Chapter 20 - Credit and Inventory Management

Chapter 20 - Credit and Inventory Management
Chapter 20
Credit and Inventory Management

Multiple Choice Questions

1. Blackwell Brothers sells men's suits. he store o!!ers a 1 percent discount i! payment is
received within 10 days. "therwise# payment is due within $0 days. his credit o!!ering is
re!erred to as the%
&. terms o! sale.
B. credit analysis.
C. collection policy.
'. paya(les policy.
). collection !loat.

2. *illian was recently hired (y a ma+or retail store. ,er +o( is to determine the pro(a(ility that
individual customers will !ail to pay !or their charge sales. *illian's +o( (est relates to which
one o! the !ollowing-
&. terms o! sale
B. credit analysis
C. collection policy
'. paya(les policy
). customer service

$. own ,ardware sells goods on credit with payment due $0 days a!ter purchase. I! payment
is not received (y the $0
th
day# the store mails a !riendly reminder to the customer. I! payment
is not received (y the ./
th
day# the store calls the customer and re0uests payment and also
stops o!!ering credit to that customer. hese procedures are re!erred to as the store's%
&. customer service policy.
B. credit policy.
'. paya(les policy.
). dis(ursements policy.

20-1
.. 1hil's 1rint 2hop grants its customers the right to pay !or their print +o(s within $0 days o!
the date o! service. his $0-day period is re!erred to as the%
&. paya(les period.
B. cash cycle.
C. transactions period.
'. credit period.
). dis(ursement period.

/. 2cott purchased a shovel# a rake# and a wheel(arrow !rom he 3ocal ,ardware 2tore
yesterday. oday# the store issued a (ill !or these items and mailed it to 2cott. 4hat is the
name given to this (ill-
&. ledger statement
B. warranty
C. indenture
'. receipt
). invoice

5. 6eo!! Industries o!!ers its credit customers a 2 percent discount i! they pay within 10 days.
his discount is re!erred to as a%
&. cash discount.
B. purchase discount.
C. collection discount.
'. market discount.
). receiva(les discount.

7. &ny written proo! that a customer owes you money !or goods or services provided is
re!erred to as a8n9%
&. account document.
B. sales dra!t.
C. credit instrument.
'. commercial paper.
). letter o! de(t.

20-2
:. ;ou are viewing a graph which compares costs with the amount o! credit e<tended. Both
the carrying costs and the opportunity costs o! credit are depicted. 4hat is the !unction called
that represents the summation o! these carrying and opportunity costs-
&. opportunity cost curve
B. credit e<tension curve
C. credit cost curve
'. terms o! sale graph
). optimal sales graph

=. &ssume that >2? is a wholly-owned su(sidiary o! the >olled 2teel Company. >2? provides
credit !inancing solely !or large ticket items purchased !rom the >olled 2teel Company.
4hich one o! the !ollowing terms descri(es >2?-
&. credit department
B. parent company
C. captive !inance company
'. credit union
). service unit

10. he (asic !actors to (e evaluated in the credit evaluation process# the !ive Cs o! credit#
are%
&. conditions# control# cessation# capital# and capacity.
B. conditions# character# capital# control# and capacity.
C. capital# collateral# control# character# and capacity.
'. character# capacity# control# cessation# and collateral.
). character# capacity# capital# collateral# and conditions.

11. >oger's ,ome &ppliances o!!ers credit to customers it deems worthy o! this privilege. o
determine i! a customer is worthy# the !irm computes a numerical value which is used to
estimate the pro(a(ility that the customer will de!ault i! credit is granted to them. he process
o! computing this numerical value is re!erred to as%
&. credit scoring.
B. credit capacity.
C. receipts assessment.
'. conditions !or credit.
). consumer analysis.

20-$
12. ;ou have recently (een hired as an accounting intern !or *e!!erson Mills. he +o( that you
have (een assigned !or today is to compile a spreadsheet that has si< columns. he column
headings are% Invoice @A Customer nameA B $0 daysA $1-50 daysA 51-=0 daysA C =0 days. ;ou
are to list every unpaid invoice (y customer name with the amount owed entered into the
appropriate column !or the num(er o! days (etween the sale date and today. "nce you have
completed that# you are to sort the report (y customer name and then total the amounts listed
in each column. 4hat is this report called-
&. credit report
B. aging schedule
C. risk assessment report
'. turnover delineation
). receiva(les consolidation report

1$. Bill is in charge o! the inventory !or ,ome Builder's 2upply. &s an inventory item gets
low# he is to restock the item (y a 0uantity that minimiDes the total inventory costs !or that
item. 4hat is this restocking 0uantity called-
&. short order 0uantity
B. re!ill unit 0uantity
C. economic order 0uantity
'. minimum stock level
). re-order limit

1.. &llison has developed a set o! procedures !or determining the amount o! each raw
material that she needs to have in inventory i! she is to keep her !irm's assem(ly lines
operating e!!iciently. hese procedures are commonly re!erred to (y which one o! the
!ollowing terms-
&. !irst-in# !irst-out method
B. the Baumol model
C. net working capital planning
'. economic order procedures
). materials re0uirements planning

20-.
1/. 4hich one o! the !ollowing is a system !or managing demand-dependent inventories that
minimiDes the inventory levels o! a !irm-
&. +ust-in-time inventory
B. turnover planning
'. inventory scoring
). inventory ranking

15. he terms o! sale generally include which o! the !ollowing-
I. type o! credit instrument
II. cash discount
III. credit period
IE. discount period
&. I and III only
B. II and IE only
C. III and IE only
'. II# III# and IE only
). I# II# III# and IE

17. 4hat is the primary purpose o! credit analysis-
&. determine the optimal credit period
B. esta(lish the e!!ectiveness o! granting a cash discount
C. determine the optimal discount period# i! any
'. access the !re0uency and amount o! sales (y customer
). evaluate whether or not a customer will pay

1:. he period o! time that e<tends !rom the day a credit sale is made until the day the (ank
credits a !irm's account with the payment !or that sale is known as the FFFFF period.
&. !loat
B. cash collection
C. sales
'. accounts receiva(le
). discount

20-/
1=. 4hich one o! the !ollowing will increase a !irm's investment in accounts receiva(les-
&. a decrease in the num(er o! days !or which credit is granted
B. a decrease in credit sales
C. an increase in cash sales
'. a decrease in the average collection period
). an increase in average daily credit sales

20. & !irm's total investment in receiva(les depends primarily on the !irm's%
&. total sales and cash discount period.
B. cash to credit sales ratio.
C. (ad de(t ratio.
'. average collection period and amount o! credit sales.
). amount o! credit sales and cash discount percentage.

21. 4hich one o! the !ollowing time periods is included in the accounts receiva(le period (ut
not in the cash collection period-
&. the period o! time (etween the receipt o! a check and the availa(ility o! those !unds
B. time it takes a !irm to process incoming receipts
C. period o! time a check is in the mail
'. the amount o! time that it takes a (ank to credit a !irm's account !or a deposit made
). period o! time it takes an invoice to reach a customer (y mail

22. 4hich one o! the !ollowing statements is correct i! you purchase an item with credit terms
o! 1G/# net 1/-
&. I! you pay within 1 day# you will receive a / percent discount.
B. I! you pay within / days# you will receive a 1 percent discount.
C. I! you do not pay within 1/ days# you will (e charged interest at a 1./ percent monthly rate.
'. I! you pay within 1/ days# you will receive a 1G/th percent discount.
). ;ou must pay the discounted amount within 1/ days.

20-5
2$. ;ou are doing some comparison shopping. ?ive stores o!!er the product you want at
(asically the same price. 4hich one o! the !ollowing stores o!!ers the (est credit terms i! you
plan on taking the discount-

&. store &
B. store B
C. store C
'. store '
). store )

2.. ;ou are doing some comparison shopping. ?ive stores o!!er the product you want at
plan to !orego the discount-

&. store &
B. store B
C. store C
'. store '
). store )

20-7
2/. 4hich one o! the !ollowing statements is correct-
&. he credit period (egins when the discount period ends.
B. he discount period is the length o! time granted to a customer to pay !or a purchase.
C. he credit period (egins on the invoice date.
'. 4ith terms o! 2G10# net $0# the net credit period is 20 days.
). 4ith )"M dating# all sales are assumed to have occurred on the 1/
th
o! each month.

25. 4hich two o! the !ollowing are the key considerations !or a seller who is esta(lishing the
length o! the credit period (eing o!!ered to a customer-
I. seller's operating cycle
II. customer's operating cycle
III. seller's inventory period
IE. customer's inventory period
&. I and II
B. II and III
C. III and IE
'. II and IE
). I and IE

27. 4hich one o! the !ollowing !actors tends to !avor longer credit periods-
&. high consumer demand
B. lower priced merchandise
C. increased credit risk
'. merchandise with low collateral value
). increased competition

2:. 4hich one o! the !ollowing statements is correct in regards to credit periods-
&. 1erisha(le items tend to have longer credit periods.
B. Items with low markups tend to have longer credit periods.
C. 2maller accounts tend to have longer credit periods.
'. 'i!!erent customers may (e o!!ered di!!erent credit periods (y the same !irm.
). Hewer products tend to have shorter credit periods.

20-:
2=. & cash discount o! 2G/# net $0%
&. grants customers $0 days to pay a!ter the discount period e<pires.
B. o!!ers customers a ma<imum o! $0 days credit.
C. grants !ree credit !or a period o! $0 days.
'. charges a higher price to a cash customer than to a customer who pays in 2 days.
). grants customers 2 days to pay i! they want the / percent discount.

$0. Inder credit terms o! 1G/# net 1/# customers should%
&. always pay on the 1/
th
day.
B. take the / percent discount and pay immediately.
C. take the discount and pay on the day !ollowing the day o! sale.
'. either take the discount or pay on the 1/
th
day.
). (oth take the discount and pay on the 1/
th
day.

