Chapter 20

Chapter 20 Credit and Inventory Management

1. The terms of sale establish how the firm proposes proposes to purchase its goods or services. Ans !alse

"evel #asic

$ub%ect Terms Terms &f $ale

Type Type Concepts

2. &ne of the most important factors influencing influencing the length of the credit period period offered by the seller is the operating cycle of the seller. Ans !alse

"evel #asic

$ub%ect Credit 'eriods


(. All else e)ual* the credit period offered offered to a firm+s firm+s customers is li,ely to be shorter shorter when -A the seller operates in a marginally marginally competitive mar,et* and -# the si/e of the account is large. Ans !alse

"evel #asic



. The fact that auto parts stores stores face shorter credit periods periods than florists is consistent with the factors factors listed as influences on credit period in the tet. Ans !alse

"evel #asic



. #radley Mfg. changed its credit terms from 2310 net (0 to 2310 net 0. In doing so* the firm firm has lowered the effective annual cost of credit for their customers. Ans True

"evel #asic

$ub%ect Cost &f Credit


4. #radley Mfg. changed its credit terms from 2310 net (0 to 2310 net 0. It is reasonable reasonable to assume that the firm+s AC' will be increased by this action. Ans True

"evel #asic

$ub%ect Cash 5iscount And AC'


6. &n average* manufacturing firms hold a greater proportion of total assets in the form of inventories inventories than retailers. Ans !alse

"evel #asic

$ub%ect Investment In Inventory


7. All else e)ual* a firm that holds safety safety stoc,s of inventory will have a lower economic order )uantity -8&9 than a firm that does not. Ans !alse

"evel #asic

$ub%ect $afety $toc,s And 8&9


:. All else e)ual* a firm that holds safety safety stoc,s of inventory will have a lower level of average inventory than than a firm that does not. Ans !alse

"evel #asic

$ub%ect $afety $toc,s And Inventory "evels

Copyright ; 200 Mcill ?yerson "imited.

'age 1



10. The conditions under which a firm firm sells its goods and services services for cash or credit credit are called the A Terms of sale. # Credit anal ys ysis. C Collection po policy. 5 'ayables policy. 8 Collection float. Ans A

"evel #asic


Type Type 5efinitions

11. The process of determining the li,elihood that customers customers will not pay is called @@@@@@@@@@@@. A the terms of sale # credit analysis C the colle llectio tion policy licy 5 the paya ayables les polic licy 8 disburseme semen nt an analys lysis Ans #

"evel #asic

$ub%ect Credit Analysis


12. The procedures followed by the firm for ensuring payment payment on its accounts receivables are are called its @@@@@@@@@@@@@@. A sales policy # credit policy C collection policy 5 payables po policy 8 disburseme semen nts policy icy Ans C

"evel #asic

$ub%ect Collection 'olicy


1(. The length of time for which credit credit is granted to a firm+s customers customers is called the @@@@@@@@@@@@. A cash cycle # operating cycle C transactio tions period 5 credit period 8 disburseme semen nt period iod Ans 5

"evel #asic

$ub%ect Credit 'eriod


1. The bill for goods and services services provided by the seller to the purchaser is called a-n a-n A "edger st statement. # arranty. C Indenture. 5 Indemn demniity statement. 8 Invoice. Ans 8

"evel #asic

$ub%ect Invoice



'age 2


1. A discount on the purchase price given to buyers as an inducement inducement for prompt payment is called a-n a-n @@@@@@@@@@@@@@@. A cash di discount # purchases disc iscount C orig origin inaal iss issue dis discou count 5 open mar mar,et ,et dis disccount 8 receiva ivables discount Ans A

"evel #asic

$ub%ect Cash 5iscounts


14. The credit credit instrument instrument is the @@@@@@@@@@@@@@@ @@@@@@@@@@@@@@@@@@@. @@@@. A legal legal docume document nt submitt submitted ed to the CC?A CC?A for ever every y busine business ss transa transacti ction on in Canada Canada # basic basic eviden evidence ce of indebte indebtedne dness ss in a cre credit dit transa transacti ction on C cost cost of of obta obtaini ining ng fin finan anci cing ng on on cons consum umer er pro produc ducts ts 5 means means of paymen paymentt chosen chosen by by the purcha purchaser ser in a stand standard ard 8&M 8&M trans transac action tion 8 receip receiptt for for payme payment nt issu issued ed by the the firm firm on its its cash cash disbur disbursem sement entss Ans #

"evel #asic

$ub%ect Credit Instrument


16. A graphical graphical representation of the sum of the carrying costs and the opportunity costs of a chosen chosen credit policy is called the A Credit st statement. # Invoice. C Credit co cost cu curve. 5 Terms of sale. 8 8con 8conom omic ic orde orderr )uan )uanti tity ty -8&9 -8&9. . Ans C

"evel #asic

$ub%ect Credit Cost Curve


17. A @@@@@@@@@@@@@@@@ @@@@@@@@@@@@@@@@ is an instrument that is due and payable immediately upon receipt. A commercial draft # time draft C ban,er+s acceptance 5 sight draft 8 trade ac acceptance Ans 5

"evel #asic

$ub%ect $ight 5raft


1:. A wholly=owned wholly=owned subsidiary that handles handles the credit function for the parent firm is called a-n A Contr Controll olled ed disb disbur urse seme ment ntss compa company ny.. # Buni Bunior or subs subsid idia iary ry firm firm.. C 'ar 'arallel llel pay payment mentss firm. irm. 5 Capt Captiv ivee fin finaance nce com compa pany ny.. 8 &perating ing divis ivisiion. Ans 5

"evel #asic

$ub%ect Captive !inance Company



'age (


20. The basic factors to be evaluated evaluated in the credit evaluation process* process* the five Cs of credit* credit* are A Conditi Conditions ons** contr control* ol* cessat cessation* ion* capita capital* l* and and capaci capacity ty.. # Conditi Conditions ons** char charact acter er** capi capital tal** contr control* ol* and capaci capacity ty.. C Capita Capital* l* coll collate ateral ral** contr control* ol* charac character ter** and and capa capacity city.. 5 Charac Character ter** capac capacity ity** cont control rol** cessa cessation tion** and collate collateral ral.. 8 Charac Character ter** capa capacity city** capital capital** colla collater teral* al* and conditi conditions ons.. Ans 8

"evel #asic

$ub%ect !ive Cs &f Credit


21. @@@@@@@@@@@@@@@ is the process of )uantifying the li,elihood of default when granting granting consumer credit credit based on ob%ective characteristics of the buyer. A Credit scoring # Cre Credit dit rati ration onaali/a li/ati tion on C ?eceipts assessment 5 'ay 'ayable abless ris, is, anal analy ysis sis 8 5is 5isbur burseme sement nt spec specia iali li/a /ati tion on Ans A

"evel #asic

$ub%ect Credit $coring


22. A statistical techni)ue for distinguishing between two samples on the basis of their observed observed characteristics is called a-n A Cre Credit dit repo reporrt ana analy lysi sis. s. # Agin Aging g sch schedu edule analy nalysi sis. s. C ?is, ?is, ass sseess ssme ment nt repo eport. rt. 5 Turno urnove verr deli deline neat atio ion n rep repor ort. t. 8 Mult Mu ltip iple le disc discri rimi mina nant nt anal analy ysis. sis. Ans 8

"evel #asic

$ub%ect Multiple 5iscriminant Analysis


2(. A compilation of the firm+s accounts receivable ordered ordered by the length of time each account has remained unpaid is called a-n A Credit report. # Aging schedule. C ?is, ?is, ass sseess ssme ment nt repo eport. rt. 5 Turnove noverr deli deline neaation tion.. 8 Cost Cost cons consol olida idatio tion n and and cons consis iste tency ncy repo report rt.. Ans #

"evel #asic

$ub%ect Aging $chedule


2. The restoc,ing )uantity that minimi/es the firm+s total inventory costs costs is called called the A $hor hortag tage cos costt )u )uanti antity ty.. # Car Carryin rying g cost ost )uan )uanti tity ty.. C 8con 8conom omic ic orde orderr )ua )uan ntity tity.. 5 $pecu pecula lati tion on )ua )uantit ntity y. 8 $peci pecial al=o =orrder der )ua )uantit ntity y. Ans C

"evel #asic

$ub%ect 8conomic &rder 9uantity



'age 


2. The minimum level of inventory a firm ,eeps on hand at any given time is called its A et et wor, wor,in ing g cap capit ital al in inv inven ento tory ry.. # $hortage cost. C 8con 8conom omic ic orde orderr )ua )uan ntity tity.. 5 $afety stoc,. 8 ?eorder po point. Ans 5

"evel #asic

$ub%ect $afety $toc,


24. The procedures of the firm used to determine the levels for for demand=dependent inventory types types such as wor,=in=progress and raw materials are called @@@@@@@@@@@@@@@@@@@@. A firs first= t=in in** firs first= t=ou outt meth method odss # the #aumol model C net net wor wor,i ,ing ng capi capita tall pla plan nning ning 5 econ conom omic ic orde orderr plann lannin ing g 8 mate materi rial alss re) re)ui uire reme ment ntss p pla lann nnin ing g Ans 8

