Question 1

Gnome, Inc. institutes a policy of selling on credit for the ﬁrst time in the ﬁrm's history. Gnome ﬁnds, much to its dismay, that it must pay to produce the merchandise but it now experiences a delay in
Collection of revenues. Gnome's problem describes the ____________ factor of credit policy
Effects.

Accepted Answer

A)   Cost.
B)   cost of debt
C)   revenue
D)   Probability of nonpayment.
E)   Cash discount.F) None of the above
G) A) and E)

Question 2

Considering the 5 C's of credit, what does conditions signify?

Accepted Answer

A)   The customer's willingness to meet credit obligations.
B)   The customer's ability to meet credit obligations out of operating cash ﬂows.
C)   The customer's ﬁnancial reserves.
D)   A pledged asset in the case of default.
E)   General economic conditions in the customer's line of business.F) B) and E)
G) C) and E)

Question 3

Which one of the following is NOT required to evaluate a proposed credit policy?

Accepted Answer

A)   Selling price per unit.
B)   Required rate of return for period.
C)   Variable cost per unit.
D)   Current quantity sold.
E)   Fixed cost per unit.F) A) and E)
G) A) and D)

Question 4

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?

Accepted Answer

A)   $45,976
B)   $47,116
C)   $49,081
D)   $50,224
E)   $53,566F) A) and E)
G) C) and D)

Question 5

You have the opportunity to make a one-time sale if you will give a new customer 30 days to pay. You suspect that there is a 50 percent chance that this person will never pay you. The sales price of
The item the customer wants to buy is $325. Your variable cost on that item is $219 and your
Monthly interest rate is 1 percent. You _____ grant credit because the net present value of the sale
Is _____.

Accepted Answer

A)   should; $105
B)   should; $109
C)   should not; -$58
D)   should not; -$47
E)   should not; -$33F) A) and E)
G) A) and D)

Question 6

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?

Accepted Answer

A)   Yes; because you will earn $2.23 on every credit sale you make.
B)   Yes; because you will earn $5.68 on every credit sale you make.
C)   No; because the net present value of the potential sale is -$1.55.
D)   No; because the net present value of the potential sale is -$.98.
E)   It doesn't matter; because the present value of the potential sale is $0.F) B) and E)
G) All of the above

Question 7

Which one of the following is the correct sequence of events related to the cash ﬂows from a credit sale?

Accepted Answer

A)   Customer mails cheques; The bank credits the ﬁrm's account; Credit sale is made; Firm deposits cheque in bank.
B)   Credit sale is made; Customer mails cheques; The bank credits the ﬁrm's account; Firm deposits cheque in bank.
C)   The bank credits the ﬁrm's account; Credit sale is made; Firm deposits cheque in bank; Customer mails cheques.
D)   Credit sale is made; Customer mails cheques; Firm deposits cheque in bank; The bank credits the ﬁrm's account.
E)   Credit sale is made; The bank credits the ﬁrm's account; Customer mails cheques; Firm deposits cheque in bank.F) D) and E)
G) A) and E)

Question 8

A cash discount of 2/10, net 25:

Accepted Answer

A)   Grants customers 25 days to pay after the discount period expires.
B)   Discourages customers from paying early.
C)   Grants free credit for a period of 25 days.
D)   Charges lower prices to customers who are granted credit.
E)   Grants customers an additional 15 days to pay if they forfeit the discount.F) A) and D)
G) D) and E)

Question 9

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?

Accepted Answer

A)   $173,200
B)   $187,200
C)   $190,200
D)   $197,000
E)   $200,000F) B) and C)
G) D) and E)

Question 10

The net credit period:

Accepted Answer

A)   Is the length of time after the discount period that a customer has to pay the full amount of the invoice.
B)   Generally is between 15 and 150 days.
C)   Begins on the invoice date and ends on the ﬁnal day a customer can pay without being delinquent.
D)   Is established based on the seller's operating cycle.
E)   Is determined by the seller's inventory period.F) B) and D)
G) A) and C)

Question 11

Relatively expensive products tend to have relatively short credit periods.

Accepted Answer

A) True 
 B)False

Question 12

Provide a deﬁnition for credit period.

Accepted Answer

The length...

Question 13

All else equal, the credit period offered to a ﬁrm's customers is likely to be shorter when (A) the
seller operates in a marginally competitive market, and (B) the size of the account is large.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A)   Discount period.
B)   Credit period.
C)   Cash discount.
D)   Credit analysis.
E)   Type of credit instrument.F) C) and D)
G) All of the above

Question 15

Which of the following is the best deﬁnition of a collection policy.

Accepted Answer

A)   A compilation of accounts receivable by the age of each account.
B)   Wholly owned subsidiary that handles credit extension and receivables ﬁnancing through commercial paper.
C)   A discount given for a cash purchase.
D)   Procedures followed by a ﬁrm in collecting accounts receivable.
E)   Conditions on which a ﬁrm sells its goods and services for cash or credit.F) C) and D)
G) B) and C)

Question 16

Using the EOQ model, a manager can determine _____________. This allows the ﬁrm to place orders before inventories reach a critical level, allowing for suﬃcient delivery time.