$1. & 2G10# net $0 credit policy%
&. is an e<pensive !orm o! short-term credit i! a (uyer !oregoes the discount.
B. provides cheap !inancing to the (uyer !or $0 days.
C. is an ine<pensive means o! reducing the seller's collection period i! every customer takes
the discount.
'. tends to have little e!!ect on the seller's collection period.
). tends to increase a !irm's investment in receiva(les as compared to a straight net $0 policy.

$2. he 6reen ,ornet o!!ers a trade discount with terms o! 2G/# )"M. &ssume you purchase
an item on credit !rom he 6reen ,ornet on Monday# Hovem(er $. 4hat is the invoice date
!or this purchase-
&. Hovem(er $
B. Hovem(er /
C. Hovem(er 7
'. Hovem(er :
). Hovem(er $0

20-=
$$. 4hich one o! the !ollowing credit instruments is commonly used in international
commerce-
&. open account
B. sight dra!t
C. time dra!t
'. (anker's acceptance
). promissory note

$.. & conditional sales contract%
&. passes title to the goods sold to the (uyer at the time the contract is signed.
B. normally calls !or one lump sum payment on the contract payment date.
C. generally has a (uilt-in interest cost.
'. is paya(le immediately upon receipt.
). is a !ormal (id !or a pro+ect.

$/. 4hich o! the !ollowing statements correctly re!lect the e!!ects o! granting credit to
customers-
I. otal revenues may increase i! (oth the 0uantity sold and the price per unit increase when
credit is granted.
II. & !irm's cash cycle generally increases i! credit is granted# all else e0ual.
III. Both the cost o! de!ault and the cost o! discounts must (e considered (e!ore granting
credit.
IE. & !irm may have to increase its long-term (orrowing i! it decides to grant credit to its
customers.
&. I# II# and III only
B. II# III# and IE only
C. I# III# and IE only
'. I# II# and IE only

20-10
$5. ;ou are considering switching !rom an all cash credit policy to a net $0 credit policy. ;ou
do not e<pect the switch to a!!ect either your sales 0uantity or your sales price. Ignoring
interest and assuming that every month has $0 days# your net present value o! the switch will
(e e0ual to%
&. Dero.
B. your selling price per unit.
C. your selling price per unit multiplied (y -1.
'. your selling price per unit multiplied (y -$0.
). your total monthly sales multiplied (y -1.

$7. he optimal amount o! credit e0uates the incremental costs o! carrying the increase in
accounts receiva(le to the incremental%
&. decrease in the cash cycle.
B. (ene!it !rom decreasing the inventory level.
C. cash !lows !rom increased sales.
'. increase in (ad de(ts.
). gain in net pro!its.

$:. 4hen credit policy is at the optimal point# the%
&. total costs o! granting credit will (e ma<imiDed.
B. carrying costs o! credit will (e e0ual to Dero.
C. opportunity cost o! credit will (e e0ual to Dero.
'. carrying costs will e0ual the opportunity costs.
). total costs will e0ual the opportunity costs.

$=. I! you e<tend credit !or a one-time sale to a new customer you risk an amount e0ual to%
&. the sales price o! the item sold.
B. the varia(le cost o! the item sold.
C. the !i<ed cost o! the item sold.
'. the pro!it margin on the item sold.
). Dero.

20-11
.0. 4hich one o! the !ollowing statements is correct-
&. I! the ma+ority o! a !irm's new customers (ecome repeat customers then there is a strong
argument against e<tending credit even i! the de!ault rate is low.
B. & customer's past payment history reveals little in!ormation in relation to his or her !uture
tendency to pay.
C. & suggested policy !or o!!ering credit to new customers is to limit the amount o! their
initial credit purchase.
'. he risk o! issuing credit is the same !or a new customer as it is !or an e<isting customer.
). he recommended credit policy !or new customers is to e<tend the ma<imum amount o!
credit you will ever (e willing to o!!er as an enticement to get their (usiness.

.1. 4hich o! the !ollowing are !re0uently used as sources o! in!ormation when trying to
ascertain the creditworthiness o! a customer-
I. payment history with similar !irms
II. credit reports
III. !inancial statements
IE. in!ormation provided (y a (ank
&. I and III only
B. II and IE only
C. I and II only
'. I# II# and III only

.2. 4hen evaluating the creditworthiness o! a customer# the term character re!ers to the%
&. nature o! the cash !lows o! the customer's (usiness.
B. customer's !inancial resources.
C. types o! assets the customer wants to pledge as collateral.
'. customer's willingness to pay (ills in a timely !ashion.
). nature o! the customer's line o! work.

.$. 4hich one o! the !ive Cs o! credit re!ers to a !irm's !inancial reserves-
&. character
B. capacity
C. collateral
'. conditions
). capital

20-12
... 4hich one o! the !ive Cs o! credit re!ers to the general economic situation in the
customer's line o! (usiness-
&. capacity
B. character
C. conditions
'. capital
). collateral

./. 4hich one o! the !ollowing statements is correct-
&. &n aging schedule helps identi!y those customers who are the most delin0uent.
B. he percentage o! total receiva(les that !alls within a certain time period on an aging
schedule will remain constant over time even i! the !irm has seasonal sales.
C. Hormally !irms call their delin0uent customers prior to sending them a past due letter.
'. & constant average collection period over a period o! time is cause !or concern.
). It is common practice when a customer !iles !or (ankruptcy to sell that customer's
receiva(le at !ace value.

.5. 4hich one o! the !ollowing inventory items is pro(a(ly the least li0uid-
&. plywood held in inventory (y a home (uilder
B. a wheel (arrow held in inventory (y a garden center
C. a partially assem(led interior !or a new vehicle
'. a set o! tires owned (y an automo(ile manu!acturer
). a toy owned (y a retail toy store

.7. 4hich one o! the !ollowing inventory items is pro(a(ly the most li0uid-
&. a custom made set o! kitchen ca(inets
B. metal ca(inets !or dishwashers
C. wheat stored in a grain silo
'. a customiDed drilling press
). a partially (uilt modular home

20-1$
.:. 4hich one o! the !ollowing inventory-related costs is considered a shortage cost-
&. storage costs
B. insurance cost
C. cost o! sa!ety reserves
'. o(solescence cost
). opportunity cost o! capital used !or inventory purchases

.=. he &BC approach to inventory management is (ased on the concept that%
&. inventory should arrive +ust in time to (e used.
B. the inventory period should (e constant !or all inventory items.
C. (asic inventory items that are essential to production and also ine<pensive should (e
ordered in small 0uantities only.
'. a small percentage o! the inventory items pro(a(ly represents a large percentage o! the
inventory cost.
). one-third o! a year's inventory need should (e on hand# another third should (e on order#
and the last third should not (e ordered yet.

/0. he )"J model is designed to determine how much%
&. total inventory a !irm needs in any one year.
B. total inventory costs will (e !or any one given year.
C. inventory should (e purchased at a time.
'. inventory will (e sold per day.
). a !irm loses in sales per day when an inventory item is depleted.

/1. &t the optimal order 0uantity siDe# the%
&. total cost o! holding inventory is !ully o!!set (y the restocking costs.
B. carrying costs are e0ual to Dero.
C. restocking costs are e0ual to Dero.
'. total costs e0ual the carrying costs.
). carrying costs e0ual the restocking costs.

20-1.
/2. he )"J model is designed to minimiDe%
&. production costs.
B. inventory o(solescence.
C. the carrying costs o! inventory.
'. the costs o! replenishing inventory.
). the total costs o! holding inventory.

/$. 4hich one o! the !ollowing items is most likely a derived-demand inventory item-
&. cereal ready to (e (agged and shipped to stores
B. tires held in inventory (y an auto maker
C. shoes on display in a retail store
'. toys ready to (e shipped to toy stores
). wheat harvested (y a !armer

/.. Inventory needs under a derived-demand inventory system are%
&. primarily dependent upon the competitive demands placed on a !irm's suppliers.
B. (ased on the anticipated demand !or the !inished product.
C. (ased on minimiDing the cost o! restocking inventory.
'. held constant over time.
). determined (y a kan(an system.

//. & +ust-in-time inventory system%
I. when implemented properly reduces the cost o! inventory to Dero.
II. increases the inventory turnover rate.
III. is su!!icient to handle immediate production needs.
IE. minimiDes the costs o! holding inventory.
&. I and III only
B. II and IE only
C. I# II# and IE only

20-1/
/5. he incremental investment in receiva(les under the accounts receiva(le approach is e0ual
to%
&. 1 - vJ.
B. 1J.
C. 1J K v8J - J9.
'. 18J - J9.
). 1J8J - J9.

/7. he accounts receiva(le approach to credit policy supports the theory that%
&. a !irm's risk o! o!!ering credit to a new customer is limited to the varia(le cost o! the sold
items.
B. the (est credit policy is an all-cash policy.
C. the cost o! o!!ering credit to a new customer is the same as the cost o! o!!ering credit to an
e<isting customer.
'. !oregoing cash discounts is a method o! o(taining ine<pensive short-term !inancing.
). the de!ault risk o! a credit policy is the same as the de!ault risk under an all cash-policy i!
your customers remain the same.