"evel #asic

$ub%ect Materials ?e)uirements 'lanning


26. @@@@@@@@@@@@@@@ is a system for managing managing demand=dependent inventories inventories that minimi/es the inventory inventory holdings of the firm at any given time. A Bus Bust=in t=in=t =tim imee inve invent nto ory # Turnover inv inventory tory C et et wor wor, ,ing ing cap capit itaal pla plann nnin ing g 5 Inventory sc scoring 8 Inventory ran,ing Ans A

"evel #asic

$ub%ect Bust=In=Time Inventory


27. Credit granted granted by one firm firm to another another firm is called called A Consumer credit. # holesale credit. C Trade credit. 5 ?etail credit. 8 !irm credit. Ans C

"evel #asic

$ub%ect Trade Credit


2:. The @@@@@@@@ establishes the credit period* the cash discount amount* and the discount discount period. A Terms of sale # Collection policy C Credit an analys lysis report ort 5 Invoice 8 Credit report Ans A

"evel #asic




'age 


(0. hich one of the following following mathematica mathematicall definitions definitions is correctD correctD A The cost cost of switc switching hing cred credit it policie policiess is define defined d as the )uant )uantity ity multip multiplied lied by -'=v -'=v. . # The net presen presentt value value of of eten etending ding credit credit is is e)ual e)ual to =v E -'= -'= v3?. v3?. C The total total cost cost of holding holding invent inventory ory is e)ua e)uall to -9-9-CC CC E -!-T3 -!-T39. 9. 5 The econ economic omic order order )uant )uantity ity is e)ual e)ual to the the s)ua s)uare re root root of of -T-! -T-!3CC. 3CC. 8 Accounts Accounts receiv receivable able is defined defined as averag averagee daily daily sales sales multiplied multiplied by the average average collec collection tion period. period. Ans 8

"evel Intermediate

$ub%ect Mathematical 5efinitions


(1. The monetary incentive given to encourage prompt payment is called the A Invoice am amount. # Credit am amount. C $ale term. 5 ?eceivables les credit. 8 Cash di discount. Ans 8

"evel #asic

$ub%ect Cash 5iscount


(2. The @@@@@@@ @@@@@@@ date mar,s the beginning beginning of the credit credit period. A Cash # Invoice C 5iscount 5 et payment 8 5ue Ans #

"evel #asic

$ub%ect Invoice 5ate


((. hen a ban, guarantees the payment payment of a commercial commercial draft* the instrument instrument is called a-n A #an,er+s acc acceptan tance. # Trade ac acceptance. C &pen account. 5 $ight dr draft. 8 Time draft. Ans A

"evel #asic

$ub%ect #an,er+s Acceptance


(. $u/ie+s Fitchen sells ma%or ,itchen appliances. The The Fitchen 5ollar provides provides financing strictly to buyers of $u/ie+s appliances. The Fitchen 5ollar is a wholly owned subsidiary of $u/ie+s Fitchen. The Fitchen 5ollar is called a A Capital tal cre credit ou outle tlet. # ?eta ?etail il cre credit dit com ompa pany ny.. C Cons Consum umer er credi reditt com compa pany ny.. 5 ?eg ?egiona ionall cr credit dit com compa pany ny.. 8 Capt Captiv ivee fina financ ncee comp compaany. ny. Ans 8

"evel #asic

$ub%ect Captive !inance Company



'age 4


(. The model that attempts to determine the optimal order order si/e when when restoc,ing inventory is called the A M?' model. # A#C approach. C BIT system. 5 8&9 model. 8 $afet y stoc, mo model. Ans 5

"evel #asic

$ub%ect 8&9 Model


(4. $afety stoc, is is defined defined as the the A Minim Minimum um )ua )uant ntity ity for for a repl replac acem emen entt orde orderr. # Maimu Maimum m level level of inven inventor tory y that that eists eists when when a replac replaceme ement nt order order is rece receive ived. d. C 9uantity 9uantity specif specified ied as as the reorde reorderr point point when when long long delive delivery ry times times eis eist. t. 5 "evel of inventor inventory y that that trigger triggerss a derived derived demand demand order order when when delivery delivery time is involve involved. d. 8 Minim Minimum um lev level el of of inve invento ntory ry tha thatt a firm firm ,ee ,eeps ps on on hand hand.. Ans 8

"evel #asic



(6. The costs of setting up a production run or placing an order order are called A Carrying co costs. # ?estoc,ing costs. C BIT costs. 5 8&9 costs. 8 5erived demand costs. ts. Ans #

"evel #asic

$ub%ect ?estoc,ing Costs


(7. hich of the following statements statements is false false regarding trade creditD A Trade Trade credit credit is created created when a firm firm uses uses cash cash to ma,e purchases purchases from another another firm. firm. # Trade Trade credit credit is not not usually usually an intere interest=be st=bearing aring asset asset for the firm granting granting the the credit. credit. C Trad Tradee cred credit it pos posse sess sses es a deg degre reee of def defau ault lt ris ris,. ,. 5 Collec Collection tion of of trade trade recei receivab vables les can can be be sped sped up by offer offering ing disc discoun ounts. ts. 8 Trade Trade cred credit it is an impo importa rtant nt sourc sourcee of eter eternal nal fina financi ncing ng for for Canada Canada firms firms.. Ans A

"evel #asic



(:. There is a saying in ban,ing that when a business is eperiencing eperiencing financial problems* trade creditors creditors are the first to ,now. ,now. hy would this be trueD A Trade Trade cred creditor itorss perfor perform m credit credit chec chec,s ,s less less o ofte ften n than than do ban,s ban,s.. # Trade Trade cred creditor itorss get all all of their their infor informat mation ion abou aboutt credit credit ris, ris,ss from from ban,s. ban,s. C Trade Trade creditor creditorss can easily reposses repossesss the merchandise merchandise sold if the borrower borrower refuses refuses to pay. pay. 5 Trade Trade credit credit is usually usually etended etended only only to the the most creditworthy creditworthy of business businesses* es* while while ban,s ban,s will ma,e short=term loans to almost any business. 8 Trade Trade credit credit is typically typically of shorter shorter maturity* maturity* and offe offered red more more fre)ue fre)uently ntly** than than other other types types of credit credit such as ban, loans. Ans 8

"evel #asic




'age 6


0. About @@@@@@@@ of all of the assets assets of Canadian industrial firms are in the form of accounts accounts receivable. A 7G # 11G C 16G 5 20G 8 0G Ans #

"evel #asic

$ub%ect Importance of ?eceivables


1. If a firm has a detailed credit policy it will li,ely lead lead to @@@@@@@@@@@@@@@@@@@. A fre)ue fre)uent nt credi creditt sales sales to cust custome omers rs with with an avera average ge to high high degre degreee of defau default lt ris, ris, # a polic policy y wher wheree virt virtua ually lly all all sale saless are are made made for for cas cash h C only the mos mostt credi creditwor tworthy thy of consum consumers ers receiv receiving ing credit credit 5 incons inconsist istenc encies ies in the the terms terms of cred credit it sales sales gran granted ted cust custome omers rs 8 org organi/ ani/ed ed pay paymen ment ef efforts orts Ans C

"evel #asic

$ub%ect Credit 'olicy


2. hen A#C Co. Co. ma,es a sale of of inventory inventory on credit credit to HJ Co.* Co.* I. a receivable is created for A#C II. cash is paid to A#C III. a payable is created for A#C IK. HJ+s inventory is increased A I only # I and III only C I and IK only 5 II and III only 8 II* III* and IK onl y Ans C

"evel #asic

$ub%ect $elling &n Credit


(. hich of following correctly specifies the level of the firm+s firm+s receivables balanceD balanceD I. Average annual sales3average collection period II. Average collection period3average daily sales III. Average daily sales L average collection period IK. Credit sales3Accounts receivable turnover A I only # II only C III only 5 II and IK only 8 III and IK only Ans 8

"evel #asic

$ub%ect ?eceivables #alance



'age 7


. hich of the following are terms terms used interchangeably to refer refer to the length of time it ta,es for the firm to collect on a saleD I. Average Average collection period II. 5ays+ sales in receivables III. Inventory turnover IK. ?eceivables ?eceivab les period A I and II only # I* III* and IK onl y C II and III only 5 II* II III* an and IK IK onl y 8 I* II* and IK only Ans 8

"evel #asic

$ub%ect Average Average Collection 'eriod


. The terms of sale typically specify each of the following 8HC8'T 8HC8'T A Type of cred credit it in instr strum umen ent. t. # Credit pe period. C Cash di discount pe period iod. 5 Cash discount. 8 'robabili ility of pa payment. Ans 8

"evel #asic



4. BBB* Inc. recently etended its credit period period from net (0 days days to net net 0 days. days. This represents represents a change change in the firm+s @@@@@@@@@@@@@@. A collection po policy # terms of sale C receivables p po olicy 5 credi redit= t=g gran ranting ting polic olicy y 8 loan policy Ans #

"evel #asic



6. $uppose your firm firm is offered offered terms of 2310 net (0 on its purchases. Assuming that your your firm intends to buy on credit* good cash management practice suggests that a rational purchaser should pay only on whi ch of the following daysD I. 5ay 2 II. 5ay : III. 5ay 10 IK. IK. 5ay 20 K. 5ay (0 A I* II* or K only # III or K only C II only 5 K only 8 I or II only Ans #

