rate of the
discount if you purchase $2,900 worth of merchandise?
A.
B.
C.
D.
E.
23.5 percent
27.7 percent
28.8 percent
33.5 percent
34.3 percent
63. Your firm currently sells 500 units a month at a price of $75 a unit. You think you can increase your
sales by an additional 130 units if you switch to a net 30 credit policy. The monthly interest rate is .4
percent and your variable cost per unit is $35. What is the incremental cash inflow from the
proposed credit policy switch?
A.
B.
C.
D.
E.
$1,800
$2,400
$3,600
$5,200
$6,000
64. Your firm currently sells 215 units a month at a price of $90 a unit. You think you can increase your
sales by an additional 45 units if you switch to a net 30 credit policy. The monthly interest rate is .5
percent and your variable cost per unit is $60. What is the net present value of the proposed credit
policy switch?
A. $247,950
B. $250,650
C. $255,050
D. $267,300
E. $274,350
65. Currently, your firm sells 170 units a month at a price of $140 a unit. You think you can increase
your sales by an additional 30 units if you switch to a net 30 credit policy. The monthly interest rate
is .6 percent and your variable cost per unit is $100. What is the net present value of the proposed
credit policy switch?
A.
B.
C.
D.
E.
$173,200
$187,200
$190,200
$197,000
$200,000
66. Currently, Tyler Enterprises sells 350 units a month at a price of $42 a unit. The company thinks
they can increase sales by an additional 100 units if they switch to a net 30 credit policy. The
monthly interest rate is .4 percent and the variable cost per unit is $22. What is the incremental cash
inflow of the proposed credit policy switch?
A.
B.
C.
D.
E.
$1,480
$2,000
$2,200
$2,520
$4,200
67. Your company currently sells a product with a variable cost per unit of $16 and a unit selling price
of $31. At the present time, your company only sells on a cash basis and has monthly sales of 310
units. The monthly interest rate is 2 percent. Your company is considering switching to a net 30
credit policy. What is the switch break-even point?
A.
B.
C.
D.
E.
312 units
316 units
320 units
323 units
329 units
68. The Gardeners Co. currently sells 1,800 units a month for total monthly sales of $79,200. The
company is considering replacing its current cash only credit policy with a net 30 policy. The
variable cost per unit is $34 and the monthly interest rate is 1.7 percent. What is the switch breakeven level of sales?
A.
B.
C.
D.
E.
69.
1,943 units
2,017 units
2,108 units
2,406 units
2,548 units
Stamford, Inc. currently sells 8,350 units a month for total monthly sales of $179,500. The company
is considering replacing its current cash only credit policy with a net 30 policy. The variable cost per
unit is $6.23 and the monthly interest rate is 2 percent. What is the switch break-even level of sales?
A.
B.
C.
D.
E.
8,416 units
8,517 units
8,587 units
8,606 units
8,686 units
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 20 percent chance this person will never pay you. The sales price of the item
the customer wants to buy is $136. Your variable cost on that item is $94 and your monthly interest
rate is 2.5 percent. Should you grant credit to this customer? Why or why not?
A.
B.
C.
D.
E.
yes; because the net present value of the potential sale is $12
yes; because the net present value of the potential sale is $39
no; because the net present value of the potential sale is -$44
no; because the net present value of the potential sale is -$2
doesn't matter; because the NPV of the potential sale is zero
71. You are considering a temporary opening of a kiosk in the local mall. Any sale you make will be a
one-time sale. There is only a 45 percent chance that you will collect your money on a credit sale.
The product you want to sell has a variable cost of $4.10 and a sales price of $5.75. The monthly
interest rate is 1.3 percent. Should you offer people 30 days to pay? Why or why not?
A.
B.
C.
D.
E.
yes; because you will earn $2.23 on every credit sale you make
yes; because you will earn $5.68 on every credit sale you make
no; because the net present value of the potential sale is -$1.55
no; because the net present value of the potential sale is -$.98
it doesn't matter; because the present value of the potential sale is $0
72. You are trying to attract new customers that you feel could become repeat customers. The average
price of the items you sell is $93 with a $70 variable cost. Your monthly interest rate is 2.1 percent.
Your experience tells you that 10 percent of these customers will never pay their bill. What is the
value of a new customer who does not default on their bill?
A.
B.
C.
D.
E.
$986
$1,095
$2,617
$3,333
$4,429
73. You are trying to attract new customers that you feel could become repeat customers. The average
price of the items you sell is $93 with a $70 variable cost. Your monthly interest rate is 2.1 percent.
Your experience tells you that 10 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.
B.
C.
D.
yes; because the net present value of extending credit is $40
yes; because the net present value of extending credit is $916
no; because the net present value of extending credit is -$1,025
no; because the net present value of extending credit is -$59
E. it doesn't matter; because the present value of extending credit is $0
74. You sell 7,000 units of an item each year. The carrying cost per unit is $1.10 and the fixed costs per
order are $75. What is the economic order quantity?
A.
B.
C.
D.
E.
691 units
713 units
859 units
977 units
1,025 units
75. The most fashionable pair of roller skates sells for $45.99 a pair. Your store consistently sells 8,500
pairs of these roller skates year after year. The fixed costs to order more of this item is $70 and the
carrying costs are $2.80 per pair. What is the economic order quantity?
A.
B.
C.
D.
E.
184 units
309 units
461 units
525 units
652 units
76. One of the best selling items your firm offers sells for $19.99 a unit. The variable cost per unit is
$11.59 and the carrying cost per unit is $.58. You sell 10,415 of these units each year. The fixed cost
to order this item is $65. What is the economic order quantity?
A.
B.
C.
D.
E.
1,080 units
1,314 units
1,528 units
1,773 units
1,946 units
77. Each year you sell 1,200 units of a product at a price of $59.99 each. The variable cost per unit is
$37.91 and the carrying cost per unit is $4.57. You have been buying 175 units at a time. Your fixed
cost of ordering is $80. What is the economic order quantity?
A.
B.
C.
D.
E.
185 units
195 units
205 units
215 units
225 units
78. Your firm currently has a cash sales only policy. Under this policy, you sell 290 units a month at a
price of $160 a unit. Your variable cost per unit is $104 and your carrying cost per unit is $2.70. The
monthly interest rate is 1.1 percent. You think that you can increase your sales to 350 units a month
if you institute a net 30 credit policy. What is the net present value of the switch using the one-shot
approach?