/:. 4hich two o! the !ollowing are the key elements in determining whether or not a switch
!rom a no-credit policy to a credit policy is advisa(le-
I. varia(le cost per unit
II. cash discount percentage
III. credit price
IE. de!ault rate
&. I and III only
B. II and IE only
C. II and III only
'. I and IE only
). III and IE only

20-15
/=. "n average# your !irm sells L$:#700 o! items on credit each day. he !irm's average
operating cycle is .= days and it ac0uires and sells inventory# on average# every 17 days. 4hat
is the average accounts receiva(le (alance-
&. L5/7#=00
B. L:.:#000
C. L1#2$:#.00
'. L1#$1/#/00
). L1#:=5#$00

50. he 4inter 2tore +ust purchased L.:#$00 o! goods !rom its supplier with credit terms o!
1G10# net 2/. 4hat is the discounted price-
&. L.$#.70
B. L.5#20=
C. L.7#:17
'. L.7#=2=
). L.:#$00

51. oday# "cto(er 12# Hadine's ?ashions purchased L/11 worth o! merchandise !rom a
supplier. he credit terms are 1G/# net 20. By what day does Hadine's have to make the
payment to receive the discount- Hote% "cto(er has $1 days.
&. "cto(er 1$
B. "cto(er 1/
C. "cto(er 17
'. "cto(er 27
). Hovem(er 1

52. & supplier grants your !irm credit terms o! 2G10# net .0. 4hat is the e!!ective annual rate
o! the discount i! the !irm purchases L.#500 worth o! merchandise-
&. 27.2. percent
B. 27.:5 percent
C. 2:.:0 percent
'. 2=.0$ percent
). 2=.27 percent

20-17
5$. Cape May 1roducts currently sells 5/0 units a month at a price o! L/= a unit. he !irm
(elieves it can increase its sales (y an additional 12/ units i! it switches to a net $0 credit
policy. he monthly interest rate is 0.$/ percent and the varia(le cost per unit is L$:. 4hat is
the incremental cash in!low !rom the proposed credit policy switch-
&. L77.
B. L2#52/
C. L.#7/0
'. L/#5=0
). L7#$7/

5.. 1olly's ,ome &ccents currently sells $./ units a month at a price o! L/= a unit. 1olly
thinks she can increase her sales (y an additional // units i! she switches to a net $0 credit
policy. he monthly interest rate is 0.. percent and the varia(le cost per unit is L$2. 4hat is
the net present value o! the proposed credit policy switch-
&. L$.=#1$/
B. L$/0#:=/
C. L.25#/07
'. L521#=2=
). L:21#1$/

5/. Currently# 6lasgow Importers sells 2:0 units a month at a price o! L72= a unit. he !irm
(elieves it can increase its sales (y an additional .0 units i! it switches to a net $0 credit
policy. he monthly interest rate is 0./ percent and the varia(le cost per unit is L.:0. 4hat is
&. -L21$#$50
B. -L=#2.0
C. L1=0#200
'. L1#2:7#/20
). L1#75:#5:0

20-1:
55. Currently# he oy Bo< sells .5/ units a month at an average price o! L$= a unit. he
company thinks it can increase sales (y an additional 1$0 units a month i! it switches to a net
$0 credit policy. he monthly interest rate is 0.. percent and the varia(le cost per unit is L21.
4hat is the incremental cash in!low o! the proposed credit policy switch-
&. L2#120
B. L2#$.0
C. L2#200
'. L2#7$0
). L/#070

57. 1reston Milled 1roducts currently sells a product with a varia(le cost per unit o! L21 and a
unit selling price o! L.0. &t the present time# the !irm only sells on a cash (asis with monthly
sales o! 2#:00 units. he monthly interest rate is 0./ percent. 4hat is the switch (reak-even
point i! the !irm switched to a net $0 credit policy- &ssume the selling price per unit and the
varia(le costs per unit remain constant.
&. 2#:$0 units
B. 2#=10 units
C. $#$$$ units
'. $#.1. units
). $#/25 units

5:. 2aucier M Co. currently sells 2#200 units a month !or total monthly sales o! L:5#/00. he
company is considering replacing its current cash only credit policy with a net $0 policy. he
varia(le cost per unit is L1: and the monthly interest rate is 1.2 percent. 4hat is the switch
(reak-even level o! sales- &ssume the selling price per unit and the varia(le costs per unit
remain constant.
&. 1#=.$ units
B. 2#117 units
C. 2#2.= units
'. 2#.05 units
). 2#/.: units

20-1=
5=. he Cellar 'oor currently sells =#520 units a month !or total monthly sales o! L$15#000.
he company is considering replacing its current cash only credit policy with a net $0 policy.
he varia(le cost per unit is L1/ and the monthly interest rate is 1./ percent. 4hat is the
switch (reak-even level o! sales-
&. =#711 units
B. =#77= units
C. =#:1. units
'. =#=/7 units
). =#::= units

70. ;ou have the opportunity to make a one-time sale i! you will give a new customer $0 days
to pay. ;ou suspect there is a 1/ percent chance this person will never pay you. he sales
price o! the item the customer wants to (uy is L2:=. ;our varia(le cost on that item is L1/5
and your monthly interest rate is 1.7/ percent. 2hould you grant credit to this customer- 4hy
or why not-
&. yesA (ecause the H1E o! the potential sale is L11$.0/
B. yesA (ecause the H1E o! the potential sale is L:/..$
C. noA (ecause the H1E o! the potential sale is -L1$$.00
'. noA (ecause the H1E o! the potential sale is -11$.0/
). noA (ecause the H1E o! the potential sale is -L:=.5/

71. ;ou are considering renting a kiosk in the local mall !or a period o! three months. &ny
sale you make will (e a one-time sale. here is only a 7= percent chance you will collect
payment on a credit sale. he product you want to sell has a varia(le cost o! L$.:: and a sales
price o! L..==. he monthly interest rate is 1./ percent. 2hould you o!!er people $0 days to
pay- 4hy or why not-
&. yesA (ecause the H1E o! a credit sale is L0.0=.
B. yesA (ecause the H1E o! a credit sale is L0.0$.
C. noA (ecause the H1E o! a credit sale is -L0.0:.
'. noA (ecause the H1E o! a credit sale is -L0.02.
). It doesn't matter (ecause the H1E o! a credit sale is appro<imately Dero.

20-20
72. ;ou are trying to attract new customers that you !eel could (ecome repeat customers. he
average selling price o! your products is L5= each with a L.1 per unit varia(le cost. he
monthly interest rate is 1.2 percent. ;our e<perience tells you that : percent o! these
customers will never pay their (ill. 4hat is the value o! a new customer who does not de!ault
on his or her (ill-
&. L1#=:5
B. L2#$$$
C. L2#517
'. L.#:17
). L:#:57

7$. ;ou are trying to attract new customers that you !eel could (ecome repeat customers. he
average price o! your product is L51= per unit with a L.$/ varia(le cost per unit. he monthly
interest rate is 1.: percent. ;our e<perience tells you that = percent o! these customers will
never pay their (ill. 2hould you o!!er credit terms o! net $0 to attract these potential
customers- 4hy or why not-
&. yesA (ecause the H1E o! e<tending credit is L:#:57
B. yesA (ecause the H1E o! e<tending credit is L=#7:7
C. yesA (ecause the H1E o! e<tending credit is L12:
'. noA (ecause the H1E o! e<tending credit is -L./=
). It doesn't matter (ecause the H1E o! e<tending credit is Dero.

7.. & !irm sells .#/00 units o! an item each year. he carrying cost per unit is L2.1/ and the
!i<ed costs per order are L57. 4hat is the economic order 0uantity-
&. $7. units
B. .21 units
C. .=7 units
'. /$0 units
). 52$ units

20-21
7/. he (est-selling pair o! roller skates he een 2tore o!!ers sells !or L7=.== a pair. he
store consistently sells /#700 pairs o! these roller skates every year. he !i<ed costs to order
more skates is L5: and the carrying costs are L1.=/ per pair. 4hat is the economic order
0uantity-
&. ..5 pairs
B. /1/ pairs
C. /2= pairs
'. 5$1 pairs
). 5.: pairs

75. "ne o! the (est selling items 3.. en o!!ers sells !or L=.== a unit. he varia(le cost per
unit is L5.$: and the carrying cost per unit is L1.12. he !irm sells 7#100 o! these units each
year. he !i<ed cost to order this item is L7/. 4hat is the economic order 0uantity-
&. 5=0 units
B. 7.7 units
C. =7/ units
'. 1#1/7 units
). 1#250 units

77. )ach year you sell =/0 units o! a product at a price o! L:== each. he varia(le cost per
unit is L/7/ and the carrying cost per unit is L15.=0. ;ou have (een (uying 100 units at a
time. ;our !i<ed cost o! ordering is L50. 4hat is the economic order 0uantity-
&. :2 units
B. =/ units
C. 10/ units
'. 11$ units
). 12. units

20-22
7:. 4eis(rough Inited currently has a cash sales only policy. Inder this policy# the !irm sells
.10 units a month at a price o! L21= a unit. he varia(le cost per unit is L1.: and the carrying
cost per unit is L$.$0. he monthly interest rate is 1.$ percent. he !irm (elieves it can
increase its sales to .7/ units a month i! it institutes a net $0 credit policy. 4hat is the net
present value o! the switch using the one-shot approach-
&. L22:#.00
B. L2//#/=0
C. L251#.70
'. L2:2#2$$
). L2:/#=02

7=. Inder the current cash sales only policy Blue Bird# Inc.# will sell 21/ units a month at a
price o! L.5= each. he varia(le cost per unit is L$0/ and the monthly interest rate is 1.7
percent. Based on a recent survey# the !irm (elieves it can sell an additional $5 units per
month i! it o!!ers a net $0 credit policy. 4hat is the net present value o! the switch using the
one-shot approach-
&. L212#:05
B. L2$1#/.$
C. L2$/#.7=
'. L2.:#=.5
). L2/1#11:

:0. Inder your current cash sales only policy you sell 1$2 units a month !or a total sales value
o! L=#2.0. ;our varia(le cost per unit is L.. and your monthly interest rate is 1 percent. Based
on a recent survey# you (elieve that you can sell an additional 22 units per month i! you o!!er
a net $0 credit policy. 4hat is the net present value o! the proposed switch using the accounts
receiva(le approach-
&. L./#=75
B. L.5#==2
C. L.=#0:1
'. L/0#22.
). L/$#/55