"evel #asic




'age :


7. "aw++&rder Industries recently changed changed the terms it offers offers its customers from 2310 net (0 to (320 net 0. #y its action* the firm has @@@@@@@@@@@@@@. A shor shorte tene ned d its its cust custom omer ers+ s+ cas cash h cycl cyclee # leng lengthe thene ned d its its custo custome mers rs++ rece receiv ivab able less peri period od C leng length then ened ed its its cus custo tome mers rs++ cash cash cyc cycle le 5 shor shorte tene ned d its its cus custom tomer ers+ s+ pay payab able less peri period od 8 shor shorte tene ned d its its cust custom omer ers+ s+ cred credit it peri period od Ans A

"evel #asic



:. hich of the following following stateme statements nts is correctD correctD A The cre credit dit perio period d is the the length length of of time for whic which h a disco discount unt can can be ta,en. ta,en. # Trad Tradee cre credi ditt term termss are are set set by the buy buyer er.. C Trade Trade credit credit is clas classif sified ied as a liabi liability lity for the seller seller.. 5 A cash cash disc discoun ountt is gene general rally ly offer offered ed to slow slow down down paymen paymentt of invoi invoices ces.. 8 The invoic invoicee date date is the beginn beginning ing of the credit credit period. period. Ans 8

"evel #asic



0. ?egardless of the day on which the sale is made* the 'ropellerhead $oftware Co. dates the invoice as the 1th of the month. The firm* therefore* must must employ @@@@@@@@@@@@ terms. A M&M # 5 &$ C ?& < 5 8& M 8 "&' Ans A

"evel #asic



1. A seller who etends credit for a longer longer period than the purchaser+s purchaser+s inventory cycle A ill ill not end end up financ financing ing other other aspects aspects of the purchaser purchaser+s +s business business beyond beyond the immediate immediate purchase purchase and sale of the inventory. # ill ill force force the the purcha purchaser ser to pay pay for for invento inventory ry befor beforee that that invento inventory ry is reso resold. ld. C ill ill be assure assured d that the the purchase purchaserr will be be able to convert convert the the inventory inventory into into cash cash before before payment payment is due. 5 ill ill have have no need need to to offer offer a discou discount nt perio period d and a net cred credit it perio period. d. 8 ill ill end end up financ financing ing a portio portion n of the the purcha purchaser ser+s +s recei receivab vables les peri period od as well. well. Ans 8

"evel #asic



2. The credit credit period will typically be longer the @@@@@@@@@@@@@@@@@@@. A high higher er the the cre credi ditt ris ris, , of of the the buye buyer r # great reater er the the comp compeetiti tition on C high higher er the cons consum umer er dema demand nd for for the the prod produc uctt 5 high higher er the peri perish shab abili ility ty of the the pro produ duct ct 8 smal sm aller ler the the si/ si/ee of of the the cust custome omer+ r+ss acc accou ount nt Ans #

"evel #asic




'age 10


(. An increase in @@@@@@@@@@@@@@@@@ will tend to lead to longer credit periods. I. product perishability II. consumer demand for the product III. product cost IK. competition among sellers of the product A III only # I and II only C II and IK only 5 III and IK only 8 I* II* and IK only Ans 5

"evel #asic



. hich of the following tend to have relatively short credit credit periodsD I. 'erishable products II. >igh=demand products III. ?elatively epensive products IK. ?elatively standardi/ed products A III only # I and IK only C II and III only 5 III and IK only 8 I* II* and IK only Ans 8

"evel #asic



. If you )uit your %ob as a carpenter and open a fruit stand* you will li,ely find the length of the credit period you get from suppliers to be A rela relativ tively ely long long due due to to the the ris, ris,ss inv invol olve ved d # relativ relatively ely long long if you yourr accou account nt is a small small one for you yourr suppli supplier er C rela relativ tively ely sho short rt beca because use fru fruit it is high highly ly peri perish shab able le 5 rela relativ tively ely shor shortt beca because use fruit fruit is is a high high cos costt item item 8 relativ relatively ely shor shortt if there there is is a high high degree degree of of compe competiti tition on among among your your supp supplie liers rs Ans C

"evel #asic



4. A#C Co. is considering considering giving a 2G cash discount discount to its customers who pay within 10 days. -The firm currently offers no discount.  If it instit utes this policy* it is li,ely that t hat I. A#C will eperience a net use of funds. II. The buyers will be able to reduce reduce their cost of goods goods sold. III. #uyers who do not ta,e the discount discount will be using an epensive source source of financing. IK. A#C will find that its average collection period will increase. A I and III only # I and IK only C II and III only 5 II* II III* an and IK IK onl y 8 I* II* III* an and IK Ans C

"evel #asic




'age 11


6. If a seller re)uires a credit credit commitment from a customer before goods are delivered* delivered* a-n @@@@@@@@@@@@@@@@ is in order. A invoice # open account C promissory note 5 cond condit itio iona nall sale saless cont contra ract ct 8 commercial dr draft Ans 8

"evel #asic

$ub%ect Commercial 5raft


7. hich of the the following following statements statements is is falseD falseD A #y etendin etending g credit* credit* a firm typically typically increase increasess its cash flow through through increase increased d gross gross profits profits.. # A cash cash disc discoun ountt is typic typically ally intend intended ed to be be an ince incentiv ntivee to pay pay early early.. C All else else the the same* same* firms firms with with higher higher mar, mar,ups ups will will tend tend to have have more more flei fleible ble cred credit it terms. terms. 5 henever henever credit credit is etende etended d to a new customer customer who who would would not not otherwise otherwise pay cash* cash* the the amount amount the seller has at ris, is the price the customer pays. 8 The carry carrying ing costs costs associated associated with grantin granting g credit credit will will increase increase as credit credit policies policies are are relaed. relaed. Ans 5

"evel #asic

$ub%ect Trade 5iscounts


:. A firm revises its credit policy policy and begins begins selling all goods for cash only* only* no credit. It will li,ely eperience an acceleration in collection of revenues due to the @@@@@@@@@@ effects of their credit policy. A cost # cost of debt C revenue 5 prob probaabili bility ty of non nonpa pay ymen ment 8 cash discount Ans C

"evel #asic

$ub%ect ?evenue !actor of Credit


40.
"evel #asic

$ub%ect Cost !actor &f Credit


41. A @@@@@@@@@@@ @@@@@@@@@@@ factor of credit policy effects effects occurs when when a firm institutes a credit policy and finds finds it must arrange financing for its increased receivables. A cost # cost of debt C revenue 5 prob probaabili bility ty of non nonpa pay ymen ment 8 cash discount Ans #

"evel #asic

$ub%ect Cost &f 5ebt !actor



'age 12


42. A @@@@@@@@@@@@@@ @@@@@@@@@@@@@@ factor of credit credit policy effects occurs when when a firm which institutes a credit policy finds finds it must bear the cost of some of its customers defaulting on their obligations. A cost # cost of debt C revenue 5 prob probaabili bility ty of non nonpa pay ymen ment 8 cash discount Ans 5

"evel #asic

$ub%ect 'robability &f onpayment !actor


4(. A @@@@@@@@@@@@@@ @@@@@@@@@@@@@@ factor of credit credit policy effects occurs when when a firm that institutes changes in its eisting eisting credit policy finds that* as a result* some of its customers choose to pay early to ta,e advantage of the new terms. A cost # cost of debt C revenue 5 prob probaabili bility ty of non nonpa pay ymen ment 8 cash discount Ans 8

"evel #asic

$ub%ect Cash 5iscount !actor


4. A firm in a competitive industry institutes a change in credit credit policy that allows buyers more advantageous advantageous terms. The firm also also drops its prices prices by G. nless @@@@@@@@@@@@* the change will almost certainly certainly be a negative 'K investment. A total co costs fall # most most of of the the sel selle ler+ r+ss cos costs ts are are vari variab able le cost costss C the the selle sellerr is plann plannin ing g to offe offerr a cas cash h disc discou ount nt 5 sales increase 8 cust custome omers rs act actua ually lly ta,e ta,e adv advan antag tagee of the the new new ter terms ms Ans 5

"evel #asic

$ub%ect 'K &f Credit 'olicy Changes

Type Type Concepts Concepts

4. hich of the following is considered a carrying cost cost associated with granting granting creditD A A firm firm+s +s re)u re)uir ired ed retur return n on on pay payab able less # A firm+ irm+ss g gaains ins fr from bad bad de debts bts C A firm firm+s +s cost cost of mana managi ging ng cred credit it 5 A fir firm+ m+ss cost cost of of mana managi ging ng pay payme ments nts to sup suppli plier erss 8 A firm irm+s co cost of of e)uity ity Ans C

"evel #asic

$ub%ect Credit Carrying Costs



'age 1(


44. hich of the following is considered a carrying cost cost for the firm when it grants grants creditD I. The re)uired return on receivables II. "osses from bad debts III. The cost of managing credit IK. The cost of managing credit collections A I and III only # II and IK only C I* II* and IK only 5 II* II III* an and IK IK onl y 8 I* II* III* an and IK Ans 8

