Question 1

What is the primary purpose of credit analysis?

Accepted Answer

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 payF) C) and D)
G) B) and E)

Question 2

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?

Accepted Answer

A)  store A
B)  store B
C)  store C
D)  store D
E)  store EF) All of the above
G) A) and D)

Question 3

A 2/10, net 30 credit policy:

Accepted Answer

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.F) C) and D)
G) A) and C)

Question 4

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?

Accepted Answer

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.F) A) and C)
G) A) and D)

Question 5

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?

Accepted Answer

A)  48.69
B)  51.71
C)  54.20
D)  61.10
E)  64.50F) C) and D)
G) B) and D)

Question 6

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?

Accepted Answer

A)  store A
B)  store B
C)  store C
D)  store D
E)  store EF) B) and D)
G) A) and E)

Question 7

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.

Accepted Answer

Firms with excess capacity are more apt ...

Question 8

The Winter Store just purchased $48,300 of goods from its supplier with credit terms of 1/10, net 25. What is the discounted price?

Accepted Answer

A)  $43,470
B)  $46,209
C)  $47,817
D)  $47,929
E)  $48,300F) C) and E)
G) C) and D)

Question 9

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 $4,600 worth of merchandise?

Accepted Answer

A)  27.24 percent
B)  27.86 percent
C)  28.80 percent
D)  29.03 percent
E)  29.27 percentF) A) and E)
G) All of the above

Question 10

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

Accepted Answer

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.F) B) and C)
G) B) and D)

Question 11

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 $67. What is the economic order quantity?

Accepted Answer

A)  374 units
B)  421 units
C)  497 units
D)  530 units
E)  623 unitsF) A) and D)
G) C) and D)

Question 12

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?

Accepted Answer

A)  credit department
B)  parent company
C)  captive finance company
D)  credit union
E)  service unitF) A) and E)
G) C) and D)

Question 13

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?

Accepted Answer

A)  $104,557
B)  $114,829
C)  $134,822
D)  $136,516
E)  $141,520F) D) and E)
G) A) and C)

Question 14

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 $148 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?

Accepted Answer

A)  $228,400
B)  $255,590
C)  $261,470
D)  $282,233
E)  $285,902F) B) and E)
G) A) and E)

Question 15

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?

Accepted Answer

A)  -$230,880
B)  -$118,420
C)  $311,508
D)  $428,997
E)  $566,840F) B) and C)
G) None of the above

Question 16

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:

Accepted Answer

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

Question 17

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?

Accepted Answer

A)  3.55 percent
B)  3.68 percent
C)  4.29 percent
D)  4.71 percent
E)  4.88 percentF) C) and E)
G) C) and D)

Question 18

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?

Accepted Answer

A)  November 3
B)  November 5
C)  November 7
D)  November 8
E)  November 30F) B) and C)
G) C) and D)

Question 19

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 7,100 of these units each year. The fixed cost to order this item is $75. What is the economic order quantity?

Accepted Answer

A)  690 units
B)  747 units
C)  975 units
D)  1,157 units
E)  1,260 unitsF) C) and D)
G) A) and D)

Question 20

Which one of the following statements is correct?

Accepted Answer

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

Exam 20: Credit and Inventory Management

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?

Correct Answer
verified

What is the primary purpose of credit analysis?

Correct Answer
verified

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?

Correct Answer
verified

Correct Answer
verified

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.

Correct Answer
verified
Firms with excess capacity are more apt ...
View Answer

Correct Answer
verified

Which one of the following statements is correct?

Correct Answer
verified

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?

Correct Answer
verified

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?

Correct Answer
verified

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 7,100 of these units each year. The fixed cost to order this item is $75. What is the economic order quantity?

Correct Answer
verified

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?

Correct Answer
verified

Correct Answer
verified

A 2/10, net 30 credit policy:

Correct Answer
verified

Correct Answer
verified

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 $4,600 worth of merchandise?

Correct Answer
verified

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 $67. What is the economic order quantity?

Correct Answer
verified

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

Correct Answer
verified

Correct Answer
verified

The Winter Store just purchased $48,300 of goods from its supplier with credit terms of 1/10, net 25. What is the discounted price?

Correct Answer
verified

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?

Correct Answer
verified

Exam 20: Credit and Inventory Management

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?

Correct AnswerverifiedShow Answer

What is the primary purpose of credit analysis?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedFirms with excess capacity are more apt ...View AnswerShow Answer

Correct AnswerverifiedShow Answer

Which one of the following statements is correct?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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 7,100 of these units each year. The fixed cost to order this item is $75. What is the economic order quantity?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A 2/10, net 30 credit policy:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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 $4,600 worth of merchandise?

Correct AnswerverifiedShow Answer

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 $67. What is the economic order quantity?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The Winter Store just purchased $48,300 of goods from its supplier with credit terms of 1/10, net 25. What is the discounted price?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
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Correct Answer
verified

Correct Answer
verified
Firms with excess capacity are more apt ...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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