20-2$
:1. ;ou are currently selling 72 units a month at a price o! L210 a unit. ;our varia(le cost o!
each unit is L1$0. I! you switch !rom your current cash sales only policy to a net $0 policy
you think your sales will increase to a total o! =/ units per month. he monthly interest rate is
1./ percent. 4hat is the net present value o! this proposed switch using the accounts
&. L10.#//7
B. L11.#:2=
C. L1$.#:22
'. L1$5#/15
). L1.1#/20

:2. ;our current sales consist o! 27 units per month at a price o! L22/ a unit. ;ou are
weighing the pros and cons o! switching to a net $0 credit policy !rom your current cash only
policy. I! you decide to switch your credit policy you also plan to increase the sales price to
L2.0 a unit. I! you make the switch you do not e<pect your total monthly sales 0uantity to
change (ut you do e<pect a $ percent de!ault rate. he monthly interest rate is 1./ percent.
4hat is the net present value o! the proposed credit policy switch-
&. L5#727
B. L5#:=$
C. L7#205
'. L7#=5/
). L:#.:1

:$. ;our current sales consist o! ./ units per month at a price o! L$=0 a unit. ;ou are
L.10 a unit. he monthly interest rate is 1.. percent. 4hat is the (reak-even de!ault rate o! the
proposed switch-
&. $.// percent
B. $.5: percent
C. ..2= percent
'. ..71 percent
). ..:: percent

20-2.
Essay Questions

:.. 4hich do you !eel is the more appropriate upper limit !or the credit period that a seller
o!!ers to a (uyer% the (uyer's operating cycle or the (uyer's inventory period-

:/. &ssume all suppliers to a large retail chain o!!er credit terms o! 2G10# net $0. he retail
chain consistently takes the 2 percent discount and pays in 50 days. 4hen pressed on the
issue# the retail chain tells the suppliers they can either accept the payments as they currently
are or lose the (usiness. Is this ethical- ,ow might this impact a small supplier versus a large
supplier- )<plain.

20-2/
:5. 4hy might !irms !orego discounts o!!ered (y their suppliers even though it is costly to do
so- 4hat steps might a !irm pursue to (e a(le to take these discounts-

:7. &ll else e0ual# !irms with 819 e<cess capacity# 829 low varia(le costs# and 8$9 repeat
customers are more apt to o!!er li(eral credit terms to their customers than are other !irms.
)<plain why this tendency e<ists.

20-25


::. he 6reen ,ornet sells earnings !orecasts !or international securities. Its credit terms are
2G10# net $0. Based on e<perience# // percent o! all customers will take the discount. he !irm
sells 2#500 !orecasts every month at a price o! L1#100 each. 4hat is the !irm's average (alance
sheet amount in accounts receiva(le-
&. L=.0#27.
B. L1#.0:#272
C. L1#7:5#/21
'. L1#:11#012
). L1#=1/#$:7

:=. & !irm o!!ers terms o! 2G=# net .1. 4hat e!!ective annual interest rate does the !irm earn
when a customer does not take the discount-
&. 1:.57 percent
B. 20../ percent
C. 2$.$7 percent
'. 2/.$. percent
). 2/.=2 percent

=0. Music City# Inc. has an average collection period o! /5 days. Its average daily investment
in receiva(les is L/0#000. 4hat are the annual credit sales-
&. L25:#.07
B. L$07#10=
C. L$2/#:=$
'. L72:#21/
). L757#12$

=1. he urn It Ip Corporation sells on credit terms o! net $0. Its accounts are# on average# 5
days past due. &nnual credit sales are L7 million. 4hat is the company's (alance sheet amount
in accounts receiva(le-
&. L5=0#.11
B. L72$#$$$
C. L:/1#557
'. L=1/#.07
). L=2$#/=$

20-27
=2. Neep M ?lying is a wholesaler that stocks engine components and test e0uipment !or the
commercial aircra!t industry. & new customer has placed an order !or eight high-(ypass
tur(ine engines# which increase !uel economy. he varia(le cost is L1.7 million per unit# and
the credit price is L2.1 million each. Credit is e<tended !or one period. Based on historical
e<perience# payment !or a(out 1 out o! every 2.0 such orders is never collected. he re0uired
return is 2.: percent per period. 4hat is the H1E per unit i! this is a one-time order-
&. L$15#.07
B. L$2:#:1=
C. L$$.#2=0
'. L$.2#:02
). L$/1#0/5

=$. Juest# Inc.# is considering a change in its cash-only sales policy. he new terms o! sale
would (e one month. he re0uired return is 1.5 percent per month. Based on the !ollowing
in!ormation# what is the H1E o! the new policy-

&. L2:#7/0
B. L$2#/00
C. L$/#000
'. L$:#2/0
). L.0#000

=.. Cohen Industrial 1roducts uses 2#100 switch assem(lies per week and then reorders
another 2#100. he relevant carrying cost per switch assem(ly is L20# and the !i<ed order cost
is L$00. 4hat is the )"J-
&. 1#27=.:.
B. 1#.$..1.
C. 1#:0=.=7
'. 2#27:..2
). 2#5=:.1/

20-2:
=/. >oger's 2tore (egins each week with 1/0 phasers in stock. his stock is depleted each
week and reordered. he carrying cost per phaser is L.: per year and the !i<ed order cost is
L70. 4hat is the optimal num(er o! orders that should (e placed each year-
&. .:.5=
B. /1.71
C. /..20
'. 51.10
). 5../0

=5. he 'ilana Corporation is considering a change in its cash-only policy. he new terms
would (e net one period. he re0uired return is 2 percent per period. 4hat is the H1E o! the
new policy given the !ollowing in!ormation-

&. -L2$0#::0
B. -L11:#.20
C. L$11#/0:
'. L.2:#==7
). L/55#:.0

=7. he Cycle 2hoppe has decided to o!!er credit to its customers during the spring selling
season. 2ales are e<pected to (e $$0 (icycles. he average cost to the shop o! a (icycle is
L$00. he owner knows that only =$ percent o! the customers will (e a(le to make their
payments. o identi!y the remaining 7 percent# she is considering su(scri(ing to a credit
agency. he initial charge !or this service is L/.0# with an additional charge o! L5 per
individual report. 4hat is the amount o! the net savings !rom su(scri(ing to the credit
agency-
&. L$#7=0
B. L$#=20
C. L.#0:0
'. L.#.10
). L.#=/0

20-2=
Chapter 20 Credit and Inventory Management &nswer Ney


1. Blackwell Brothers sells men's suits. he store o!!ers a 1 percent discount i! payment is
received within 10 days. "therwise# payment is due within $0 days. his credit o!!ering is
re!erred to as the%
A. terms o! sale.
B. credit analysis.
'. paya(les policy.
). collection !loat.
>e!er to section 20.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Obecti!e: "#$%
Section: "#&%
'o(ic: 'erms of sale

2. *illian was recently hired (y a ma+or retail store. ,er +o( is to determine the pro(a(ility that
individual customers will !ail to pay !or their charge sales. *illian's +o( (est relates to which
one o! the !ollowing-
&. terms o! sale
B. credit analysis
C. collection policy
'. paya(les policy
). customer service

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%
'o(ic: Credit analysis

20-$0
$. own ,ardware sells goods on credit with payment due $0 days a!ter purchase. I! payment
is not received (y the $0
th
day# the store mails a !riendly reminder to the customer. I! payment
is not received (y the ./
th
day# the store calls the customer and re0uests payment and also
stops o!!ering credit to that customer. hese procedures are re!erred to as the store's%
&. customer service policy.
B. credit policy.
'. paya(les policy.
). dis(ursements policy.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%
'o(ic: Collection (olicy

.. 1hil's 1rint 2hop grants its customers the right to pay !or their print +o(s within $0 days o!
the date o! service. his $0-day period is re!erred to as the%
&. paya(les period.
B. cash cycle.
C. transactions period.
D. credit period.
). dis(ursement period.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&"
'o(ic: Credit (eriod

20-$1
/. 2cott purchased a shovel# a rake# and a wheel(arrow !rom he 3ocal ,ardware 2tore
yesterday. oday# the store issued a (ill !or these items and mailed it to 2cott. 4hat is the
name given to this (ill-
&. ledger statement
B. warranty
C. indenture
'. receipt
E. invoice

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&"
'o(ic: )n!oice

5. 6eo!! Industries o!!ers its credit customers a 2 percent discount i! they pay within 10 days.
his discount is re!erred to as a%
A. cash discount.
B. purchase discount.
C. collection discount.
'. market discount.
). receiva(les discount.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&"
'o(ic: Cas* discounts

20-$2
7. &ny written proo! that a customer owes you money !or goods or services provided is
re!erred to as a8n9%
&. account document.
B. sales dra!t.
C. credit instrument.
'. commercial paper.
). letter o! de(t.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&"
'o(ic: Credit instruments

:. ;ou are viewing a graph which compares costs with the amount o! credit e<tended. Both
the carrying costs and the opportunity costs o! credit are depicted. 4hat is the !unction called
that represents the summation o! these carrying and opportunity costs-
&. opportunity cost curve
B. credit e<tension curve
C. credit cost curve
'. terms o! sale graph
). optimal sales graph
>e!er to section 20..