A. $228,400
B. $248,709
C. $252,814
D. $282,233
E. $285,902
79. Under your current cash sales only policy you sell 170 units a month at a price of $25. Your variable
cost per unit is $18 and your monthly interest rate is 2 percent. Based on a recent survey, you believe
that you can sell an additional 40 units per month if you offer a net 30 credit policy. What is the net
present value of the switch using the one-shot approach?
A.
B.
C.
D.
E.
$5,044
$6,970
$7,584
$8,853
$9,030
80. Under your current cash sales only policy you sell 110 units a month for a total sales value of
$7,590. Your variable cost per unit is $38 and your monthly interest rate is 1.7 percent. Based on a
recent survey, you believe that you can sell an additional 30 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.
B.
C.
D.
E.
$45,976
$47,116
$49,081
$50,224
$53,566
81. You are currently selling 60 units a month at a price of $195 a unit. Your variable cost of each unit
is $145. 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 100 units per month. Your monthly interest rate is 1.5 percent. What
is the net present value of this proposed switch using the accounts receivable approach?
A.
B.
C.
D.
E.
$115,833
$126,667
$133,333
$145,667
$152,833
82. Your current sales consist of 25 units per month at a price of $200 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 $215 a unit. If you make the
switch you do not expect your total monthly sales quantity to change but you do expect a 2 percent
default rate. The monthly interest rate is 2.5 percent. What is the net present value of the proposed
credit policy switch?
A.
B.
C.
D.
E.
$0
$5,000
$5,700
$10,000
$10,700
83. Your current sales consist of 25 units per month at a price of $200 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 $215 a unit. The monthly
interest rate is 2 percent. What is the break-even default rate of the proposed switch?
A.
B.
C.
D.
E.
4.48 percent
4.59 percent
4.65 percent
4.97 percent
5.12 percent
Essay Questions
84. Which do you feel is the more appropriate upper limit for the credit period which a seller offers to a
buyer: the buyer's operating cycle or the buyer's inventory period?
85. 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.
86. Why might firms forego discounts even though it is costly to do so? What steps might a firm pursue
to be able to take these discounts?
87. All else equal, it is likely that firms with (1) excess capacity, (2) low variable costs, and (3) repeat
customers will extend credit more liberally than others. Why?
ch21 KEY
Multiple Choice Questions
1. The conditions under which a firm sells its goods and services for cash or credit are called the:
A.
B.
C.
D.
E.
terms of sale.
credit analysis.
collection policy.
payables policy.
collection float.
Ross - Chapter 021 #1
SECTION: 21.1
TOPIC: TERMS OF SALE
TYPE: DEFINITIONS
2. The process of determining the likelihood that customers will not pay is called:
A.
B.
C.
D.
E.
the terms of sale.
credit analysis.
the collection policy.
the payables policy.
disbursement analysis.
Ross - Chapter 021 #2
SECTION: 21.1
TOPIC: CREDIT ANALYSIS
TYPE: DEFINITIONS
3. The procedures a firm follows in the pursuit of customer payments are referred to as the firm's
_____ policy.
A.
B.
C.
D.
E.
sales
credit
collection
payables
disbursements
Ross - Chapter 021 #3
SECTION: 21.1
TOPIC: COLLECTION POLICY
TYPE: DEFINITIONS
4. The length of time for which credit is granted to a firm's customers is called the:
A.
B.
C.
D.
E.
payables period.
operating cycle.
transactions period.
credit period.
disbursement period.
Ross - Chapter 021 #4
SECTION: 21.2
TOPIC: CREDIT PERIOD
TYPE: DEFINITIONS
5. The bill for goods or services provided by the seller to the purchaser is called a(n):
A.
B.
C.
D.
E.
ledger statement.
warranty.
indenture.
indemnity statement.
invoice.
Ross - Chapter 021 #5
SECTION: 21.2
TOPIC: INVOICE
TYPE: DEFINITIONS
6. A discount given to buyers as an inducement for prompt payment is called a(n) _____ discount.
A.
B.
C.
D.
E.
cash
purchase
collection
market
receivables
Ross - Chapter 021 #6
SECTION: 21.2
TOPIC: CASH DISCOUNT
TYPE: DEFINITIONS
7. The basic evidence of indebtedness is called the:
A.
B.
C.
D.
E.
account document.
sales draft.
credit instrument.
commercial paper.
letter of debt.
Ross - Chapter 021 #7
SECTION: 21.2
TOPIC: CREDIT INSTRUMENT
TYPE: DEFINITIONS
8. A graphical representation of the sum of the carrying costs and the opportunity costs of a chosen
credit policy is called the:
A.
B.
C.
D.
E.
opportunity cost curve.
credit extension curve.
credit cost curve.
terms of sale graph.
economic order quantity graph.
Ross - Chapter 021 #8
SECTION: 21.4
TOPIC: CREDIT COST CURVE
TYPE: DEFINITIONS
9. A captive finance company is:
A. a wholly-owned subsidiary that handles the credit function for the parent firm.
B. controlled disbursements company which controls the accounts payables for the parent firm.
C. a wholly-owned subsidiary which handles all the long-term debt obligations of the parent firm.
D. a loan company which provides financing strictly to a particular industry, such as retail furniture
stores.
E. a consumer loan company which operates in one clearly defined and limited geographic area.
Ross - Chapter 021 #9
SECTION: 21.4
TOPIC: CAPTIVE FINANCE COMPANY
TYPE: DEFINITIONS
10. The basic factors to be evaluated in the credit evaluation process, the five Cs of credit, are:
A.
B.
C.
D.
E.
conditions, control, cessation, capital, and capacity.
conditions, character, capital, control, and capacity.
capital, collateral, control, character, and capacity.
character, capacity, control, cessation, and collateral.
character, capacity, capital, collateral, and conditions.
Ross - Chapter 021 #10
SECTION: 21.5
TOPIC: FIVE Cs OF CREDIT
TYPE: DEFINITIONS
11. What is the process of quantifying the likelihood of default when granting consumer credit called?
A.
B.
C.
D.
E.
credit scoring
credit capacity
receipts assessment
conditions for credit
consumer analysis
Ross - Chapter 021 #11
SECTION: 21.5
TOPIC: CREDIT SCORING
TYPE: DEFINITIONS
12. A compilation of a firm's accounts receivables segmented by the length of time each account has
remained unpaid is called a(n):
A.
B.
C.
D.
E.
credit report.
aging schedule.
risk assessment report.
turnover delineation.
receivables consolidation and consistency report.
Ross - Chapter 021 #12
SECTION: 21.6
TOPIC: AGING SCHEDULE
TYPE: DEFINITIONS
13. What is the restocking quantity that minimizes a firm's total inventory cost called?
A.