"evel #asic

$ub%ect Credit Carrying Costs


46. The total cost of granting credit has two components. @@@@@@@@ are are the costs of lost sales incurred when credit is not granted and are inversely related to the amount of credit etended @@@@@@@@ are the cash flows that are incurred when credit i s granted and are positively related to the amount of credit etended. A $toc $toc,o ,out ut cos costs tsNN &ppo &pport rtun unit ity y cos costs ts # Carr Carry ying ing cos costs tsNN &ppo &pport rtun unity ity cost costss C &ppo &pport rtun unit ity y cos costs tsNN Int Inter eres estt cost costss 5 &ppo &pport rtun unit ity y cos costs tsNN Carr Carry ying ing cost costss 8 $ale $aless cos costs tsNN Ca Carry rrying ing cos costs ts Ans 5

"evel #asic

$ub%ect Credit Costs


47. &f the following* a firm @@@@@@@@@@@@@@@ will li,ely have the most liberal credit policy. policy. A that that has a core core grou group p of custo customer mers* s* who purc purchas hasee invent inventory ory on on a fre)ue fre)uent nt basis* basis* # that that is presen presently tly opera operating ting its its manuf manufact acturi uring ng facil facilitie itiess at maimu maimum m capaci capacity ty C that that is is a who whole lesa sale lerr of of fre fresh sh flow flower erss 5 that that is eper eperienc iencing ing sever severee cash cash flow flow proble problems ms due due to tremen tremendou douss growth growth 8 whos whosee oper operat ating ing cost costss are are almo almost st all all var varia iable ble costs costs Ans A

"evel #asic

$ub%ect "iberal Credit 'olicy


4:. A#C Co. is considering considering granting granting credit credit to a new corporate customer. A#C is concerned concerned about about the new customer+s credit history. history. A#C would li,ely find find each of the following useful 8HC8'T @@@@@@@@@@@@@@@@. A the the custo custome mer+ r+ss fina financ ncia iall stat statem emen ents ts # a 5un 5un O #rad #radsstre treet repo reporrt C a Creditel report 5 a cre credi ditt rep repor ortt fro from m the the custo custome mer+ r+ss ban ban, , 8 an ag aging ing of of A#C A#C+s +s rece receiv ivab able less Ans 8

"evel #asic

$ub%ect Credit Analysis



'age 1


60. "ately* Inc. is having trouble obtaining trade trade credit primarily because they have a policy of paying their suppliers 20 or more days days late. "ately is being re%ected because of of its @@@@@@@@@@@@@@. A capacity # character C capital 5 collateral 8 economic co condition Ans #

"evel #asic

$ub%ect Character


61. McCaw Jill Co.* a wholesaler wholesaler of college tetboo,s* is concerned concerned about your college boo,store having having sufficient operating cash flow flow to meet its credit obligations in a timely fashion. McCaw is concerned about about the boo,store+s @@@@@@@@@@@@@@@@@. A capacity # character C capital 5 collateral 8 economic co condition Ans A

"evel #asic

$ub%ect Capacity


62. A firm will li,ely be re%ected re%ected for credit due to concerns concerns about its @@@@@@@@@@@@@ if its financial reserves are considered to be lac,ing. A capacity # character C capital 5 collateral 8 economic co condition Ans C

"evel #asic

$ub%ect Capital


6(. A firm has has inade)uate @@@@@@@@@@@@ if it does does not have sufficient sufficient assets to pledge in the case of of default. As a result it will li,ely be re%ected for credit. A capacity # character C capital 5 collateral 8 economic mic condition ions Ans 5

"evel #asic

$ub%ect Collateral


6. A firm will li,ely be turned turned down for credit due to concerns concerns about its @@@@@@@@@@@ if there are signs that the firm+s industry is in general decline. A capacity # character C capital 5 collateral 8 economic mic condition ions Ans 8

"evel #asic

$ub%ect 8conomic Condition



'age 1


6. &f a firm+s five Cs of credit* credit* which is "8A$T li,ely to be directly managed by the firmD A capacity # character C capital 5 collateral 8 economic mic condition ions Ans 8

"evel #asic

$ub%ect 8conomic Conditions


64. A typical typical first step in the collection of an overdue account is to @@@@@@@@@@@@@@@@ . A emp mplo loy y a colle ollecction tion agen agency cy # send send the the cus custo tome merr an an agin aging g sch sched edul ulee C ma,e ma,e a tele teleph phon onee cal calll to the the cus custo tome mer r 5 ta,e ta,e lega legall act actio ion n aga agains instt the the cust custom omer er 8 call th the cu customer+s b baan, Ans C

"evel #asic

$ub%ect Collection 'olicies


66. $un$ign !oods* a retail grocery store* store* is determining how much inventory to ,eep ,eep on hand. hich of the following types of inventory does it probably need to considerD I. ?aw materials II. or,=in=progress III. !inished goods A II only # III only C I and II only 5 I and III only 8 I* II* and III Ans #

"evel #asic

$ub%ect Types Types &f Inventory


67. An automobile tire would be be considered @@@@@@@@@ @@@@@@@@@ inventory to an automobile manufacturer and @@@@@@@@@@@@@@ inventory to a tire manufacturer. A raw raw mate materi rial alsN sN wor wor,= ,=in in=p =pro rogr gres esss # fini finish shed ed goo goods dsNN wor, wor,=i =in= n=pr prog ogre ress ss C wor, wor,=i =in= n=pr prog ogre ress ssNN raw raw mate materi rial alss 5 fini finish shed ed good goodsN sN raw raw mat mater eria ials ls 8 raw raw mate materi rial alsN sN fini finish shed ed good goodss Ans 8

"evel #asic

$ub%ect Inventory Categories


6:. Consider a roll of sheet steel. This represents represents @@@@@@@@ inventory to a farm=machinery manufacturer and @@@@@@@@ inventory in a steel mill. A raw raw mate materi rial alsN sN wor wor,= ,=in in=p =pro rogr gres esss # fini finish shed ed goo goods dsNN wor, wor,=i =in= n=pr prog ogre ress ss C wor, wor,=i =in= n=pr prog ogre ress ssNN raw raw mate materi rial alss 5 fini finish shed ed good goodsN sN raw raw mat mater eria ials ls 8 raw raw mate materi rial alsN sN fini finish shed ed good goodss Ans 8

"evel #asic




'age 14


70. hich of the following statements statements is3are correct correct regarding inventoryD I. &ne company+s raw materials may be another+s finished goods. II. The three basic types of inventory may be )uite different in terms of their li)uidity. III. An inventory item that becomes a part of another item is called derived demand inventory. A I only # II only C I and III only 5 II and III only 8 I* II* and III Ans 8

"evel #asic



71. hich of the following following is a type type of inventory inventory shortage shortage costD costD A $tor torage age and and tra trac,in c,ing g cos costs ts # Insur surance nce and tae taess C ?estoc,ing costs 5 "osse ossess due due to obs obsole olesce scence nce 8 &ppo &pport rtun unity ity cost cost of of capi capita tall inve invest sted ed in in inve invento ntory ry Ans C

"evel #asic

$ub%ect Inventory $hortage Costs


72. All else the same* @@@@@@@@ costs are are greatest when the firm holds holds a small )uantity of inventory* inventory* and @@@@@@@@@@@ costs are greatest when there is a large )uantity of inventory on hand. A carrying ingN int interest # opp opportu ortuni nity tyNN res restoc toc,ing ,ing C restoc toc,ing ingN ca carryin rying g 5 carrying ingN res restoc,ing ing 8 interestN ca carryi ng ng Ans C

"evel #asic

$ub%ect Inventory Costs


7(. hich of the following following is &T considered considered to be a carrying costD costD A $torage co costs # Insu Insura ranc ncee and and tae taess on on inv inven ento tory ry C ?estoc,ing costs 5 "osses d du ue to to th theft 8 The The oppo opport rtun unity ity cos costt of capi capita tall on the the inve investe sted d amou amount nt Ans C

"evel #asic



7. pon graduation with your your finance degree* you ta,e a position with a medium=si/ed manufacturing concern. ou ou find that there are several pieces of inventory re)uired in the manufacturing process that ma,e up a small percentage of physical inventory* but but a large percentage of inventory value. Anious to impress your boss* you suggest the firm use the @@@@@@@@@@@@@@ of inventory management. A 8&9 model # derived demand model C shortage co cost mo model 5 inve inven ntory tory dep depleti letio on mod modeel 8 A#C model Ans 8

"evel #asic

$ub%ect Inventory Management



'age 16


7. hich of the following inventory management techni)ues techni)ues would M&$T li,ely be used by a Bapanese auto manufacturerD A A#C ap approach # 8&9 model C Mate Materi rial alss re) re)ui uire reme ment ntss p pla lann nnin ing g 5 Bus Bust=in t=in=t =tim imee appr appro oach ach 8 Aging ap approach Ans 5