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Obecti!e: "#$"
Section: "#&+
'o(ic: Credit cost cur!e

20-$$
=. &ssume that >2? is a wholly-owned su(sidiary o! the >olled 2teel Company. >2? provides
credit !inancing solely !or large ticket items purchased !rom the >olled 2teel Company.
4hich one o! the !ollowing terms descri(es >2?-
&. credit department
B. parent company
C. captive !inance company
'. credit union
). service unit

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&+
'o(ic: Ca(ti!e finance com(any

10. he (asic !actors to (e evaluated in the credit evaluation process# the !ive Cs o! credit#
are%
&. conditions# control# cessation# capital# and capacity.
B. conditions# character# capital# control# and capacity.
C. capital# collateral# control# character# and capacity.
'. character# capacity# control# cessation# and collateral.
E. character# capacity# capital# collateral# and conditions.
>e!er to section 20./

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&,
'o(ic: -i!e Cs of credit

20-$.
11. >oger's ,ome &ppliances o!!ers credit to customers it deems worthy o! this privilege. o
determine i! a customer is worthy# the !irm computes a numerical value which is used to
estimate the pro(a(ility that the customer will de!ault i! credit is granted to them. he process
o! computing this numerical value is re!erred to as%
A. credit scoring.
B. credit capacity.
C. receipts assessment.
'. conditions !or credit.
). consumer analysis.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&,
'o(ic: Credit scoring

12. ;ou have recently (een hired as an accounting intern !or *e!!erson Mills. he +o( that you
have (een assigned !or today is to compile a spreadsheet that has si< columns. he column
headings are% Invoice @A Customer nameA B $0 daysA $1-50 daysA 51-=0 daysA C =0 days. ;ou
are to list every unpaid invoice (y customer name with the amount owed entered into the
appropriate column !or the num(er o! days (etween the sale date and today. "nce you have
completed that# you are to sort the report (y customer name and then total the amounts listed
in each column. 4hat is this report called-
&. credit report
B. aging schedule
C. risk assessment report
'. turnover delineation
). receiva(les consolidation report

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&.
'o(ic: Aging sc*edule

20-$/
1$. Bill is in charge o! the inventory !or ,ome Builder's 2upply. &s an inventory item gets
low# he is to restock the item (y a 0uantity that minimiDes the total inventory costs !or that
item. 4hat is this restocking 0uantity called-
&. short order 0uantity
B. re!ill unit 0uantity
C. economic order 0uantity
'. minimum stock level
). re-order limit
>e!er to section 20.:

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Obecti!e: "#$+
Section: "#&/
'o(ic: 0conomic reorder 1uantity

1.. &llison has developed a set o! procedures !or determining the amount o! each raw
material that she needs to have in inventory i! she is to keep her !irm's assem(ly lines
operating e!!iciently. hese procedures are commonly re!erred to (y which one o! the
!ollowing terms-
&. !irst-in# !irst-out method
B. the Baumol model
'. economic order procedures
E. materials re0uirements planning

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&/
'o(ic: 2aterials re1uirements (lanning

20-$5
1/. 4hich one o! the !ollowing is a system !or managing demand-dependent inventories that
minimiDes the inventory levels o! a !irm-
A. +ust-in-time inventory
B. turnover planning
'. inventory scoring
). inventory ranking

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&/
'o(ic: 3ust$)n$'ime in!entory

15. he terms o! sale generally include which o! the !ollowing-
I. type o! credit instrument
II. cash discount
III. credit period
IE. discount period
&. I and III only
B. II and IE only
C. III and IE only
E. I# II# III# and IE

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%

20-$7
17. 4hat is the primary purpose o! credit analysis-
&. determine the optimal credit period
B. esta(lish the e!!ectiveness o! granting a cash discount
C. determine the optimal discount period# i! any
'. access the !re0uency and amount o! sales (y customer
E. evaluate whether or not a customer will pay

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%

1:. he period o! time that e<tends !rom the day a credit sale is made until the day the (ank
credits a !irm's account with the payment !or that sale is known as the FFFFF period.
&. !loat
B. cash collection
C. sales
D. accounts receiva(le
). discount

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%
'o(ic: Accounts recei!able (eriod

20-$:
1=. 4hich one o! the !ollowing will increase a !irm's investment in accounts receiva(les-
&. a decrease in the num(er o! days !or which credit is granted
B. a decrease in credit sales
C. an increase in cash sales
'. a decrease in the average collection period
E. an increase in average daily credit sales

AACSB: N/A
Bloom's: Com(re*ension
Difficulty: Basic
Section: "#&%
'o(ic: )n!estment in recei!ables

20. & !irm's total investment in receiva(les depends primarily on the !irm's%
&. total sales and cash discount period.
B. cash to credit sales ratio.
C. (ad de(t ratio.
D. average collection period and amount o! credit sales.
). amount o! credit sales and cash discount percentage.

AACSB: N/A
Difficulty: Basic
Section: "#&%

20-$=
21. 4hich one o! the !ollowing time periods is included in the accounts receiva(le period (ut
not in the cash collection period-
&. the period o! time (etween the receipt o! a check and the availa(ility o! those !unds
B. time it takes a !irm to process incoming receipts
C. period o! time a check is in the mail
'. the amount o! time that it takes a (ank to credit a !irm's account !or a deposit made
E. period o! time it takes an invoice to reach a customer (y mail

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%

22. 4hich one o! the !ollowing statements is correct i! you purchase an item with credit terms
o! 1G/# net 1/-
&. I! you pay within 1 day# you will receive a / percent discount.
B. I! you pay within / days# you will receive a 1 percent discount.
C. I! you do not pay within 1/ days# you will (e charged interest at a 1./ percent monthly rate.
'. I! you pay within 1/ days# you will receive a 1G/th percent discount.
). ;ou must pay the discounted amount within 1/ days.

AACSB: N/A
Difficulty: Basic
Section: "#&"

20-.0
2$. ;ou are doing some comparison shopping. ?ive stores o!!er the product you want at
plan on taking the discount-

&. store &
B. store B
C. store C
'. store '
E. store )

AACSB: N/A
Difficulty: Basic
Section: "#&"

20-.1
2.. ;ou are doing some comparison shopping. ?ive stores o!!er the product you want at
plan to !orego the discount-

&. store &
B. store B
C. store C
D. store '
). store )

AACSB: N/A
Difficulty: Basic
Section: "#&"

2/. 4hich one o! the !ollowing statements is correct-
&. he credit period (egins when the discount period ends.
B. he discount period is the length o! time granted to a customer to pay !or a purchase.
C. he credit period (egins on the invoice date.
'. 4ith terms o! 2G10# net $0# the net credit period is 20 days.
). 4ith )"M dating# all sales are assumed to have occurred on the 1/
th
o! each month.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&"

20-.2
25. 4hich two o! the !ollowing are the key considerations !or a seller who is esta(lishing the
length o! the credit period (eing o!!ered to a customer-
I. seller's operating cycle
II. customer's operating cycle
III. seller's inventory period
IE. customer's inventory period
&. I and II
B. II and III
C. III and IE
D. II and IE
). I and IE

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&"

27. 4hich one o! the !ollowing !actors tends to !avor longer credit periods-
&. high consumer demand
B. lower priced merchandise
C. increased credit risk
'. merchandise with low collateral value
E. increased competition

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&"

20-.$
2:. 4hich one o! the !ollowing statements is correct in regards to credit periods-
&. 1erisha(le items tend to have longer credit periods.
B. Items with low markups tend to have longer credit periods.
C. 2maller accounts tend to have longer credit periods.
D. 'i!!erent customers may (e o!!ered di!!erent credit periods (y the same !irm.
). Hewer products tend to have shorter credit periods.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&"

2=. & cash discount o! 2G/# net $0%
&. grants customers $0 days to pay a!ter the discount period e<pires.
B. o!!ers customers a ma<imum o! $0 days credit.
C. grants !ree credit !or a period o! $0 days.
'. charges a higher price to a cash customer than to a customer who pays in 2 days.
). grants customers 2 days to pay i! they want the / percent discount.

AACSB: N/A
Difficulty: Basic
Section: "#&"

20-..
$0. Inder credit terms o! 1G/# net 1/# customers should%
&. always pay on the 1/
th
day.
B. take the / percent discount and pay immediately.
C. take the discount and pay on the day !ollowing the day o! sale.
D. either take the discount or pay on the 1/
th
day.
). (oth take the discount and pay on the 1/
th
day.

AACSB: N/A
Difficulty: Basic
Section: "#&"

$1. & 2G10# net $0 credit policy%
A. is an e<pensive !orm o! short-term credit i! a (uyer !oregoes the discount.
B. provides cheap !inancing to the (uyer !or $0 days.
C. is an ine<pensive means o! reducing the seller's collection period i! every customer takes
the discount.
'. tends to have little e!!ect on the seller's collection period.
). tends to increase a !irm's investment in receiva(les as compared to a straight net $0 policy.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&"
'o(ic: Cost of credit

20-./
$2. he 6reen ,ornet o!!ers a trade discount with terms o! 2G/# )"M. &ssume you purchase
an item on credit !rom he 6reen ,ornet on Monday# Hovem(er $. 4hat is the invoice date
!or this purchase-
&. Hovem(er $
B. Hovem(er /
C. Hovem(er 7
'. Hovem(er :
E. Hovem(er $0

AACSB: N/A
Difficulty: Basic
Section: "#&"
'o(ic: 'rade discount

$$. 4hich one o! the !ollowing credit instruments is commonly used in international
commerce-
&. open account
B. sight dra!t
C. time dra!t
D. (anker's acceptance
). promissory note

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&"

20-.5
$.. & conditional sales contract%
&. passes title to the goods sold to the (uyer at the time the contract is signed.
B. normally calls !or one lump sum payment on the contract payment date.
C. generally has a (uilt-in interest cost.
'. is paya(le immediately upon receipt.
). is a !ormal (id !or a pro+ect.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&"

$/. 4hich o! the !ollowing statements correctly re!lect the e!!ects o! granting credit to
customers-
I. otal revenues may increase i! (oth the 0uantity sold and the price per unit increase when
credit is granted.
II. & !irm's cash cycle generally increases i! credit is granted# all else e0ual.
III. Both the cost o! de!ault and the cost o! discounts must (e considered (e!ore granting
credit.
IE. & !irm may have to increase its long-term (orrowing i! it decides to grant credit to its
customers.
&. I# II# and III only
B. II# III# and IE only
C. I# III# and IE only
'. I# II# and IE only
>e!er to section 20.$