B.
C.
D.
E.
short order quantity
refill unit quantity
economic order quantity
minimum stock level
re-order limit
Ross - Chapter 021 #13
SECTION: 21.8
TOPIC: ECONOMIC ORDER QUANTITY
TYPE: DEFINITIONS
14. The procedures used to determine inventory levels for demand-dependent inventory types such as
work-in-progress and raw materials are called:
A.
B.
C.
D.
E.
first-in, first-out methods.
the Baumol model.
net working capital planning.
economic order procedures.
materials requirements planning.
Ross - Chapter 021 #14
SECTION: 21.8
TOPIC: MATERIALS REQUIREMENTS PLANNING
TYPE: DEFINITIONS
15. Which one of the following is a system for managing demand-dependent inventories that minimizes
the inventory holdings of a firm?
A.
B.
C.
D.
E.
just-in-time inventory
turnover planning
net working capital planning
inventory scoring
inventory ranking
Ross - Chapter 021 #15
SECTION: 21.8
TOPIC: JUST-IN-TIME INVENTORY
TYPE: DEFINITIONS
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.
B.
C.
D.
E.
I and III only
II and IV only
III and IV only
II, III, and IV only
I, II, III, and IV
Ross - Chapter 021 #16
SECTION: 21.1
TOPIC: TERMS OF SALE
TYPE: CONCEPTS
17. What is the primary purpose of credit analysis?
A.
B.
C.
D.
E.
determine the optimal credit period
establish the effectiveness of granting a cash discount
determine the optimal discount period, if any
access the frequency and amount of sales by customer
evaluate whether or not a customer will pay
Ross - Chapter 021 #17
SECTION: 21.1
TOPIC: CREDIT ANALYSIS
TYPE: CONCEPTS
18. The period of time which extends from the day a credit sale is made until the bank credits a firm's
account with the payment for that sale is known as the _____ period.
A.
B.
C.
D.
E.
float
cash collection
sales
accounts receivable
credit
Ross - Chapter 021 #18
SECTION: 21.1
TOPIC: ACCOUNTS RECEIVABLE PERIOD
TYPE: CONCEPTS
19. Which one of the following will increase a firm's investment in accounts receivables?
A.
B.
C.
D.
E.
a decrease in the number of days for which credit is granted
a decrease in credit sales
an increase in cash sales
a decrease in the average collection period
an increase in average daily credit sales
Ross - Chapter 021 #19
SECTION: 21.1
TOPIC: INVESTMENT IN RECEIVABLES
TYPE: CONCEPTS
20. A firm's total investment in receivables depends primarily on the firm's:
A.
B.
C.
D.
E.
total sales and cash discount period.
cash to credit sales ratio.
bad debt ratio.
average collection period and amount of credit sales.
amount of credit sales and cash discount percentage.
Ross - Chapter 021 #20
SECTION: 21.1
TOPIC: INVESTMENT IN RECEIVABLES
TYPE: CONCEPTS
21. Which one of the following time periods is included in the accounts receivable period but not in the
cash collection period?
A.
B.
C.
D.
E.
the period of time between the receipt of a check and the availability of those funds
time it takes a firm to process incoming receipts
period of time a check is in the mail
the amount of time that it takes a bank to credit a firm's account for a deposit made
period of time it takes an invoice to reach a customer by mail
Ross - Chapter 021 #21
SECTION: 21.1
TOPIC: INVESTMENT IN RECEIVABLES
TYPE: CONCEPTS
22. Which one of the following statements is correct if you purchase an item with credit terms of 1/5,
net 15?
A.
B.
C.
D.
E.
If you pay within 1 day, you will receive a 5 percent discount.
If you pay within 5 days, you will receive a 1 percent discount.
If you do not pay within 15 days, you will be charged interest at a 1.5 percent monthly rate.
If you pay within 15 days, you will receive a 1/5th percent discount.
You must pay the discounted amount within 15 days.
Ross - Chapter 021 #22
SECTION: 21.2
TOPIC: TERMS OF SALE
TYPE: CONCEPTS
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.
B.
C.
D.
E.
store A
store B
store C
store D
store E
Ross - Chapter 021 #23
SECTION: 21.2
TOPIC: TERMS OF SALE
TYPE: CONCEPTS
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 do not plan on
taking advantage of the discount?
A.
B.
C.
D.
E.
store A
store B
store C
store D
store E
Ross - Chapter 021 #24
SECTION: 21.2
TOPIC: TERMS OF SALE
TYPE: CONCEPTS
25. Which one of the following statements is correct concerning the credit period?
A.
B.
C.
D.
E.
The credit period begins when the discount period ends.
The discount period is the length of time granted to a customer to pay for a purchase.
The credit period begins on the invoice date.
With terms of 2/10, net 30, the net credit period is 20 days.
With EOM dating, all sales are assumed to have occurred on the 15th of each month.
Ross - Chapter 021 #25
SECTION: 21.2
TOPIC: CREDIT PERIOD
TYPE: CONCEPTS
26. Which two of the following are the key considerations when setting the length of the credit period
for a customer?
I. seller's operating cycle
II. customer's operating cycle
III. seller's inventory period
IV. customer's inventory period
A.
B.
C.
D.
E.
I and II
II and III
III and IV
II and IV
I and IV
Ross - Chapter 021 #26
SECTION: 21.2
TOPIC: CREDIT PERIOD
TYPE: CONCEPTS
27. Which one of the following factors tends to favor longer credit periods?
A.
B.
C.
D.
E.
high consumer demand
lower priced merchandise
increased credit risk
merchandise with low collateral value
increased competition
Ross - Chapter 021 #27
SECTION: 21.2
TOPIC: CREDIT PERIOD
TYPE: CONCEPTS
28. Which one of the following statements is correct concerning credit periods?
A.
B.
C.
D.
E.
Perishable items tend to have longer credit periods.
Items with low markups tend to have longer credit periods.
Smaller accounts tend to have longer credit periods.
A firm may offer different credit terms to different customers.
Newer products tend to have shorter credit periods.
Ross - Chapter 021 #28
SECTION: 21.2
TOPIC: CREDIT PERIOD
TYPE: CONCEPTS
29. A cash discount of 3/15, net 45:
A.
B.
C.
D.
E.
grants customers 45 days to pay after the discount period expires.
discourages customers from paying early.
grants free credit for a period of 45 days.
charges higher prices if a customer pays cash at the time of purchase.
grants customers 45 days to pay if they forfeit the discount.