"evel #asic

$ub%ect Inventory Management Techni)ues Techni)ues


74. hich of the following inventory management techni)ues techni)ues would wor, best for firms where a small portion portion of inventory in terms of )uantit y might represent a large portion in terms of inventory value. A A#C ap approach # 8&9 model C Mate Materi rial alss re) re)ui uire reme ment ntss p pla lann nnin ing g 5 Bus Bust=in t=in=t =tim imee appr appro oach ach 8 Aging ap approach Ans A

"evel #asic



76. sing the 8&9 model* a manager manager can determine @@@@@@@@@@@@@. This allows the firm to place orders before inventories reach a critical level* allowing for sufficient delivery time. A carrying costs # safety stoc,s C restoc,ing costs 5 reorder points 8 theft losses Ans 5

"evel #asic

$ub%ect ?eorder 'oints


77. hich of the following would &T be a part of an 8&9 model of inventory managementD A $hortage costs # Carrying costs C #ond yields 5 ?eorder points 8 $afety stoc,s Ans C

"evel #asic

$ub%ect The 8&9 Model


7:. hich of the following are the three three elements of the terms of saleD I. Type Type of credit instrument II. Collection procedures to be followed III. 5iscount period and discount amount IK. Time period for which credit is granted A I* II* and III # I* II* and IK C I* III* and IK 5 II* III* and IK Ans C

"evel #asic




'age 17


:0. A customer purchases P00 of goods goods and receives credit credit terms of 2310* net 20. The credit credit terms are defined as A Ten Ten percent percent discount discount if paid in two days* otherw otherwise ise payable payable in full full after after a total total of thirty days. # Two Two percent percent discount discount if paid in in ten days* otherwise otherwise payabl payablee in full full after after a total of of thirty thirty days. days. C Two Two percent percent penalty imposed imposed if paid more than ten days days after after the due due date* date* which which is twenty days from date of sale. 5 Two Two percen percentt discoun discountt if paid paid in ten days days** otherwi otherwise se payab payable le in full full in twenty twenty day days. s. 8 Two Two perce percent nt disco discount unt on on ten percen percentt of the the sale sale if the the bill bill is paid paid in twenty twenty days. days. Ans 5

"evel #asic



:1. The following following se)uence se)uence of events events occurs occurs A customer buys goods on credit Customer writes chec, for payment Customer puts chec, in mail !irm receives chec, !irm deposits chec, in ban, #an, credits firm+s account >ow long is the accounts receivable periodD A 1 days # 1 days C 16 days 5 17 days 8 20 days Ans 8


&ctober  &ctober 17 &ctober 1: &ctober 21 &ctober 2( &ctober 2

$ub%ect Accounts ?eceivable 'eriod


:2. hich one of the following would tend to increase the credit periodD A The The pro produ duct ct sold sold is peri perish shab able le.. # The The pro produ duct ct sold sold is seas season onal al in natu nature re.. C The The buy buyer er is cons conside idere red d a cred credit it ris, ris,.. 5 The The si/ si/ee of the cust custom omer er+s +s acco accoun untt is is ssma mall. ll. 8 The The buy buyer er+s +s inv inven ento tory ry per perio iod d is sho short rt.. Ans #




:(. The most appropri appropriate ate upper limit limit for the credit credit period is the a "ength of the buyer+s operating cycle. A 5ate 5ate on on whic which h the the selle sellerr must must pay pay its its sup suppli plier er.. # "eng "ength th of the selle seller+ r+ss inv inven entor tory y per period iod.. C "eng "ength th of the buy buyer er+s +s inve invento ntory ry peri period od.. 5 Averag eragee colle collect ctio ion n peri period od mul multip tipli lied ed by by two. two. Ans A





'age 1:


:. hich of the following following would tend to decrease decrease the credit credit periodD periodD I. The product is a low=priced item. II. The product is a standardi/ed raw material. III. The product is well established in the mar,etplace. IK. The product has low collateral value. A I and II only # I and III only C II and IK only 5 I* II* and III onl y 8 I* II* III* an and IK Ans 8




:. hich one of the following statements concerning concerning cash discounts is correctD A A cash cash disc discoun ountt is a means means of char chargin ging g higher higher pric prices es to cred credit it custome customers. rs. # Cash Cash discou discounts nts incr increa ease se the the amount amount of of credi creditt provid provided ed to cust custome omers. rs. C If the the credit credit terms are 2310* 2310* net net 1* the buyer buyer gains 1 days days of of credit credit by forfeiting forfeiting the the discoun discount. t. 5 Cash Cash disco discounts unts are relati relatively vely inepe inepensi nsive ve for for the the selle seller. r. 8 #uyers #uyers sh should ould forego forego cash discounts discounts since since they are normal normally ly only only 2G of the the purchas purchasee price. price. Ans A




:4. hich of the following statements statements are true concerning credit policyD I. A firm that begins begins to offer offer credit credit to its customers may in fact increase increase its total revenue as a result of the credit offering. II. A seller must have have a source of financing sufficient sufficient to cover any accounts receivable balance created by introducing a credit policy. III. The cost cost of sales will initially be delayed delayed when a credit credit policy is first first adopted. IK. A customer who forfeits a cash discount is accepting a high cost for credit financing. A I and II only # II and IK only C I* II* and III onl y 5 I* II* an and IK only 8 I* II* III* an and IK Ans 5




:6. The optimal amount of credit to be granted granted can be located graphically at the point where the A &ppo &pport rtun unity ity cost costss o off cre credit dit are are min minimi imi/e /ed. d. # $um of the the oppo opportu rtunity nity cost cost and and the carryi carrying ng cost cost is minim minimi/e i/ed. d. C 5ifferenc 5ifferencee between between the opportunity opportunity cost and the carrying carrying costs costs of credit are maimi/ed. maimi/ed. 5 $um of the the oppo opportu rtunity nity cost cost and and the carryi carrying ng cost costss is maimi/ maimi/ed. ed. 8 Carr Carry ying cost costss of of cre credi ditt are are e)ua e)uall to to /er /ero. o. Ans #


$ub%ect &ptimal Amount &f Credit



'age 20


:7. hich of the following would be considered considered a carrying carrying cost of creditD creditD I. $u/ie buys P200 of goods on credit but never never pays her bill. II. It costs P00 a wee, to employ Bac, to call customers concerning concerning their late payments. III. It re)uires  hours a wee,* at an annual annual salary of P0*000* for for the manager manager to approve credit applications. IK. Mawell* Inc. re)uires an an annual rate of return of 12G on its receivables. A I only # I and II only C II and III only 5 I* II* and III onl y 8 I* II* III* an and IK Ans 8


$ub%ect Carrying Cost &f Credit


::. Mar,+s Tire Tire is applying to the

$ub%ect !ive C+s &f Credit


100. hich one of the following is the normal order of events when when a firm is collecting an account receivable receivable from a customerD I. "egal action II. 'hone call III. Collection agency IK. 5elin)uency letter A II* IK* III* I # III* IK* I* II C IK* III* II* I 5 IK* III* I* II 8 IK* II* III* I Ans #

"evel #asic

$ub%ect Collection 8fforts


101. hich one of the following statements is correct concerning concerning inventory costsD costsD A "ost "ost sale saless are are cost costss relat related ed to saf safety ety rese reserv rves es.. # A loss loss due due to to a thef theftt is a sho short rtag agee cos cost. t. C Carr Carry ying cos costs ts dec decre reas asee as inve invent ntory ory leve levels ls ris rise. e. 5 The goal goal of of invent inventory ory manage managemen mentt is the the minimi/ minimi/atio ation n of stor storage age costs. costs. 8 The The cost cost to to set set up a pro produ duct ctio ion n run run is a carr carryi ying ng cos cost. t. Ans A





'age 21


102. ewell and Company is a manufacturing concern. concern. The company company divides their raw raw materials inventory into four classifications based upon the cost of each item. #ased upon this system* ewell will A Compu Compute te the the 8&9 8&9 for for eac each h gro group up of items items.. # Incur Incur more more sho shorta rtage ge costs costs on on the the less less epe epensi nsive ve items. items. C &rder &rder the the more more epens epensive ive items items more more fre) fre)uen uently tly than than the the less less epens epensive ive items items.. 5 Mainta Maintain in a larger larger safety safety stoc, stoc, on on the the more more epens epensive ive items. items. 8 Apply Apply the the BIT BIT invent inventory ory approa approach ch to to the the less less epens epensive ive items. items. Ans C


$ub%ect A#C Approach


10(.