AACSB: N/A
Difficulty: )ntermediate
Section: "#&4
'o(ic: Credit (olicy effects

20-.7
$5. ;ou are considering switching !rom an all cash credit policy to a net $0 credit policy. ;ou
do not e<pect the switch to a!!ect either your sales 0uantity or your sales price. Ignoring
interest and assuming that every month has $0 days# your net present value o! the switch will
(e e0ual to%
&. Dero.
B. your selling price per unit.
C. your selling price per unit multiplied (y -1.
'. your selling price per unit multiplied (y -$0.
E. your total monthly sales multiplied (y -1.
>e!er to section 20.$

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&4
'o(ic: 0!aluating credit (olicy

$7. he optimal amount o! credit e0uates the incremental costs o! carrying the increase in
accounts receiva(le to the incremental%
&. decrease in the cash cycle.
B. (ene!it !rom decreasing the inventory level.
C. cash !lows !rom increased sales.
'. increase in (ad de(ts.
). gain in net pro!its.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&+
'o(ic: O(timal amount of credit

20-.:
$:. 4hen credit policy is at the optimal point# the%
&. total costs o! granting credit will (e ma<imiDed.
B. carrying costs o! credit will (e e0ual to Dero.
C. opportunity cost o! credit will (e e0ual to Dero.
D. carrying costs will e0ual the opportunity costs.
). total costs will e0ual the opportunity costs.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&+
'o(ic: O(timal credit (olicy

$=. I! you e<tend credit !or a one-time sale to a new customer you risk an amount e0ual to%
&. the sales price o! the item sold.
B. the varia(le cost o! the item sold.
C. the !i<ed cost o! the item sold.
'. the pro!it margin on the item sold.
). Dero.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&,

20-.=
.0. 4hich one o! the !ollowing statements is correct-
&. I! the ma+ority o! a !irm's new customers (ecome repeat customers then there is a strong
argument against e<tending credit even i! the de!ault rate is low.
B. & customer's past payment history reveals little in!ormation in relation to his or her !uture
tendency to pay.
C. & suggested policy !or o!!ering credit to new customers is to limit the amount o! their
initial credit purchase.
'. he risk o! issuing credit is the same !or a new customer as it is !or an e<isting customer.
). he recommended credit policy !or new customers is to e<tend the ma<imum amount o!
credit you will ever (e willing to o!!er as an enticement to get their (usiness.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&,

.1. 4hich o! the !ollowing are !re0uently used as sources o! in!ormation when trying to
ascertain the creditworthiness o! a customer-
I. payment history with similar !irms
II. credit reports
III. !inancial statements
IE. in!ormation provided (y a (ank
&. I and III only
B. II and IE only
C. I and II only
'. I# II# and III only

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&,
'o(ic: Credit information

20-/0
.2. 4hen evaluating the creditworthiness o! a customer# the term character re!ers to the%
&. nature o! the cash !lows o! the customer's (usiness.
B. customer's !inancial resources.
C. types o! assets the customer wants to pledge as collateral.
D. customer's willingness to pay (ills in a timely !ashion.
). nature o! the customer's line o! work.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&,

.$. 4hich one o! the !ive Cs o! credit re!ers to a !irm's !inancial reserves-
&. character
B. capacity
C. collateral
'. conditions
E. capital

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&,

20-/1
... 4hich one o! the !ive Cs o! credit re!ers to the general economic situation in the
customer's line o! (usiness-
&. capacity
B. character
C. conditions
'. capital
). collateral

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&,

./. 4hich one o! the !ollowing statements is correct-
A. &n aging schedule helps identi!y those customers who are the most delin0uent.
B. he percentage o! total receiva(les that !alls within a certain time period on an aging
schedule will remain constant over time even i! the !irm has seasonal sales.
C. Hormally !irms call their delin0uent customers prior to sending them a past due letter.
'. & constant average collection period over a period o! time is cause !or concern.
). It is common practice when a customer !iles !or (ankruptcy to sell that customer's
receiva(le at !ace value.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&.
'o(ic: Collection (olicy

20-/2
.5. 4hich one o! the !ollowing inventory items is pro(a(ly the least li0uid-
&. plywood held in inventory (y a home (uilder
B. a wheel (arrow held in inventory (y a garden center
C. a partially assem(led interior !or a new vehicle
'. a set o! tires owned (y an automo(ile manu!acturer
). a toy owned (y a retail toy store

AACSB: N/A
Difficulty: Basic
Learning Obecti!e: "#$4
Section: "#&5
'o(ic: )n!entory ty(es

.7. 4hich one o! the !ollowing inventory items is pro(a(ly the most li0uid-
&. a custom made set o! kitchen ca(inets
B. metal ca(inets !or dishwashers
C. wheat stored in a grain silo
'. a customiDed drilling press
). a partially (uilt modular home

AACSB: N/A
Difficulty: Basic
Section: "#&5
'o(ic: )n!entory ty(es

20-/$
.:. 4hich one o! the !ollowing inventory-related costs is considered a shortage cost-
&. storage costs
B. insurance cost
C. cost o! sa!ety reserves
'. o(solescence cost
). opportunity cost o! capital used !or inventory purchases

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&5
'o(ic: )n!entory costs

.=. he &BC approach to inventory management is (ased on the concept that%
&. inventory should arrive +ust in time to (e used.
B. the inventory period should (e constant !or all inventory items.
C. (asic inventory items that are essential to production and also ine<pensive should (e
ordered in small 0uantities only.
D. a small percentage o! the inventory items pro(a(ly represents a large percentage o! the
inventory cost.
). one-third o! a year's inventory need should (e on hand# another third should (e on order#
and the last third should not (e ordered yet.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&/
'o(ic: )n!entory management tec*ni1ues

20-/.
/0. he )"J model is designed to determine how much%
&. total inventory a !irm needs in any one year.
B. total inventory costs will (e !or any one given year.
C. inventory should (e purchased at a time.
'. inventory will (e sold per day.
). a !irm loses in sales per day when an inventory item is depleted.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&/
'o(ic: 0conomic order 1uantity

/1. &t the optimal order 0uantity siDe# the%
&. total cost o! holding inventory is !ully o!!set (y the restocking costs.
B. carrying costs are e0ual to Dero.
C. restocking costs are e0ual to Dero.
'. total costs e0ual the carrying costs.
E. carrying costs e0ual the restocking costs.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&/

20-//
/2. he )"J model is designed to minimiDe%
&. production costs.
B. inventory o(solescence.
C. the carrying costs o! inventory.
'. the costs o! replenishing inventory.
E. the total costs o! holding inventory.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&/

/$. 4hich one o! the !ollowing items is most likely a derived-demand inventory item-
&. cereal ready to (e (agged and shipped to stores
B. tires held in inventory (y an auto maker
C. shoes on display in a retail store
'. toys ready to (e shipped to toy stores
). wheat harvested (y a !armer

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&/
'o(ic: Deri!ed$demand in!entory

20-/5
/.. Inventory needs under a derived-demand inventory system are%
&. primarily dependent upon the competitive demands placed on a !irm's suppliers.
B. (ased on the anticipated demand !or the !inished product.
C. (ased on minimiDing the cost o! restocking inventory.
'. held constant over time.
). determined (y a kan(an system.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&/
'o(ic: Deri!ed$demand in!entory

//. & +ust-in-time inventory system%
I. when implemented properly reduces the cost o! inventory to Dero.
II. increases the inventory turnover rate.
III. is su!!icient to handle immediate production needs.
IE. minimiDes the costs o! holding inventory.
&. I and III only
B. II and IE only
C. I# II# and IE only
D. II# III# and IE only

AACSB: N/A
Section: "#&/
'o(ic: 3ust$)n$'ime in!entory

20-/7
/5. he incremental investment in receiva(les under the accounts receiva(le approach is e0ual
to%
&. 1 - vJ.
B. 1J.
C. 1J K v8J - J9.
'. 18J - J9.
). 1J8J - J9.
>e!er to section 20.&

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&A
'o(ic: Accounts recei!able a((roac*

/7. he accounts receiva(le approach to credit policy supports the theory that%
A. a !irm's risk o! o!!ering credit to a new customer is limited to the varia(le cost o! the sold
items.
B. the (est credit policy is an all-cash policy.
C. the cost o! o!!ering credit to a new customer is the same as the cost o! o!!ering credit to an
e<isting customer.
'. !oregoing cash discounts is a method o! o(taining ine<pensive short-term !inancing.
). the de!ault risk o! a credit policy is the same as the de!ault risk under an all cash-policy i!
your customers remain the same.

