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Exam 20: Credit and Inventory Management

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Question 21

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Which one of the following will increase a firm's investment in accounts receivables?

A) a decrease in the number of days for which credit is granted
B) a decrease in credit sales
C) an increase in cash sales
D) a decrease in the average collection period
E) an increase in average daily credit sales

F) A) and E)
G) All of the above

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Question 22

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Which one of the following statements is correct?

A) If the majority of a firm's new customers become repeat customers then there is a strong argument against extending credit even if the default rate is low.
B) A customer's past payment history reveals little information in relation to his or her future tendency to pay.
C) A suggested policy for offering credit to new customers is to limit the amount of their initial credit purchase.
D) The risk of issuing credit is the same for a new customer as it is for an existing customer.
E) The recommended credit policy for new customers is to extend the maximum amount of credit you will ever be willing to offer as an enticement to get their business.

F) A) and D)
G) A) and B)

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Question 23

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A firm's total investment in receivables depends primarily on the firm's:

Inventory needs under a derived-demand inventory system are:

Which of the following statements correctly reflect the effects of granting credit to customers? I. Total revenues may increase if both the quantity sold and the price per unit increase when credit is granted. II. A firm's cash cycle generally increases if credit is granted, all else equal. III. Both the cost of default and the cost of discounts must be considered before granting credit. IV. A firm may have to increase its long-term borrowing if it decides to grant credit to its customers.

Polly's Home Accents currently sells 345 units a month at a price of $59 a unit. Polly thinks she can increase her sales by an additional 55 units if she switches to a net 30 credit policy. The monthly interest rate is 0.4 percent and the variable cost per unit is $32. What is the net present value of the proposed credit policy switch?

Under the current cash sales only policy Blue Bird, Inc., will sell 215 units a month at a price of $469 each. The variable cost per unit is $305 and the monthly interest rate is 1.7 percent. Based on a recent survey, the firm believes it can sell an additional 36 units per month if it offers a net 30 credit policy. What is the net present value of the switch using the one-shot approach?

Bill is in charge of the inventory for Home Builder's Supply. As an inventory item gets low, he is to restock the item by a quantity that minimizes the total inventory costs for that item. What is this restocking quantity called?

At the optimal order quantity size, the:

Under your current cash sales only policy you sell 132 units a month for a total sales value of $9,240. Your variable cost per unit is $44 and your monthly interest rate is 1 percent. Based on a recent survey, you believe that you can sell an additional 22 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?

The terms of sale generally include which of the following? I. type of credit instrument II. cash discount III. credit period IV. discount period

You are viewing a graph which compares costs with the amount of credit extended. Both the carrying costs and the opportunity costs of credit are depicted. What is the function called that represents the summation of these carrying and opportunity costs?

Which one of the following inventory items is probably the least liquid?

A conditional sales contract:

A firm offers terms of 2/9, net 41. What effective annual interest rate does the firm earn when a customer does not take the discount?

The Green Hornet sells earnings forecasts for international securities. Its credit terms are 2/10, net 30. Based on experience, 55 percent of all customers will take the discount. The firm sells 2,600 forecasts every month at a price of $1,100 each. What is the firm's average balance sheet amount in accounts receivable?

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.

Saucier & Co. currently sells 2,200 units a month for total monthly sales of $86,500. The company is considering replacing its current cash only credit policy with a net 30 policy. The variable cost per unit is $18 and the monthly interest rate is 1.2 percent. What is the switch break-even level of sales? Assume the selling price per unit and the variable costs per unit remain constant.

The ABC approach to inventory management is based on the concept that:

Today, October 12, Nadine's Fashions purchased $511 worth of merchandise from a supplier. The credit terms are 1/5, net 20. By what day does Nadine's have to make the payment to receive the discount? Note: October has 31 days.