$ub%ect 5erived 5emand


10. hich one of the following groups of items best identifies various types of inventory opportunity opportunity costsD A Inventory Inventory obso obsolescen lescence* ce* wareh warehouse ouse rent* opportunity opportunity cost of capital capital utili/ed* utili/ed* insuranc insurancee premium premium on inventory # Insurance Insurance premiu premium m on invento inventory* ry* cost of of e)uipment e)uipment setup for product production ion run* run* cost cost of inventory inventory cler,* cler,* inventory theft C areh arehous ousee rent* rent* insuranc insurancee premium premium** inventory inventory obsol obsolesc escenc ence* e* reorde reorderr costs costs 5 Cost of of inventory inventory trac, trac,ing ing system* system* cost cost of for,lif for,liftt driver driver to move move inventory inventory** cost cost of accou accounts nts payable payable cler, to process bills from suppliers* insurance premium on inventory 8 Cost of of inventory inventory cler,* cler,* cost cost of for,lift for,lift driver driver to move invento inventory ry** cost cost of cler, cler, to reorder reorder inventor inventory* y* cost of machine operator to setup a production run Ans A


$ub%ect &pportunity Cost


10. Custom !urniture provides handcrafted handcrafted furniture made from raw raw timber. 8ach piece of furniture is custom custom designed with the color of the finish and the type of hardware -handles* ,nobs* etc. to be applied chosen by the customer. A piece of furniture that has been cut and assembled and is now waiting waiti ng for the finish and hardware would be counted in the @@@@@@@ inventory of Custom !urniture. A ?aw materials # 5erived demand C !inished goods 5 or,=in= in=progress 8 Customer hold Ans 5


$ub%ect or,=In='rogress or,=In='rogress



'age 22


104. hich one of the following best ran,s ran,s inventory types from the most li)uid to the least li)uidD I. !inished goods = standard product II. !inished goods = customi/ed product III. or,=in=progress IK. ?aw materials materi als A IK* I* II* III # I* II* IK* III C II* I* IK* III 5 IK* I* III* II 8 I* IK* III* II Ans A


$ub%ect Inventory "i)uidity


106. A firm currently currently has a cash only credit credit policy. The firm is considering adopting adopting a credit policy which will etend credit to customers for  days da ys and grant the credit customers who pay in 1 days or less a discount. hich of the following variables used in the analysis of this proposal are outside of the control of t he firmD I. 5iscount percent II. 5efault rate III. Increase in sales IK. Credit price A I and III only # I and IK only C II and III only 5 II and IK only 8 I* II* III* an and IK Ans C


$ub%ect 5efault ?ate


107. hich of the following will be affected affected by a change in a firm+s credit policyD I. Inventory II. Cash flows III. &ffice staff IK. et wor,ing wor,in g capital A I and II only # II and IK only C II* III* an and IK onl y 5 I* II* an and IK only 8 I* II* III* an and IK Ans 8




10:. our our company purchased purchased P10*000 worth of inventory on Banuary 2 on credit. The terms of sale are (31 net . >ow much will you pay if payment is made on Banuary 1D A P7*60 # P:*(00 C P:*600 5 P10*000 8 P10*(00 Ans C

"evel #asic

$ub%ect Inventory Cash 5iscounts

Type Type 'roblems


'age 2(


110. our our company purchased purchased P10*000 worth of inventory Banuary 2 on credit. The terms of sale are (31 net . hat is the effective effective annual interest rate if you pay the full amount in  daysD A (.1G # 27.0G C (6.4G 5 .:G 8 6.(G Ans 5

"evel #asic

$ub%ect 8ffective Interest ith Cash 5iscounts

Type Type 'roblems 'roblems

111.. our 111 our company purchased P10*000 worth of inventory Banuary 2 on credit. The terms of sale are are (31 net . hat is the effective effective annual interest rate if you pay the full amount in :0 daysD A (.1G # 14.0G C 16.4G 5 2.:G 8 .:G Ans #

"evel #asic

$ub%ect 8ffective Interest ith Cash 5iscounts


112. our our company purchased purchased P10*000 worth of inventory on Banuary 2 on credit. The terms of sale are (31 net . hat is the annual percentage rate if you pay the full full amount in  daysD A (.1G # 27.0G C (6.4G 5 .:G 8 6.(G Ans C

"evel #asic

$ub%ect A'? ith Cash 5iscounts


11(. our our company is considering granting granting credit to a new customer. customer. The price per unit is P14 and the variable cost per unit is P10. The chance of default default is 7G and the monthly interest rate rate is 0.7G. The customer will pay in (0 days if they do not default. If the customer does not default* they will buy one unit every month forever. hat is the 'K of granting creditD A QP16*02 # QP1(( C P1*16 5 P1*6 8 P1*62 Ans 5

"evel #asic

$ub%ect 'K &f 'erpetual Credit $ale


11. our our company is considering granting credit to a new customer on a one time sale. The price per per unit is P22 and the variable cost per unit is P16. The chance of default is 20G and the monthly interest rate is 1G. The customer will pay in (0 days days if they do not default. hat is the 'K of granting creditD A P1.(7 # P(.22 C P.(2 5 P.0 8 P4.00 Ans #

"evel #asic

$ub%ect 'K &f &ne=Time $ale



'age 2


11. our our company is considering granting credit to a new customer on a one time sale. The price per per unit is P22 and the variable cost per per unit is P17. The monthly interest rate is 1G. 1G. The customer will pay in (0 days if they do not default. hat is the brea,=even brea,=even default percentD A (.7G # 14.1G C 16.0G 5 16.(G 8 17.G Ans C

"evel #asic

$ub%ect 5efault #rea,=8ven


114. our our company is considering granting granting credit to a new customer. customer. The price per unit is P14 and the variable cost per unit is P10. The monthly interest rate is 0.7G. The customer will pay in (0 days days if they do not default. If the customer does not not default* they will buy one unit every month forever. forever. hat is the brea,= even default percentD A (.6G # 7.0G C 41.G 5 77.0G 8 :2.0G Ans 8

"evel #asic

$ub%ect 5efault #rea,=8ven


116. Cindy+s Toys Toys has an average inventory of 1*700 teething rings. rings. The carrying cost per unit per year is R. Cindy places an order for (*400 teething rings on the first of each month and the order cost is P2. hat are the total carrying costs under the current systemD A P # P:0 C P14 5 P(00 8 P(:0 Ans #

"evel #asic

$ub%ect Inventory Carrying Costs


117. Cindy+s Toys Toys has an average inventory of 1*700 teething rings. rings. The carrying cost per unit per year is R. Cindy places an order for (*400 teething rings on the first of each month and the order cost is P2. hat are the total carrying costs using the 8&9D A P # P:0 C P14 5 P(00 8 P(:0 Ans C

"evel #asic




'age 2


11:. Farloff Medical $upply maintains an an average inventory of 2*000 human s,ulls for sale to medical medical schools and filmma,ers. The carrying cost per s,ull per year is estimated estimated to be P. #oris places an order order for 10*000 s,ulls on the first of each month and the order cost is P6. hat are the total carrying costs under the current systemD A P1*20 # P2*00 C P*000 5 P10*000 8 P2*000 Ans 5

"evel #asic



120. Farloff Medical $upply maintains an an average inventory of 2*000 human s,ulls for sale to medical medical schools and filmma,ers. The carrying cost per s,ull per year is estimated estimated to be P. #oris places an order order for 10*000 s,ulls on the first of each month and the order cost is P6. hat are the total carrying costs using the 8&9D A P(*17 # P*102 C P*6( 5 P*:71 8 P*14: Ans C

"evel #asic



121. Cindy+s Toys Toys has an average inventory of 1*700 teething rings. rings. The carrying cost per unit per year is R. Cindy places an order for (*400 teething rings on the first of each month and the order cost is P2. hat are the total restoc,ing costs under the current systemD A P # P:0 C P10 5 P14 8 P(00 Ans 8

"evel #asic

$ub%ect Inventory ?estoc,ing Costs


122. Cindy+s Toys Toys has an average inventory of 1*700 teething rings. rings. The carrying cost per unit per year is R. Cindy places an order for (*400 teething rings on the first of each month and the order cost is P2. hat are the total restoc,ing costs using the 8&9D A P # P:0 C P14 5 P(00 8 P(:0 Ans C

"evel #asic




'age 24


12(. Farloff Medical $upply maintains an an average inventory of 2*000 human s,ulls for sale to medical medical schools and filmma,ers. The carrying cost per s,ull per year is estimated estimated to be P. #oris places an order order for 10*000 s,ulls on the first of each month and the order cost is P6. hat are the total restoc,ing costs under the current systemD A P22 # P0 C P:00 5 P:0 8 P1*00 Ans C

"evel #asic



12. Farloff Medical $upply maintains an an average inventory of 2*000 human s,ulls for sale to medical medical schools and filmma,ers. The carrying cost per s,ull per year is estimated estimated to be P. #oris places an order order for 10*000 s,ulls on the first of each month and the order cost is P6. hat are the total restoc,ing costs using the 8&9D A P(*17 # P*102 C P*6 5 P*:71 8 P*14: Ans C

"evel #asic



12. Cindy+s Toys Toys has an average inventory of 1*700 teething rings. rings. The carrying cost per unit per year is R. Cindy places an order for (*400 teething rings on the first of each month and the order cost is P2. hat is the economic order )uantity -8&9D A *02 units # *1:( units C *:2 units 5 4*6( units 8 4*400 units Ans 5

"evel #asic



124. Farloff Medical $upply maintains an an average inventory of 2*000 human s,ulls for sale to medical medical schools and filmma,ers. The carrying cost per s,ull per year is estimated estimated to be P. #oris places an order order for 10*000 s,ulls on the first of each month and the order cost is P6. hat is the economic order )uantity -8&9D A 1*104 units # 1*46 units C 1*6 units 5 1*701 units 8 1*7:6 units Ans 8

"evel #asic




'age 26


126. Cindy+s Toys Toys has an average inventory of 1*700 teething rings. rings. The carrying cost per unit per year is R. Cindy places an order for (*400 teething rings on the first of each month and the order cost is P2. hat is the average inventory using the 8&9D A 2*21 units # 2*:4 units C 2*64 units 5 (*274 units 8 (*(00 units Ans 5

"evel #asic

$ub%ect Average Average Inventory


127. Farloff Medical $upply maintains an an average inventory of 2*000 human s,ulls for sale to medical medical schools and filmma,ers. The carrying cost per s,ull per year is estimated estimated to be P. #oris places an order order for 10*000 s,ulls on the first of each month and the order cost is P6. hat is the average inventory using the 8&9D A ( units # 727 units C 762 units 5 :01 units 8 :: units Ans 8

"evel #asic

$ub%ect Average Average Inventory


se the following to answer )uestions 12:=1(2 Cu Current credit policy 'rice Kariable cost 9uantity Monthly return Credit terms

P0 P( 70 1.0G n3a

'roposed credit policy P0 P( 77 1.0G net (0

12:. hat is the incremental incremental cash flow per per year from from switching credit policiesD A P1 # P6 C P2 5 P1*22 8 P1*60 Ans C


$ub%ect Incremental Cash !lows


1(0. hat is the cost cost of switchin switchingD gD A P(*12 # P(7*22 C P1*12 5 P(*62 8 P(*000 Ans 5


$ub%ect Cost &f $witching...