Ross - Chapter 021 #29
SECTION: 21.2
TOPIC: DISCOUNTS
TYPE: CONCEPTS
30. Under credit terms of 2/10, net 25, customers should:
A. always pay on the 25th day.
B. take the 10 percent discount and pay immediately.
C. take the discount and pay on the 2nd day.
D. either take the discount or pay on the 25th day.
E. both take the discount and pay on the 25th day.
Ross - Chapter 021 #30
SECTION: 21.2
TOPIC: DISCOUNTS
TYPE: CONCEPTS
31. A 2/10, net 30 credit policy:
A.
B.
C.
D.
E.
is an expensive form of short-term credit if a buyer foregoes the discount.
provides cheap financing to the buyer for 30 days.
is an inexpensive means of reducing the seller's collection period if everyone takes the discount.
tends to have little effect on the seller's collection period due to the high effective interest rate.
tends to increase a firm's investment in receivables as compared to a straight net 30 policy.
Ross - Chapter 021 #31
SECTION: 21.2
TOPIC: COST OF CREDIT
TYPE: CONCEPTS
32. Tressler's offers trade discount with terms of 2/5, EOM. When are invoices with these terms due?
A.
B.
C.
D.
Invoices are due on the last day of the month in which the purchase occurred.
Invoices are due on the last day of the month following the month of purchase.
Invoices are due five days after the purchase date.
Invoices are due on the 5th of the month following the month of purchase.
E. Invoices are due on the 5th of the month following the month of purchase if you want the discount,
otherwise, the invoices are due at the end of the month following the month of purchase.
Ross - Chapter 021 #32
SECTION: 21.2
TOPIC: TRADE DISCOUNT
TYPE: CONCEPTS
33. Which one of the following credit instruments is commonly used in international commerce?
A.
B.
C.
D.
E.
open account
sight draft
time draft
banker's acceptance
promissory note
Ross - Chapter 021 #33
SECTION: 21.2
TOPIC: CREDIT INSTRUMENTS
TYPE: CONCEPTS
34. A conditional sales contract:
A.
B.
C.
D.
E.
passes title to the goods sold to the buyer at the time the contract is signed.
normally calls for one lump sum payment on the contract payment date.
generally has a built in interest cost.
is payable immediately upon receipt.
is a formal bid for a project.
Ross - Chapter 021 #34
SECTION: 21.2
TOPIC: CREDIT INSTRUMENTS
TYPE: CONCEPTS
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 borrowing if it decides to grant credit to its customers.
A.
B.
C.
D.
E.
I, II, and III only
II, III, and IV only
I, III, and IV only
I, II, and IV only
I, II, III, and IV
Ross - Chapter 021 #35
SECTION: 21.3
TOPIC: CREDIT POLICY EFFECTS
TYPE: CONCEPTS
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.
B.
C.
D.
E.
zero.
your selling price per unit.
your selling price per unit multiplied by -1.
your selling price per unit multiplied by -30.
your total monthly sales multiplied by -1.
Ross - Chapter 021 #36
SECTION: 21.3
TOPIC: EVALUATING CREDIT POLICY
TYPE: CONCEPTS
37. The optimal amount of credit would equate the incremental costs of carrying the increase in
accounts receivable to the incremental:
A.
B.
C.
D.
E.
decrease in the cash cycle.
benefit from decreasing the inventory level.
cash flows from increased sales.
increase in bad debts.
gain in net profits.
Ross - Chapter 021 #37
SECTION: 21.4
TOPIC: OPTIMAL AMOUNT OF CREDIT
TYPE: CONCEPTS
38. When credit policy is at the optimal point, the:
A.
B.
C.
D.
E.
total costs of granting credit will be maximized.
carrying costs of credit will be equal to zero.
opportunity cost of credit will be equal to zero.
carrying costs will equal the opportunity costs.
total costs will equal the opportunity costs.
Ross - Chapter 021 #38
SECTION: 21.4
TOPIC: OPTIMAL CREDIT POLICY
TYPE: CONCEPTS
39. If you extend credit to a one-time new customer you risk an amount equal to:
A.
B.
C.
D.
E.
the sales price of the item sold.
the variable cost of the item sold.
the fixed cost of the item sold.
the profit margin on the item sold.
zero.
Ross - Chapter 021 #39
SECTION: 21.5
TOPIC: CREDIT ANALYSIS
TYPE: CONCEPTS
40. Which one of the following statements is correct?
A. If the majority of your 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 is not indicative of their future payment history.
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 you are willing
to ever extend to that customer as their initial credit limit.
Ross - Chapter 021 #40
SECTION: 21.5
TOPIC: CREDIT ANALYSIS
TYPE: CONCEPTS
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.
B.
C.
D.
E.
I and III only
II and IV only
I and II only
I, II, and III only
I, II, III, and IV
Ross - Chapter 021 #41
SECTION: 21.5
TOPIC: CREDIT INFORMATION
TYPE: CONCEPTS
42. When evaluating the creditworthiness of a customer, the term character refers to the:
A.
B.
C.
D.
E.
nature of the cash flows of the customer's business.
customer's financial resources.
types of assets the customer wants to pledge as collateral.
customer's willingness to pay bills in a timely fashion.
nature of the customer's line of work.
Ross - Chapter 021 #42
SECTION: 21.5
TOPIC: FIVE Cs OF CREDIT
TYPE: CONCEPTS
43. Which one of the five Cs of credit refers to a firm's financial reserves?
A.
B.
C.
D.
E.
character
capacity
collateral
conditions
capital
Ross - Chapter 021 #43
SECTION: 21.5
TOPIC: FIVE Cs OF CREDIT
TYPE: CONCEPTS
44. Which one of the five Cs of credit refers to the general economic situation in the customer's line of
business?
A.
B.
C.
D.
E.
capacity
character
conditions
capital
collateral
Ross - Chapter 021 #44
SECTION: 21.5
TOPIC: FIVE Cs OF CREDIT
TYPE: CONCEPTS
45. Which one of the following statements is correct?
A. An aging schedule helps identify which customers are the most delinquent.
B. The percentage of total receivables that fall 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.
Ross - Chapter 021 #45
SECTION: 21.6
TOPIC: COLLECTION POLICY
TYPE: CONCEPTS
46. Which one of the following inventory items is probably the least liquid?
A.
B.
C.
D.
E.
bricks held in inventory by a home builder
a garden tractor held in inventory by a home improvements retail outlet
a partially assembled motor for a tractor
cut logs owned by a timber mill
satellite radio systems held in inventory by a car manufacturer
Ross - Chapter 021 #46
SECTION: 21.7
TOPIC: INVENTORY TYPES
TYPE: CONCEPTS
47. Which one of the following inventory items is probably the most liquid?
A.