AACSB: N/A
Difficulty: Basic
Section: "#&A

20-/:
/:. 4hich two o! the !ollowing are the key elements in determining whether or not a switch
!rom a no-credit policy to a credit policy is advisa(le-
I. varia(le cost per unit
II. cash discount percentage
III. credit price
IE. de!ault rate
&. I and III only
B. II and IE only
C. II and III only
'. I and IE only
). III and IE only

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&A
'o(ic: N67 of switc*

/=. "n average# your !irm sells L$:#700 o! items on credit each day. he !irm's average
operating cycle is .= days and it ac0uires and sells inventory# on average# every 17 days. 4hat
is the average accounts receiva(le (alance-
&. L5/7#=00
B. L:.:#000
C. L1#2$:#.00
'. L1#$1/#/00
). L1#:=5#$00
&ccounts receiva(le (alance O L$:#700 8.= - 179 O L1#2$:#.00

AACSB: Analytic
Bloom's: A((lication
Difficulty: Basic
Section: "#&%
'o(ic: Accounts recei!able balance

20-/=
50. he 4inter 2tore +ust purchased L.:#$00 o! goods !rom its supplier with credit terms o!
1G10# net 2/. 4hat is the discounted price-
&. L.$#.70
B. L.5#20=
C. L.7#:17
'. L.7#=2=
). L.:#$00
'iscounted price O L.:#$00 81 - 0.019 O L.7#:17

AACSB: Analytic
Difficulty: Basic
Section: "#&"
'o(ic: Accounts recei!able discount

51. oday# "cto(er 12# Hadine's ?ashions purchased L/11 worth o! merchandise !rom a
supplier. he credit terms are 1G/# net 20. By what day does Hadine's have to make the
payment to receive the discount- Hote% "cto(er has $1 days.
&. "cto(er 1$
B. "cto(er 1/
C. "cto(er 17
'. "cto(er 27
). Hovem(er 1
)nd o! discount period O "cto(er 12 K / days O "cto(er 17

AACSB: Analytic
Difficulty: Basic
Section: "#&"

20-50
52. & supplier grants your !irm credit terms o! 2G10# net .0. 4hat is the e!!ective annual rate
o! the discount i! the !irm purchases L.#500 worth o! merchandise-
&. 27.2. percent
B. 27.:5 percent
C. 2:.:0 percent
'. 2=.0$ percent
). 2=.27 percent
'ays in period O .0 - 10 O $0A 1eriods per year O $5/G$0 O 12.155557
Interest rate !or $0 days O P0.02 L.#500QGP81 - 0.029 L.#500Q O 0.020.0:
)!!ective annual rate O 81 K .020.0:9
12.155557
- 1 O 27.:5 percent

AACSB: Analytic
Difficulty: Basic
Section: "#&"

5$. Cape May 1roducts currently sells 5/0 units a month at a price o! L/= a unit. he !irm
(elieves it can increase its sales (y an additional 12/ units i! it switches to a net $0 credit
policy. he monthly interest rate is 0.$/ percent and the varia(le cost per unit is L$:. 4hat is
the incremental cash in!low !rom the proposed credit policy switch-
&. L77.
B. L2#52/
C. L.#7/0
'. L/#5=0
). L7#$7/
Incremental cash !low O 8L/= - L$:9 812/9 O L2#52/

AACSB: Analytic
Difficulty: Basic
Section: "#&4
'o(ic: Credit (olicy switc*

20-51
5.. 1olly's ,ome &ccents currently sells $./ units a month at a price o! L/= a unit. 1olly
thinks she can increase her sales (y an additional // units i! she switches to a net $0 credit
policy. he monthly interest rate is 0.. percent and the varia(le cost per unit is L$2. 4hat is
A. L$.=#1$/
B. L$/0#:=/
C. L.25#/07
'. L521#=2=
). L:21#1$/
H1E o! switch O - P8L/= $./9 K 8L$2 //9Q K P8L/= - L$29 //QG0.00. O L$.=#1$/

AACSB: Analytic
Bloom's: Analysis
Section: "#&4

5/. Currently# 6lasgow Importers sells 2:0 units a month at a price o! L72= a unit. he !irm
(elieves it can increase its sales (y an additional .0 units i! it switches to a net $0 credit
policy. he monthly interest rate is 0./ percent and the varia(le cost per unit is L.:0. 4hat is
&. -L21$#$50
B. -L=#2.0
C. L1=0#200
'. L1#2:7#/20
E. L1#75:#5:0
H1E O - P8L72= 2:09 K 8L.:0 .09Q K P8L72= - L.:09 .0QG0.00/ O L1#75:#5:0

AACSB: Analytic
Bloom's: Analysis
Section: "#&4

20-52
55. Currently# he oy Bo< sells .5/ units a month at an average price o! L$= a unit. he
company thinks it can increase sales (y an additional 1$0 units a month i! it switches to a net
$0 credit policy. he monthly interest rate is 0.. percent and the varia(le cost per unit is L21.
4hat is the incremental cash in!low o! the proposed credit policy switch-
&. L2#120
B. L2#$.0
C. L2#200
'. L2#7$0
). L/#070
Incremental cash !low O 8L$= - L219 81$09 O L2#$.0

AACSB: Analytic
Difficulty: Basic
Section: "#&4

57. 1reston Milled 1roducts currently sells a product with a varia(le cost per unit o! L21 and a
unit selling price o! L.0. &t the present time# the !irm only sells on a cash (asis with monthly
sales o! 2#:00 units. he monthly interest rate is 0./ percent. 4hat is the switch (reak-even
point i! the !irm switched to a net $0 credit policy- &ssume the selling price per unit and the
varia(le costs per unit remain constant.
A. 2#:$0 units
B. 2#=10 units
C. $#$$$ units
'. $#.1. units
). $#/25 units
Break-even point O J - 2#:00 O 8L.0 2#:009GRP8L.0 - L219G0.00/Q - L21S O $0 units
J O 2#:00 K $0 O 2#:$0 units

AACSB: Analytic
Bloom's: Analysis
Section: "#&4
'o(ic: Switc* brea8$e!en (oint

20-5$
5:. 2aucier M Co. currently sells 2#200 units a month !or total monthly sales o! L:5#/00. he
company is considering replacing its current cash only credit policy with a net $0 policy. he
varia(le cost per unit is L1: and the monthly interest rate is 1.2 percent. 4hat is the switch
(reak-even level o! sales- &ssume the selling price per unit and the varia(le costs per unit
remain constant.
&. 1#=.$ units
B. 2#117 units
C. 2#2.= units
'. 2#.05 units
). 2#/.: units
Break-even point O J - 2#200 O 8L:5#/009GRP88L:5#/00G2#2009 - L1:9G0.012Q - L1:S O .= unitsA
J O 2#200 K .= O 2#2.= units

AACSB: Analytic
Bloom's: Analysis
Section: "#&4

5=. he Cellar 'oor currently sells =#520 units a month !or total monthly sales o! L$15#000.
he company is considering replacing its current cash only credit policy with a net $0 policy.
he varia(le cost per unit is L1/ and the monthly interest rate is 1./ percent. 4hat is the
switch (reak-even level o! sales-
&. =#711 units
B. =#77= units
C. =#:1. units
'. =#=/7 units
E. =#::= units
Break-even point O J - =#520 O 8L$15#0009GRP88L$15#000G=#5209 - L1/9G0.01/Q - L1/S O 25=
unitsA J O =#520 K 25= O =#::= units

AACSB: Analytic
Bloom's: Analysis
Section: "#&4

20-5.
70. ;ou have the opportunity to make a one-time sale i! you will give a new customer $0 days
to pay. ;ou suspect there is a 1/ percent chance this person will never pay you. he sales
price o! the item the customer wants to (uy is L2:=. ;our varia(le cost on that item is L1/5
and your monthly interest rate is 1.7/ percent. 2hould you grant credit to this customer- 4hy
or why not-
&. yesA (ecause the H1E o! the potential sale is L11$.0/
B. yesA (ecause the H1E o! the potential sale is L:/..$
C. noA (ecause the H1E o! the potential sale is -L1$$.00
'. noA (ecause the H1E o! the potential sale is -11$.0/
). noA (ecause the H1E o! the potential sale is -L:=.5/
H1E O -L1/5 K RP1 - 0.1/Q PL2:=G81 K 0.017/9QS O L:/..$

AACSB: Analytic
Difficulty: Basic
Section: "#&,
'o(ic: One$time sale

71. ;ou are considering renting a kiosk in the local mall !or a period o! three months. &ny
sale you make will (e a one-time sale. here is only a 7= percent chance you will collect
payment on a credit sale. he product you want to sell has a varia(le cost o! L$.:: and a sales
price o! L..==. he monthly interest rate is 1./ percent. 2hould you o!!er people $0 days to
pay- 4hy or why not-
&. yesA (ecause the H1E o! a credit sale is L0.0=.
B. yesA (ecause the H1E o! a credit sale is L0.0$.
C. noA (ecause the H1E o! a credit sale is -L0.0:.
'. noA (ecause the H1E o! a credit sale is -L0.02.
E. It doesn't matter (ecause the H1E o! a credit sale is appro<imately Dero.
H1E O -L$.:: K R0.7= PL..==G81 K 0.01/9QS O L0

AACSB: Analytic
Difficulty: Basic
Section: "#&,
'o(ic: One$time sale

20-5/
72. ;ou are trying to attract new customers that you !eel could (ecome repeat customers. he
average selling price o! your products is L5= each with a L.1 per unit varia(le cost. he
monthly interest rate is 1.2 percent. ;our e<perience tells you that : percent o! these
customers will never pay their (ill. 4hat is the value o! a new customer who does not de!ault
on his or her (ill-
&. L1#=:5
B. L2#$$$
C. L2#517
'. L.#:17
). L:#:57
1E O 8L5= - L.19G0.012 O L2#$$$

AACSB: Analytic
Difficulty: Basic
Section: "#&,
'o(ic: 9e(eat sale

7$. ;ou are trying to attract new customers that you !eel could (ecome repeat customers. he
average price o! your product is L51= per unit with a L.$/ varia(le cost per unit. he monthly
interest rate is 1.: percent. ;our e<perience tells you that = percent o! these customers will
never pay their (ill. 2hould you o!!er credit terms o! net $0 to attract these potential
customers- 4hy or why not-
A. yesA (ecause the H1E o! e<tending credit is L:#:57
B. yesA (ecause the H1E o! e<tending credit is L=#7:7
C. yesA (ecause the H1E o! e<tending credit is L12:
'. noA (ecause the H1E o! e<tending credit is -L./=
). It doesn't matter (ecause the H1E o! e<tending credit is Dero.
H1E O -L.$/ K RP1 - 0.=Q P8L51= - L.$/9G0.01:QS O L:#:57