'age 27


1(1. hat is the 'K 'K of switchingD switchingD A QP*000 # QP*60 C P7*66 5 P:*1 8 P12*1( Ans C


$ub%ect 'K &f $witching...


1(2. hat is the brea,=e brea,=even ven sales increas increaseD eD A 2 units # (0 units C ( units 5 1 units 8  units Ans #


$ub%ect #rea,=8ven $ales


se the following to answer )uestions 1((=1(4 Cu Current credit policy Cash price P: Credit price n3a Kariable cost P20 9uantity 100 Monthly return 1.0G Credit terms n3a G ncollectible n3a Also assume that the customer will either pay in (0 days or will default.

'roposed credit policy P: P2 P20 100 1.0G net (0 2G

1((. hat is the incremental incremental cash flow flow per month from switchingD switchingD A P1:4.00 # P227.14 C P21.( 5 P(1.2 8 P766.0 Ans A


$ub%ect Appendi Cash !low !rom...


1(. hat is the cost cost of switchin switchingD gD A P*000 # P*:00 C P*10 5 P*200 8 P*60 Ans #


$ub%ect Appendi Cost &f $witching...



'age 2:


1(. hat is the 'K 'K of switchingD switchingD A P7*1:( # P10*1( C P1(*(6 5 P1*600 8 P14*(6 Ans 5


$ub%ect Appendi 'K &f $witching...


1(4. hat is the brea,= brea,=even even default default rateD rateD A (.2G # .1G C .7G 5 .2G 8 .G Ans C


$ub%ect Appendi #rea,=8ven 5efault...


1(6. A local food food wholesaler has an average average collection period of 1 days days and considers each month month to have a total of (0 days. &n a typical day* the wholesaler sells P2*00 of goods on credit and another P4*700 of goods for cash. hat is the epected balance in accounts receivableD A P(40*600 # P(46*00 C P(6*(00 5 P6(*000 8 P61*700 Ans #

"evel #asic

$ub%ect Accounts ?eceivable


1(7. A firm offers offers credit terms of 13* net 1. hat is the effective effective annual rate on the credit etended if a customer foregoes the discount on a P2*000 purchaseD A 26.60G # (1.2(G C (4.00G 5 .(1G 8 6.:7G Ans 5


$ub%ect 8A?


1(:. Cascade International currently currently has credit terms of net  with no discount and an average collection collection period of 7 days. Cascade believes that if it offered a 231 discount* 40G of its sales would be collected within the discount period and the remaining customers would pay in 0 days. #y how many days will Cascade+s average collection period change if the discount poli cy is adoptedD A =2: days # =27 days C =1: days 5 =10 dys 8 2 days Ans C


$ub%ect Average Average Collection 'eriod



'age (0


10. Alfred Industries currently sells sells for cash only. only. nder this policy* policy* Alfred Alfred sells 200 units a month at a price of P2: each. The variable cost is P14 per unit. The company is considering changing to a net (0 credit polic y in which case they epect sales to increase to 26 units a month while maintaining the current mar,et price. The re)uired rate of return is 1.G m onthly. hat is the present value of the benefit derived from switching the credit policyD A P4*000 # P67*000 C P7*000 5 P1(0*000 8 P1*000 Ans A


$ub%ect #enefit &f Credit 'olicy $witch


11. Buno* Inc. sells 0 units a month at at a price of P1*20 under a cash only credit policy. policy. If the firm implements a net (0=day policy* sales are epected to increase by 10G. The variable cost per unit is P60 and the monthly re)uired rate of return is 2G. hat is the cost of switching credit policiesD A P7*60 # P42*00 C P4(*(6 5 P4*00 8 P44*20 Ans 8


$ub%ect Cost &f Credit 'olicy $witch


12. "emius Industries is considering a net (0=day credit policy* policy* which they believe will increase sales by 2G. Currently "emius sells 700 units a month at a retail price of P a unit and a variable cost of P(2 each. "emius has a re)uired monthly rate of return of 1.6G. hat is the net present value of this possible switch in credit policiesD A P::*7(: # P10(*7:6 C P104*161 5 P117*:61 8 P120*007 Ans C


$ub%ect 'K &f Credit 'olicy $witch


1(. &ff ?oadin+ Inc. builds customi/ed customi/ed ATKs. ATKs. &n average* average* they use 0 tires a day in their manufacturing process. It ta,es  days to receive a shipment of tires once an order is placed. &ff ?oadin+ has a policy of maintaining 70 tires as a safety stoc,. hat is the reorder point level of inventoryD A 0 # 70 C 140 5 20 8 (2 0 Ans 5

"evel #asic

$ub%ect ?eorder 'oint



'age (1


1. 'eg+s Toys Toys manufactures 7:*00 toys a year. As a normal procedure* the company orders orders raw materials in increments such that each order produces 00 toys. The fied cost per order is P(. The toys wholesale at a price of P6.( and have a variable cost of P(.:7. hat is the total restoc,ing costD A P2*02 # P(*00 C P(*42 5 P*00 8 P4*24 Ans 8

"evel #asic

$ub%ect ?estoc,ing Cost


1. ".".#. sells 74*00 units a year. year. The average average order is for 4*000 units. units. 8ach new order arrives arrives %ust as the old order is being depleted. The company does not hold any safety stoc,. 8ach order incurs a fied cost of P7. The carrying cost of inventory is P2.21 per unit per year. hat is the total cost of i nventory for one yearD A P6*2(: # P6*(22 C P:*107 5 P1(*:2 8 P1*021 Ans #


$ub%ect Total Cost &f Inventory


14. A firm sells 1(*000 units a year. year. The carrying cost per unit per year is P0.7. As As a policy* orders are are placed at 00 units each. The fied cost per order is P4. hat is the economic order )uantityD A :: units # 1*14 units C 1*06 units 5 1*: units 8 1*66 units Ans C


$ub%ect 8&9


16. Moni,a+s sells an average of 40 frying pans a year. The carrying cost per per unit is P1.10. The inventory is restoc,ed only when it is depleted. The restoc,ed inventory level is 0 pans. hat are the total carrying costs of the frying pansD A P14.00 # P16.40 C P22.00 5 P0.00 8 P.00 Ans C


$ub%ect Carrying Cost



'age (2


17. The 5ress 5esigner uses 1*000 /ippers a year in their production process. Currently* Currently* they purchase purchase 1*000 /ippers at a time and replenish their inventory when it is depleted. The carrying cost per /ipper is P.(:. The fied order cost is P(. >ow should The 5ress 5esigner change their order )uantityD A 5ecre crease of (: units its # o change C Increase of (: units 5 Increase of 41 units 8 Increase of 1* 1*41 un units its Ans 5


$ub%ect 8&9


se the following to answer )uestions 1:=12 9uidi Kidi Co. has (2 motors in their inventory at the start of the wee,. They will use all of these in their wee,ly production runs and then resupply their inventory for the net wee,. The carrying cost per motor is P7.24. The fied cost per order is P4(. The variable cost per motor is P122. 1:. hat is the total total carrying carrying cost of the motor invento inventoryD ryD A P4*1(( # P1(*4:2 C P1:*72 5 P26*(7 8 P((*16 Ans #


$ub%ect Total Carrying Cost


10. hat are the total total restoc,ing restoc,ing costs costs for the yearD yearD A P(*264 # P*017 C P*446 5 P4*( 8 P:*420 Ans A


$ub%ect Total ?estoc,ing Cost


11. hat is the economic economic order order )uantity )uantity of motorsD motorsD A 16 # 1: C 141 5 144 8 14 7 Ans #


$ub%ect 8&9


12. >ow will the number of orders per year change if 9uidi Kidi Kidi Co. adheres to the 8&9 order levelD A 5ecre crease of of   or orders # Increase of  order ders C Increase of 10 106 or order ders 5 Increase of 12 12( or order ders 8 Increase of 1 1: or order ders Ans C