B.
C.
D.
E.
a custom made set of kitchen cabinets
metal cabinets for dishwashers
corn held in a storage facility
customized drilling press
a partially built new home
Ross - Chapter 021 #47
SECTION: 21.7
TOPIC: INVENTORY TYPES
TYPE: CONCEPTS
48. Which one of the following inventory-related costs is considered a shortage cost?
A.
B.
C.
D.
E.
storage costs
insurance cost
cost of safety reserves
obsolescence cost
opportunity cost of capital used for inventory purchases
Ross - Chapter 021 #48
SECTION: 21.7
TOPIC: INVENTORY COSTS
TYPE: CONCEPTS
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.
Ross - Chapter 021 #49
SECTION: 21.8
TOPIC: INVENTORY MANAGEMENT TECHNIQUES
TYPE: CONCEPTS
50. The economic order quantity model is designed to determine how much:
A.
B.
C.
D.
E.
total inventory a firm needs in any one year.
total inventory costs will be for any one year.
inventory should be purchased at a time.
inventory will be sold per day.
a firm loses in sales per day when an inventory item is depleted.
Ross - Chapter 021 #50
SECTION: 21.8
TOPIC: ECONOMIC ORDER QUANTITY (EOQ)
TYPE: CONCEPTS
51. At the optimal order quantity size, the:
A.
B.
C.
D.
E.
total cost of holding inventory is fully offset by the restocking costs.
carrying costs are equal to zero.
restocking costs are equal to zero.
the total costs equal the carrying costs.
the carrying costs equal the restocking costs.
Ross - Chapter 021 #51
SECTION: 21.8
TOPIC: ECONOMIC ORDER QUANTITY (EOQ)
TYPE: CONCEPTS
52. The economic order quantity model is designed to minimize:
A.
B.
C.
D.
E.
production costs.
inventory obsolescence.
the carrying costs of inventory.
the costs of replenishing inventory.
the total costs of holding inventory.
Ross - Chapter 021 #52
SECTION: 21.8
TOPIC: ECONOMIC ORDER QUANTITY (EOQ)
TYPE: CONCEPTS
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. steering wheels used by an auto manufacturer
C. shoes on display in a retail store
D. toys ready to be shipped to toy stores
E. wheat harvested by a farmer
Ross - Chapter 021 #53
SECTION: 21.8
TOPIC: DERIVED-DEMAND INVENTORY
TYPE: CONCEPTS
54. Inventory needs under a derived-demand inventory system are:
A.
B.
C.
D.
E.
primarily dependent upon the competitive demands placed on a firm's suppliers.
based on the anticipated demand for the finished product.
based on minimizing the cost of restocking inventory.
held constant over time.
determined by a kanban system.
Ross - Chapter 021 #54
SECTION: 21.8
TOPIC: DERIVED-DEMAND INVENTORY
TYPE: CONCEPTS
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.
B.
C.
D.
E.
I and III only
II and IV only
I, II, and IV only
II, III, and IV only
I, II, III, and IV
Ross - Chapter 021 #55
SECTION: 21.8
TOPIC: JUST-IN-TIME INVENTORY
TYPE: CONCEPTS
56. The incremental investment in receivables under the accounts receivable approach is equal to:
A.
B.
C.
D.
E.
Ross - Chapter 021 #56
SECTION: 21.A
TOPIC: ACCOUNTS RECEIVABLE APPROACH
TYPE: CONCEPTS
57. The accounts receivable approach supports the theory that:
A. your risk of offering credit to a new customer is limited to your cost of the items sold.
B. the best credit policy is an all-cash policy.
C. the cost of offering credit to a new customer is the same as the cost of offering credit to an existing
customer.
D. 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.
Ross - Chapter 021 #57
SECTION: 21.A
TOPIC: ACCOUNTS RECEIVABLE APPROACH
TYPE: CONCEPTS
58. Which two of the following are the key elements in determining whether or not a switch from a nocredit policy to a credit policy is advisable?
I. variable cost per unit
II. cash discount percentage
III. credit price
IV. default rate
A.
B.
C.
D.
E.
I and III only
II and IV only
II and III only
I, II, and IV only
II, III, and IV only
Ross - Chapter 021 #58
SECTION: 21.A
TOPIC: NPV OF SWITCH
TYPE: CONCEPTS
59. On average your firm sells $26,500 of items on credit each day. Your average operating cycle is 51
days and your firm acquires and sells inventory on average every 19 days. What is your average
accounts receivable balance?
A.
B.
C.
D.
E.
$503,500
$848,000
$1,012,500
$1,315,500
$1,855,000
Accounts receivable balance = $26,500
(51
19) = $848,000
AACSB TOPIC: ANALYTIC
Ross - Chapter 021 #59
SECTION: 21.1
TOPIC: ACCOUNTS RECEIVABLE BALANCE
TYPE: PROBLEMS
60. You just purchased $8,700 of goods from your supplier with credit terms of 3/10, net 30. What is the
discounted price?
A.
B.
C.
D.
$6,090
$6,960
$7,830
$8,439
E. $8,911
Discounted price = $8,700
(1
.03) = $8,439
AACSB TOPIC: ANALYTIC
Ross - Chapter 021 #60
SECTION: 21.2
TOPIC: ACCOUNTS RECEIVABLE DISCOUNTS
TYPE: PROBLEMS
61. Today, August 5, Solomon, Inc. bought $22,000 worth of merchandise from a supplier. The credit
terms are 2/8, net 25. By what day does Solomon, Inc. have to make the payment to receive the
discount?
A.
B.
C.
D.
E.
August 7
August 13
August 22
August 28
August 30
End of discount period = August 5 + 8 days = August 13
AACSB TOPIC: ANALYTIC
Ross - Chapter 021 #61
SECTION: 21.2
TOPIC: ACCOUNTS RECEIVABLE DISCOUNTS
TYPE: PROBLEMS
62. Your supplier grants you credit terms of 2/10, net 35. What is the effective annual rate of the
discount if you purchase $2,900 worth of merchandise?
A.
B.
C.
D.
E.