Accepted Answer

A)   Carrying costs.
B)   Safety stocks.
C)   Restocking costs.
D)   Reorder points.
E)   Theft losses.F) A) and B)
G) A) and C)

Question 17

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?

Accepted Answer

A)   $0
B)   $5,000
C)   $5,700
D)   $10,000
E)   $10,700F) D) and E)
G) C) and D)

Question 18

Cindy's Toys has an average inventory of 1,800 teething rings. The carrying cost per unit per year is 5¢. Cindy places an order for 3,600 teething rings on the first of each month and the order cost is $25. What is the economic order quantity (EOQ) ?

Accepted Answer

A)   4,502 units
B)   5,193 units
C)   5,492 units
D)   6,573 units
E)   6,600 unitsF) A) and C)
G) A) and B)

Question 19

Currently, your ﬁrm sells 280 units a month at a price of $125 a unit. You think you can increase your sales by an additional 70 units if you switch to a net 30 credit policy. The monthly interest rate is .5
Percent and your variable cost per unit is $80. What is the incremental cash inﬂow of the proposed
Credit policy switch?

Accepted Answer

A)   $3,078
B)   $3,150
C)   $3,334
D)   $3,450
E)   $3,610F) A) and B)
G) C) and E)

Question 20

There is a saying in banking that when a business is experiencing ﬁnancial problems, trade creditors are the ﬁrst to know. Why would this be true?

Accepted Answer

A)   Trade creditors perform credit checks less often than do banks.
B)   Trade creditors get all of their information about credit risks from banks.
C)   Trade creditors can easily repossess the merchandise sold if the borrower refuses to pay.
D)   Trade credit is usually extended only to the most creditworthy of businesses, while banks will make short-term loans to almost any business.
E)   Trade credit is typically of shorter maturity, and offered more frequently, than other types of credit such as bank loans.F) C) and D)
G) B) and E)

Exam 20: Credit and Inventory Management

Relatively expensive products tend to have relatively short credit periods.

Correct Answer
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Correct Answer
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Which one of the following is NOT required to evaluate a proposed credit policy?

Correct Answer
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Using the EOQ model, a manager can determine _____________. This allows the ﬁrm to place orders before inventories reach a critical level, allowing for suﬃcient delivery time.

Correct Answer
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The net credit period:

Correct Answer
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Correct Answer
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Which one of the following is the correct sequence of events related to the cash ﬂows from a credit sale?

Correct Answer
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Considering the 5 C's of credit, what does conditions signify?

Correct Answer
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Provide a deﬁnition for credit period.

Correct Answer
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The length...
View Answer

Cindy's Toys has an average inventory of 1,800 teething rings. The carrying cost per unit per year is 5¢. Cindy places an order for 3,600 teething rings on the first of each month and the order cost is $25. What is the economic order quantity (EOQ) ?

Correct Answer
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Correct Answer
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Correct Answer
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All else equal, the credit period offered to a ﬁrm's customers is likely to be shorter when (A) the seller operates in a marginally competitive market, and (B) the size of the account is large.

Correct Answer
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The terms of sale generally include all of the following EXCEPT the:

Correct Answer
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Correct Answer
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Which of the following is the best deﬁnition of a collection policy.

Correct Answer
verified

There is a saying in banking that when a business is experiencing ﬁnancial problems, trade creditors are the ﬁrst to know. Why would this be true?

Correct Answer
verified

Correct Answer
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A cash discount of 2/10, net 25:

Correct Answer
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Exam 20: Credit and Inventory Management

Relatively expensive products tend to have relatively short credit periods.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which one of the following is NOT required to evaluate a proposed credit policy?

Correct AnswerverifiedShow Answer

Using the EOQ model, a manager can determine _____________. This allows the ﬁrm to place orders before inventories reach a critical level, allowing for suﬃcient delivery time.

Correct AnswerverifiedShow Answer

The net credit period:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which one of the following is the correct sequence of events related to the cash ﬂows from a credit sale?

Correct AnswerverifiedShow Answer

Considering the 5 C's of credit, what does conditions signify?

Correct AnswerverifiedShow Answer

Provide a deﬁnition for credit period.

Correct AnswerverifiedThe length...View AnswerShow Answer

Cindy's Toys has an average inventory of 1,800 teething rings. The carrying cost per unit per year is 5¢. Cindy places an order for 3,600 teething rings on the first of each month and the order cost is $25. What is the economic order quantity (EOQ) ?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

All else equal, the credit period offered to a ﬁrm's customers is likely to be shorter when (A) the seller operates in a marginally competitive market, and (B) the size of the account is large.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following is the best deﬁnition of a collection policy.

Correct AnswerverifiedShow Answer

There is a saying in banking that when a business is experiencing ﬁnancial problems, trade creditors are the ﬁrst to know. Why would this be true?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A cash discount of 2/10, net 25:

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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The length...
View Answer

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