$ub%ect umber &f &rders



'age ((


1(. A firm sells sells *000 units a year. year. They have an 8&9 of 1*700 units. The firm firm offers their customers customers credit terms of 2310* net (0. The firm uses a (40=day year. If both the firm and the customers operate in a manner that maimi/es the benefits to themselves* the firm will have an operating cycle e)ual to @@@ days. A 2. # 2.0 C (.0 5 (.4 8 . Ans A

"evel Challenge

$ub%ect 8&9* Credit 'olicy And &perating Cycle


se the following to answer )uestions 1=14 Current credit policy P7.00 n3a P(4.00 120 2.00G n3a n3a

Cash price Credit price Kariable cost 9uantity Monthl y return Credit terms G ncollectable

'roposed credit policy P7.00 P0.00 P(4.00 120 2.00G et (0 (.00G

Assume the customer will either pay in (0 days or will default. 1. hat is the incremental incremental cash flow per per month from switching the credit policyD policyD A P(0 # P40 C P120 5 P170 8 P20 Ans # "evel Intermediate Type 'roblems

$ub%ect Appendi Cash !low !rom Credit 'olicy $witch

1. hat is the cost cost of switching switching the credit policyD policyD A P*(20 # P*000 C P*((( 5 P*640 8 P4*000 Ans 5

"evel Intermediate Intermediate

$ub%ect Appendi Cost &f Credit 'olicy $witch


14. hat is the 'K of switching switching the the credit policyD policyD A =P*640 # =P2*640 C P2*640 5 P(*000 8 P*640 Ans #


$ub%ect Appendi Appendi 'K &f Credit 'olicy $witch


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16. The Mi=It=p Company is considering changing changing their credit policy. policy. The company has compiled compiled the following information 'rice per unit Kariable cost per unit Current )uantity sold per month 9uantity sold under new policy Monthly re)uired return

P(4.00 P1.00 120 10 2.00G

hat is the present value of the credit policy change using the &ne=$hot ApproachD A P1*7:: # P1*04( C P14*20: 5 P14*(61 8 P16*20 Ans 5


$ub%ect Appendi &ne $hot Approach


17. hy is the buyer+s operating operating cycle considered to be an appropriate upper limit for the credit credit periodD -#e sure to define what the operating cycle is.  ouldn+t the buyer+s inventory period be a better targetD Ans The operating operating cycle cycle is the sum of the inventory inventory and accounts accounts receiva receivable ble periods. periods. !inancing !inancing longer longer than this means the seller is financing not only the buyer+s inventory needs* but also other parts of the buyer+s business. The inventory period might be a better target as an upper limit since it is )uestionable whether or not the seller should be financing the buyer+s receivables. "evel Challenge

$ub%ect "ength "ength &f Credit 'eriod

Type Type 8ssays 8ssays

1:. Consider the case where a large firm tells its suppliers suppliers that even if they re)uire terms terms of net (0* the large firm is going to ta,e 40 days to pay. The large firm essentially tells its suppliers to ta,e the terms or lose the account. Is this ethicalD ould ould this impact small suppliers more than large suppliersD 8plain. Ans This )uestion )uestion can can lead to a lively lively discussion discussion about about the ethics ethics of abusing abusing the credit credit period. period. $ome or even most will argue that it is unethical for the large firm to eercise its will against its suppliers. Most would argue that a supplier that is a relatively large firm will better be able to deal with the change than a small firm would. If a supplier is small* it could be that that the account is a significant proportion of total sales and that the firm cannot afford to lose the sale. "evel Challenge

$ub%ect 8thics O The Credit 'eriod

Type Type 8ssays

140. "isted in the tet are seven factors factors that most influence influence the credit period. period. "ist and briefly eplain eplain five of these and give an eample of a product that fits each factor. Ans This re)uires re)uires only only a minor amount amount of creativity creativity on the part of the students students** the answers answers to the listing are straight from the tet -1 perishable have a short credit period* -2 low consumer demand means a longer credit period* -( relatively i nepensive goods* standardi/ed goods* and raw materials have shorter periods* - the greater the credit ris, the shorter the credit period* - small accounts have shorter periods* -4 credit period will be longer in a competitive mar,et* and -6 the credit period may depend on the consumer type. "evel Challenge

$ub%ect !actors that Influence the Credit 'eriod



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141. hat is the cost of credit for credit terms of 2310 net (0D hat about for net (0* no discountD discountD hat are the implications for management of payments under eachD Ans The 2310 2310 net net (0 has an an 8A? of -1 -1 E .023.:7 .023.:7(4320 Q 1 S .4G. The A'? is (6.2G. !or the net (0 terms* the cost is 0G. In case the students hadn+t hadn+t actually thought about it before* it is obvious that the 2310 net (0 terms call for ta,ing the discount and ma,ing payment on the 10th day while the net (0 terms call for payment on the (0th day. The cost differences between between the two are stri,ing and provide ample opportunity for discussion of the pros and cons of each type of terms. "evel Challenge

$ub%ect Cost &f Credit Terms Terms


142. hy might firms forego discounts discounts even though it is costly to do soD soD hat steps might a firm pursue to be able to ta,e these discountsD Ans !irms will will forego forego discounts discounts when they they have inade)uate inade)uate cash cash flow to ta,e ta,e them. It would be diff difficult icult 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. >owever* it might be more desirable than raising cash* say through secured inventory financing or factoring receivables. receivables. As far as correcting correcting the problem* any of the cash and li)uidity management policies discussed earlier in the tet would help the situation if the firm is able to enhance its li)uidity and cash flow. "evel Intermediate

$ub%ect 5iscounts


14(. All else the same* it is li,ely that firms with -1 ecess ecess capacity* -2 low variable costs* and -( -( repeat customers will etend credit credit more liberally than others. hyD Ans !irms with ecess ecess capacity capacity will li,ely etend credit credit more liberally liberally as a means to increase increase sales and capacity usage. !irms with low variable costs etend credit credit more liberally because* from the 'K of switching* the 'K of the future incremental cash flows increase as variable costs per unit fall* while the cost of the switch declines as variable costs fall. !inally* firms with repeat customers gain familiarity with their customers+ character and credit needs* thereby facilitating more liberal credit terms. "evel Intermediate

$ub%ect "iberal Credit Terms Terms


14. 5raw a picture of the total credit credit cost curve along with the carrying carrying cost curve and the opportunity opportunity cost curve. $how the relationship between the amount of credit etended -hori/ontal ais and the cost of each. Also* briefly discuss what the figure illustrates. Ans Ans $tuden $tudents ts should should draw draw !igure !igure 20.1. 20.1. "evel #asic #asic

$ub%ect Total Total Credit Cost Curve


14. hat are the  Cs of credit. "ist and give a brief description description of each. Ans The five are character* character* capacity* collateral* economic conditions* and capital. The description description is also very easy. "evel #asic #asic

$ub%ect  Cs of Credit



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144. 5efine and briefly discuss the A#C* 8&9* materials re)uirements re)uirements planning -derived -derived demand * and and %ust=in= time inventory management systems. systems. hen is each appropriateD appropriateD Ans Kery Kery briefly* briefly* under A#C* you segregate segregate inventory into three three groups based based on their percent percent of inventory value and percent of inventory items. The 8&9 allows you you to determine the optimal order amount by assuming inventory depletes depletes at a constant constant rate* among other things. The 8&9 model can be modified to incorporate incorporate safety stoc,s and reorder reorder points. nder M?'* M?'* finished goods inventories are set* then you wor, bac,wards to determine the optimal levels of wor, in process and raw materials inventories. inventories. ith BIT* BIT* the goal is to minimi/e inventory and maimi/e maimi/e turnover* ,eeping %ust enough inventory on hand to meet production or sales needs. This type of inventory management re)uires stable and dependable suppliers. "evel Intermediate



146. Construct a numerical eample problem utili/ing the 8&9 inventory system. hat happens to the 8&9 and to average inventory levels when one adds safety stoc,D hat if the cost of pl acing an order doublesD hat if the carrying cost per unit is halvedD Ans e have found that that students can learn a great deal by constructing and solving their own problems. This )uestion as,s them to do %ust that* and to eamine the effects of changes in some of the parameters. "evel Intermediate

$ub%ect 8&9


147. >ow might the state of the economy affect affect the credit credit policy of a firmD Ans $tudent answers will vary. vary. The overall state of of the economy economy impacts the sales )uantity* )uantity* the selling price* the derived demand* the inventory turnover rates* the length of time to collect a receivables account* the receivable default rate* etc. A change in any one of these variables* or an y combination thereof* could cause a firm to change their t heir credit policy. "evel Intermediate



14:. >ow might the .$. war on terrorism affect affect the level level of safety stoc, a Canadian firm maintainsD Ans $tudent answers will vary. vary. The increased threat of terrorism increases the possibility that an unepected event might interrupt the flow of inventory deliveries. If a firm imports materials from or eports materials to the .$.* the new security measures at the borders will increase normal delivery times. #oth of these are factors that should cause firms to increase their safety stoc, level. The idea of the )uestion is to get students to reali/e that business decisions are not stagnant and must constantly be reviewed in light of changing situations. "evel Intermediate




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Chapter 20

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