23.5 percent
27.7 percent
28.8 percent
33.5 percent
34.3 percent
Days in period = 35
10 = 25; Periods per year = 365 / 25 = 14.6; Interest rate for 30 days = [.02
$2,900] / [(1 .02) $2,900] = $58 / $2,842 = .02041; Effective annual rate = (1 + .02041)
= .3431 = 34.3 percent
14.6
1
AACSB TOPIC: ANALYTIC
Ross - Chapter 021 #62
SECTION: 21.2
TOPIC: ACCOUNTS RECEIVABLE DISCOUNTS
TYPE: PROBLEMS
63. Your firm currently sells 500 units a month at a price of $75 a unit. You think you can increase your
sales by an additional 130 units if you switch to a net 30 credit policy. The monthly interest rate is .4
percent and your variable cost per unit is $35. What is the incremental cash inflow from the
proposed credit policy switch?
A. $1,800
B. $2,400
C. $3,600
D. $5,200
E. $6,000
Incremental cash flow = ($75
$35)
130 = $5,200
AACSB TOPIC: ANALYTIC
Ross - Chapter 021 #63
SECTION: 21.3
TOPIC: CREDIT POLICY SWITCH
TYPE: PROBLEMS
64. Your firm currently sells 215 units a month at a price of $90 a unit. You think you can increase your
sales by an additional 45 units if you switch to a net 30 credit policy. The monthly interest rate is .5
percent and your variable cost per unit is $60. What is the net present value of the proposed credit
policy switch?
A.
B.
C.
D.
E.
$247,950
$250,650
$255,050
$267,300
$274,350
NPV = -[($90
215) + ($60
45)] + [($90 - $60)
45] / .005 = $247,950
AACSB TOPIC: ANALYTIC
Ross - Chapter 021 #64
SECTION: 21.3
TOPIC: CREDIT POLICY SWITCH
TYPE: PROBLEMS
65. Currently, your firm sells 170 units a month at a price of $140 a unit. You think you can increase
your sales by an additional 30 units if you switch to a net 30 credit policy. The monthly interest rate
is .6 percent and your variable cost per unit is $100. What is the net present value of the proposed
credit policy switch?
A.
B.
C.
D.
E.
$173,200
$187,200
$190,200
$197,000
$200,000
NPV = -[($140
170) + ($100
30)] + [($140
$100)
30] / .006 = $173,200
AACSB TOPIC: ANALYTIC
Ross - Chapter 021 #65
SECTION: 21.3
TOPIC: CREDIT POLICY SWITCH
TYPE: PROBLEMS
66. Currently, Tyler Enterprises sells 350 units a month at a price of $42 a unit. The company thinks
they can increase sales by an additional 100 units if they switch to a net 30 credit policy. The
monthly interest rate is .4 percent and the variable cost per unit is $22. What is the incremental cash
inflow of the proposed credit policy switch?
A.
B.
C.
D.
E.
$1,480
$2,000
$2,200
$2,520
$4,200
Incremental cash flow = ($42
$22)
100 = $2,000
AACSB TOPIC: ANALYTIC
Ross - Chapter 021 #66
SECTION: 21.3
TOPIC: CREDIT POLICY SWITCH
TYPE: PROBLEMS
67. Your company currently sells a product with a variable cost per unit of $16 and a unit selling price
of $31. At the present time, your company only sells on a cash basis and has monthly sales of 310
units. The monthly interest rate is 2 percent. Your company is considering switching to a net 30
credit policy. What is the switch break-even point?
A.
B.
C.
D.
E.
312 units
316 units
320 units
323 units
329 units
Switch break-even point = Q¢
Q¢ = 310 + 13 = 323 units
310 = ($31
310) / {[($31
$16) / .02]
$16} = 13.09 = 13 units;
AACSB TOPIC: ANALYTIC
Ross - Chapter 021 #67
SECTION: 21.3
TOPIC: SWITCH BREAK-EVEN POINT
TYPE: PROBLEMS
68. The Gardeners Co. currently sells 1,800 units a month for total monthly sales of $79,200. The
company is considering replacing its current cash only credit policy with a net 30 policy. The
variable cost per unit is $34 and the monthly interest rate is 1.7 percent. What is the switch breakeven level of sales?
A.
B.
C.
D.
E.
1,943 units
2,017 units
2,108 units
2,406 units
2,548 units
Switch break-even point = Q¢ 1,800 = ($79,200) / {[(($79,200 / 1,800) - $34) / .017] - $34} =
142.90 = 143 units; Q¢ = 143 + 1,800 = 1,943 units
AACSB TOPIC: ANALYTIC
Ross - Chapter 021 #68
SECTION: 21.3
TOPIC: SWITCH BREAK-EVEN POINT
TYPE: PROBLEMS
69. Stamford, Inc. currently sells 8,350 units a month for total monthly sales of $179,500. The company
is considering replacing its current cash only credit policy with a net 30 policy. The variable cost per
unit is $6.23 and the monthly interest rate is 2 percent. What is the switch break-even level of sales?
A.
B.
C.
D.
E.
8,416 units
8,517 units
8,587 units
8,606 units
8,686 units
Switch break-even point = Q¢ 8,350 = ($179,500) / {[(($179,500 / 8,350) - $6.23) / .02] - $6.23} =
237.08 = 237 units; Q¢ = 237 + 8,350 = 8,587 units
AACSB TOPIC: ANALYTIC
Ross - Chapter 021 #69
SECTION: 21.3
TOPIC: SWITCH BREAK-EVEN POINT
TYPE: PROBLEMS
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 20 percent chance this person will never pay you. The sales price of the item
the customer wants to buy is $136. Your variable cost on that item is $94 and your monthly interest
rate is 2.5 percent. Should you grant credit to this customer? Why or why not?
A.
B.
C.
D.
E.
yes; because the net present value of the potential sale is $12
yes; because the net present value of the potential sale is $39
no; because the net present value of the potential sale is -$44
no; because the net present value of the potential sale is -$2
doesn't matter; because the NPV of the potential sale is zero
NPV = -$94 + (1 - .20)
[$136 / (1 + .025)] = $12.15 = $12
AACSB TOPIC: ANALYTIC
Ross - Chapter 021 #70
SECTION: 21.5
TOPIC: ONE-TIME SALE
TYPE: PROBLEMS
71. You are considering a temporary opening of a kiosk in the local mall. Any sale you make will be a
one-time sale. There is only a 45 percent chance that you will collect your money on a credit sale.
The product you want to sell has a variable cost of $4.10 and a sales price of $5.75. The monthly
interest rate is 1.3 percent. Should you offer people 30 days to pay? Why or why not?
A.
B.
C.
D.
E.
yes; because you will earn $2.23 on every credit sale you make
yes; because you will earn $5.68 on every credit sale you make
no; because the net present value of the potential sale is -$1.55
no; because the net present value of the potential sale is -$.98
it doesn't matter; because the present value of the potential sale is $0
NPV = -$4.10 + (1
.45)
[$5.75 / (1 + .013)] = -$.98
AACSB TOPIC: ANALYTIC
Ross - Chapter 021 #71
SECTION: 21.5
TOPIC: ONE-TIME SALE
TYPE: PROBLEMS
72. You are trying to attract new customers that you feel could become repeat customers. The average
price of the items you sell is $93 with a $70 variable cost. Your monthly interest rate is 2.1 percent.
Your experience tells you that 10 percent of these customers will never pay their bill. What is the
value of a new customer who does not default on their bill?
A.
B.
C.
D.
E.
$986
$1,095
$2,617
$3,333
$4,429
PV = ($93
$70) / .021 = $1,095.24 = $1,095
AACSB TOPIC: ANALYTIC
Ross - Chapter 021 #72
SECTION: 21.5
TOPIC: REPEAT SALE
TYPE: PROBLEMS
73. You are trying to attract new customers that you feel could become repeat customers. The average
price of the items you sell is $93 with a $70 variable cost. Your monthly interest rate is 2.1 percent.
Your experience tells you that 10 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.
B.
C.
D.
E.
yes; because the net present value of extending credit is $40
yes; because the net present value of extending credit is $916
no; because the net present value of extending credit is -$1,025
no; because the net present value of extending credit is -$59
it doesn't matter; because the present value of extending credit is $0
NPV = -$70 + (1
.10)
[($93
$70) / .021] = $915.71 = $916
AACSB TOPIC: ANALYTIC
Ross - Chapter 021 #73
SECTION: 21.5
TOPIC: REPEAT SALE
TYPE: PROBLEMS
74. You sell 7,000 units of an item each year. The carrying cost per unit is $1.10 and the fixed costs per
order are $75. What is the economic order quantity?
A.
B.
C.
D.
E.
691 units
713 units
859 units
977 units
1,025 units
EOQ =
(2
7,000
$75) / $1.10 =
954,545.45 = 977.008 = 977 units
AACSB TOPIC: ANALYTIC
Ross - Chapter 021 #74
SECTION: 21.8
TOPIC: ECONOMIC ORDER QUANTITY (EOQ)
TYPE: PROBLEMS
75. The most fashionable pair of roller skates sells for $45.99 a pair. Your store consistently sells 8,500
pairs of these roller skates year after year. The fixed costs to order more of this item is $70 and the
carrying costs are $2.80 per pair. What is the economic order quantity?
A.
B.
C.
D.
E.
184 units
309 units
461 units
525 units
652 units
EOQ =
(2
8,500
$70) / $2.80 =
425,000 = 651.92 = 652 units
AACSB TOPIC: ANALYTIC
Ross - Chapter 021 #75
SECTION: 21.8
TOPIC: ECONOMIC ORDER QUANTITY (EOQ)
TYPE: PROBLEMS
76. One of the best selling items your firm offers sells for $19.99 a unit. The variable cost per unit is
$11.59 and the carrying cost per unit is $.58. You sell 10,415 of these units each year. The fixed cost
to order this item is $65. What is the economic order quantity?
A.
B.
C.
D.
E.
1,080 units
1,314 units
1,528 units
1,773 units
1,946 units
EOQ =
(2
10,415
$65) / $.58 =
2,334,396.55 = 1,527.87 = 1,528 units
AACSB TOPIC: ANALYTIC
Ross - Chapter 021 #76
SECTION: 21.8
TOPIC: ECONOMIC ORDER QUANTITY (EOQ)
TYPE: PROBLEMS
77. Each year you sell 1,200 units of a product at a price of $59.99 each. The variable cost per unit is
$37.91 and the carrying cost per unit is $4.57. You have been buying 175 units at a time. Your fixed
cost of ordering is $80. What is the economic order quantity?
A.
B.
C.
D.
E.
185 units
195 units
205 units
215 units
225 units
EOQ =
(2
1,200
$80) / $4.57 =
42,013.13 = 204.97 = 205 units
AACSB TOPIC: ANALYTIC
Ross - Chapter 021 #77
SECTION: 21.8
TOPIC: ECONOMIC ORDER QUANTITY (EOQ)
TYPE: PROBLEMS
78. Your firm currently has a cash sales only policy. Under this policy, you sell 290 units a month at a
price of $160 a unit. Your variable cost per unit is $104 and your carrying cost per unit is $2.70. The
monthly interest rate is 1.1 percent. You think that you can increase your sales to 350 units a month
if you institute a net 30 credit policy. What is the net present value of the switch using the one-shot
approach?
A.
B.
C.
D.
E.
$228,400
$248,709
$252,814
$282,233
$285,902
Monthly benefit = [($160 350) / 1.011] ($104 350) [($160 $104) 290] = $55,390.70
$36,400 $16,240 = $2,750.70; NPV of switch = $2,750.70 + ($2,750.70 / .011) = $252,814
AACSB TOPIC: ANALYTIC
Ross - Chapter 021 #78
SECTION: 21.A
TOPIC: ONE-SHOT APPROACH
TYPE: PROBLEMS
79. Under your current cash sales only policy you sell 170 units a month at a price of $25. Your variable
cost per unit is $18 and your monthly interest rate is 2 percent. Based on a recent survey, you believe
that you can sell an additional 40 units per month if you offer a net 30 credit policy. What is the net
present value of the switch using the one-shot approach?
A.
B.
C.
D.
E.
$5,044
$6,970
$7,584
$8,853
$9,030
Monthly benefit = [($25
$3,780
(170 + 40)) / 1.02]
($18
(170 + 40))
[($25
$18)
170] = $5,147.06
$1,190 = $177.06; NPV of switch = $177.06 + ($177.06 / .02) = $9,030
AACSB TOPIC: ANALYTIC
Ross - Chapter 021 #79
SECTION: 21.A
TOPIC: ONE-SHOT APPROACH
TYPE: PROBLEMS
80. Under your current cash sales only policy you sell 110 units a month for a total sales value of
$7,590. Your variable cost per unit is $38 and your monthly interest rate is 1.7 percent. Based on a
recent survey, you believe that you can sell an additional 30 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.
B.
C.
D.
$45,976
$47,116
$49,081
$50,224
E. $53,566
AACSB TOPIC: ANALYTIC
Ross - Chapter 021 #80
SECTION: 21.A
TOPIC: ACCOUNTS RECEIVABLE APPROACH
TYPE: PROBLEMS
81. You are currently selling 60 units a month at a price of $195 a unit. Your variable cost of each unit
is $145. 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 100 units per month. Your monthly interest rate is 1.5 percent. What
is the net present value of this proposed switch using the accounts receivable approach?
A.
B.
C.
D.
E.
$115,833
$126,667
$133,333
$145,667
$152,833
AACSB TOPIC: ANALYTIC
Ross - Chapter 021 #81
SECTION: 21.A
TOPIC: ACCOUNTS RECEIVALBE APPROACH
TYPE: PROBLEMS
82. Your current sales consist of 25 units per month at a price of $200 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 $215 a unit. If you make the
switch you do not expect your total monthly sales quantity to change but you do expect a 2 percent
default rate. The monthly interest rate is 2.5 percent. What is the net present value of the proposed
credit policy switch?
A.
B.
C.
D.
E.
$0
$5,000
$5,700
$10,000
$10,700
d = ($215 - $200) / $215 = .069767442
NPV = -($200 25) + {($215 25) [(.069767442 - .02) / .025]} = -$5,000 + $10,700 = $5,700
AACSB TOPIC: ANALYTIC
Ross - Chapter 021 #82
SECTION: 21.A
TOPIC: DISCOUNTS AND DEFAULT RISK
TYPE: PROBLEMS
83. Your current sales consist of 25 units per month at a price of $200 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 $215 a unit. The monthly
interest rate is 2 percent. What is the break-even default rate of the proposed switch?
A.
B.
C.
D.
E.
4.48 percent
4.59 percent
4.65 percent
4.97 percent
5.12 percent
d = ($215
percent
$200) / $215 = .069767442; π = .069767442
.02
(1
.069767442) = .05116 = 5.12
AACSB TOPIC: ANALYTIC
Ross - Chapter 021 #83
SECTION: 21.A
TOPIC: DISCOUNTS AND DEFAULT RISK
TYPE: PROBLEMS
Essay Questions
84. Which do you feel is the more appropriate upper limit for the credit period which 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.
AACSB TOPIC: REFLECTIVE THINKING
Ross - Chapter 021 #84
SECTION: 21.2
TOPIC: LENGTH OF CREDIT PERIOD
85. 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 or not is debatable, but this practice occurs fairly
frequently.
AACSB TOPIC: REFLECTIVE THINKING AND ETHICS
Ross - Chapter 021 #85
SECTION: 21.2
TOPIC: ETHICS AND THE CREDIT PERIOD
86. Why might firms forego discounts 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 they have inadequate cash flow to take them. 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 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, any
of the cash and liquidity management policies discussed earlier in the text would help the situation if the
firm is able to enhance its liquidity and cash flow.
AACSB TOPIC: REFLECTIVE THINKING
Ross - Chapter 021 #86
SECTION: 21.2
TOPIC: DISCOUNTS
87. All else equal, it is likely that firms with (1) excess capacity, (2) low variable costs, and (3) repeat
customers will extend credit more liberally than others. Why?
Firms with excess capacity will likely extend credit more liberally as a means to increase sales and
capacity usage. 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 their
customers' character and credit needs, thereby facilitating more liberal credit terms.
AACSB TOPIC: REFLECTIVE THINKING
Ross - Chapter 021 #87
SECTION: 21.4
TOPIC: LIBERAL CREDIT TERMS
ch21 Summary
Category
# of Questions
AACSB TOPIC: ANALYTIC
AACSB TOPIC: REFLECTIVE THINKING
AACSB TOPIC: REFLECTIVE THINKING AND ETHICS
Ross - Chapter 021
SECTION: 21.1
SECTION: 21.2
SECTION: 21.3
SECTION: 21.4
SECTION: 21.5
SECTION: 21.6
SECTION: 21.7
SECTION: 21.8
SECTION: 21.A
TOPIC: ACCOUNTS RECEIVABLE APPROACH
TOPIC: ACCOUNTS RECEIVABLE BALANCE
TOPIC: ACCOUNTS RECEIVABLE DISCOUNTS
TOPIC: ACCOUNTS RECEIVABLE PERIOD
TOPIC: ACCOUNTS RECEIVALBE APPROACH
TOPIC: AGING SCHEDULE
TOPIC: CAPTIVE FINANCE COMPANY
TOPIC: CASH DISCOUNT
TOPIC: COLLECTION POLICY
TOPIC: COST OF CREDIT
TOPIC: CREDIT ANALYSIS
TOPIC: CREDIT COST CURVE
TOPIC: CREDIT INFORMATION
TOPIC: CREDIT INSTRUMENT
TOPIC: CREDIT INSTRUMENTS
TOPIC: CREDIT PERIOD
TOPIC: CREDIT POLICY EFFECTS
TOPIC: CREDIT POLICY SWITCH
TOPIC: CREDIT SCORING
TOPIC: DERIVED-DEMAND INVENTORY
TOPIC: DISCOUNTS
TOPIC: DISCOUNTS AND DEFAULT RISK
TOPIC: ECONOMIC ORDER QUANTITY
TOPIC: ECONOMIC ORDER QUANTITY (EOQ)
TOPIC: ETHICS AND THE CREDIT PERIOD
TOPIC: EVALUATING CREDIT POLICY
25
3
1
87
10
23
9
5
12
2
3
14
9
3
1
3
1
1
1
1
1
2
1
4
1
1
1
2
5
1
4
1
2
3
2
1
7
1
1
TOPIC: FIVE Cs OF CREDIT
TOPIC: INVENTORY COSTS
TOPIC: INVENTORY MANAGEMENT TECHNIQUES
TOPIC: INVENTORY TYPES
TOPIC: INVESTMENT IN RECEIVABLES
TOPIC: INVOICE
TOPIC: JUST-IN-TIME INVENTORY
TOPIC: LENGTH OF CREDIT PERIOD
TOPIC: LIBERAL CREDIT TERMS
TOPIC: MATERIALS REQUIREMENTS PLANNING
TOPIC: NPV OF SWITCH
TOPIC: ONE-SHOT APPROACH
TOPIC: ONE-TIME SALE
TOPIC: OPTIMAL AMOUNT OF CREDIT
TOPIC: OPTIMAL CREDIT POLICY
TOPIC: REPEAT SALE
TOPIC: SWITCH BREAK-EVEN POINT
TOPIC: TERMS OF SALE
TOPIC: TRADE DISCOUNT
TYPE: CONCEPTS
TYPE: DEFINITIONS
TYPE: PROBLEMS
4
1
1
2
3
1
2
1
1
1
1
2
2
1
1
2
3
5
1
43
15
25