AACSB: Analytic
Difficulty: Basic
Section: "#&,
'o(ic: 9e(eat sale

20-55
7.. & !irm sells .#/00 units o! an item each year. he carrying cost per unit is L2.1/ and the
!i<ed costs per order are L57. 4hat is the economic order 0uantity-
&. $7. units
B. .21 units
C. .=7 units
D. /$0 units
). 52$ units
)"J O P82 .#/00 L579GL2.1/Q
1G2
O /$0 units

AACSB: Analytic
Difficulty: Basic
Section: "#&/

7/. he (est-selling pair o! roller skates he een 2tore o!!ers sells !or L7=.== a pair. he
store consistently sells /#700 pairs o! these roller skates every year. he !i<ed costs to order
more skates is L5: and the carrying costs are L1.=/ per pair. 4hat is the economic order
0uantity-
&. ..5 pairs
B. /1/ pairs
C. /2= pairs
D. 5$1 pairs
). 5.: pairs
)"J O P82 /#700 L5:9GL1.=/Q
1G2
O 5$1 pairs

AACSB: Analytic
Difficulty: Basic
Section: "#&/

20-57
75. "ne o! the (est selling items 3.. en o!!ers sells !or L=.== a unit. he varia(le cost per
unit is L5.$: and the carrying cost per unit is L1.12. he !irm sells 7#100 o! these units each
year. he !i<ed cost to order this item is L7/. 4hat is the economic order 0uantity-
&. 5=0 units
B. 7.7 units
C. =7/ units
'. 1#1/7 units
). 1#250 units
)"J O P82 7#100 L7/9GL1.12Q
1G2
O =7/ units

AACSB: Analytic
Difficulty: Basic
Section: "#&/

77. )ach year you sell =/0 units o! a product at a price o! L:== each. he varia(le cost per
unit is L/7/ and the carrying cost per unit is L15.=0. ;ou have (een (uying 100 units at a
time. ;our !i<ed cost o! ordering is L50. 4hat is the economic order 0uantity-
A. :2 units
B. =/ units
C. 10/ units
'. 11$ units
). 12. units
)"J O P82 =/0 L509GL15.=0Q
1G2
O :2 units

AACSB: Analytic
Difficulty: Basic
Section: "#&/

20-5:
7:. 4eis(rough Inited currently has a cash sales only policy. Inder this policy# the !irm sells
.10 units a month at a price o! L21= a unit. he varia(le cost per unit is L1.: and the carrying
cost per unit is L$.$0. he monthly interest rate is 1.$ percent. he !irm (elieves it can
increase its sales to .7/ units a month i! it institutes a net $0 credit policy. 4hat is the net
present value o! the switch using the one-shot approach-
&. L22:#.00
B. L2//#/=0
C. L251#.70
'. L2:2#2$$
). L2:/#=02
Monthly (ene!it O P8L21= .7/9G1.01$Q - PL1.: .7/Q - P8L21= - L1.:9 .10Q O L$#2:0.0$A
H1E o! switch O L$#2:0.0$ K 8L$#2:0.0$G0.01$9 O L2//#/=0

AACSB: Analytic
Bloom's: Analysis
Section: "#&A
'o(ic: One$s*ot a((roac*

7=. Inder the current cash sales only policy Blue Bird# Inc.# will sell 21/ units a month at a
price o! L.5= each. he varia(le cost per unit is L$0/ and the monthly interest rate is 1.7
percent. Based on a recent survey# the !irm (elieves it can sell an additional $5 units per
month i! it o!!ers a net $0 credit policy. 4hat is the net present value o! the switch using the
one-shot approach-
&. L212#:05
B. L2$1#/.$
C. L2$/#.7=
'. L2.:#=.5
). L2/1#11:
Monthly (ene!it O RPL.5= 821/ K $59QG81 K 0.0179S - RL$0/ 821/ K $59S - R8L.5= - L$0/9
21/S O L$#=$5.2$A H1E o! switch O L$#=$5.2$ K 8L$#=$5.2$G0.0179 O L2$/#.7=

AACSB: Analytic
Bloom's: Analysis
Section: "#&A
'o(ic: One$s*ot a((roac*

20-5=
:0. Inder your current cash sales only policy you sell 1$2 units a month !or a total sales value
o! L=#2.0. ;our varia(le cost per unit is L.. and your monthly interest rate is 1 percent. Based
on a recent survey# you (elieve that you can sell an additional 22 units per month i! you o!!er
a net $0 credit policy. 4hat is the net present value o! the proposed switch using the accounts
&. L./#=75
B. L.5#==2
C. L.=#0:1
'. L/0#22.
). L/$#/55
1 O L=#2.0G1$2 O L70

AACSB: Analytic
Bloom's: Analysis
Section: "#&A

:1. ;ou are currently selling 72 units a month at a price o! L210 a unit. ;our varia(le cost o!
each unit is L1$0. I! you switch !rom your current cash sales only policy to a net $0 policy
you think your sales will increase to a total o! =/ units per month. he monthly interest rate is
1./ percent. 4hat is the net present value o! this proposed switch using the accounts
A. L10.#//7
B. L11.#:2=
C. L1$.#:22
'. L1$5#/15
). L1.1#/20

AACSB: Analytic
Bloom's: Analysis
Section: "#&A

20-70
:2. ;our current sales consist o! 27 units per month at a price o! L22/ a unit. ;ou are
L2.0 a unit. I! you make the switch you do not e<pect your total monthly sales 0uantity to
change (ut you do e<pect a $ percent de!ault rate. he monthly interest rate is 1./ percent.
4hat is the net present value o! the proposed credit policy switch-
&. L5#727
B. L5#:=$
C. L7#205
D. L7#=5/
). L:#.:1
d O 8L2.0 - L22/9GL2.0 O 0.052/
H1E O - 8L22/ 279 K R8L2.0 279 P80.052/ - 0.0$9G0.01/QS O L7#=5/

AACSB: Analytic
Bloom's: Analysis
Section: "#&A
'o(ic: Discounts and default ris8

:$. ;our current sales consist o! ./ units per month at a price o! L$=0 a unit. ;ou are
L.10 a unit. he monthly interest rate is 1.. percent. 4hat is the (reak-even de!ault rate o! the
proposed switch-
A. $.// percent
B. $.5: percent
C. ..2= percent
'. ..71 percent
). ..:: percent
d O 8L.10 - L$=09GL.10 O 0.0.:7:0.::
O 0.0.:7:0.:: - 0.01. 81 - 0.0.:7:0.::9 O $.// percent

AACSB: Analytic
Bloom's: Analysis
Section: "#&A
'o(ic: Discounts and default ris8

20-71
Essay Questions

:.. 4hich do you !eel is the more appropriate upper limit !or the credit period that a seller
o!!ers to a (uyer% the (uyer's operating cycle or the (uyer's inventory period-
he operating cycle is the sum o! the inventory and accounts receiva(le periods. he
inventory period is pro(a(ly the (etter target as an upper limit !or the seller's credit period
since it is 0uestiona(le whether or not the seller should (e !inancing the (uyer's receiva(les.
he credit period should de!initely not e<ceed the (uyer's operating period as the seller would
then (e !inancing all o! the (uyer's inventory and accounts receiva(les# plus other aspects o!
the (uyer's operations.
?eed(ack% >e!er to section 20.2

AACSB: 9eflecti!e t*in8ing
Bloom's: Analysis
Section: "#&"
'o(ic: Lengt* of credit (eriod

:/. &ssume all suppliers to a large retail chain o!!er credit terms o! 2G10# net $0. he retail
chain consistently takes the 2 percent discount and pays in 50 days. 4hen pressed on the
issue# the retail chain tells the suppliers they can either accept the payments as they currently
are or lose the (usiness. Is this ethical- ,ow might this impact a small supplier versus a large
supplier- )<plain.
his 0uestion can lead to a lively discussion a(out the ethics o! a(using the credit period.
2ome students will argue that it is unethical !or the large !irm to e<ercise its will against its
suppliers. Most would argue that a supplier that is also a relatively large !irm will (etter (e
a(le to negotiate with the retail chain and work out a more !avora(le arrangement than the
current situation. I! a supplier is small# this account may (e a signi!icant proportion o! the
supplier's total sales. In that case# the supplier may have no choice other than accepting the
terms as dictated (y the retail chain or going out o! (usiness. 4hether or not the actions o! the
retail chain are ethical is de(ata(le# (ut this practice occurs !airly !re0uently.

AACSB: 9eflecti!e t*in8ing and 0t*ics
Bloom's: 0!aluation
Section: "#&"
'o(ic: 0t*ics and t*e credit (eriod

20-72
:5. 4hy might !irms !orego discounts o!!ered (y their suppliers even though it is costly to do
so- 4hat steps might a !irm pursue to (e a(le to take these discounts-
?irms will !orego discounts when there is insu!!icient cash !low to pay within the discount
period. It would (e di!!icult to argue that this type o! !inancing# given the typically high cost
o! !oregoing the discount# would (e cheaper than other !inancing sources availa(le to the !irm.
,owever# it might (e more desira(le than raising cash# say through secured inventory
!inancing or !actoring receiva(les. &s !ar as correcting the pro(lem# the !irm's management
needs to seriously review the !irm's cash and li0uidity policies and make the changes re0uired
to improve the !irm's li0uidity and cash !low situation.

Bloom's: Analysis
Section: "#&"
'o(ic: Discounts

:7. &ll else e0ual# !irms with 819 e<cess capacity# 829 low varia(le costs# and 8$9 repeat
customers are more apt to o!!er li(eral credit terms to their customers than are other !irms.
)<plain why this tendency e<ists.
?irms with e<cess capacity are more apt to o!!er li(eral credit terms as a sales incentive as
increased sales will also increase the capacity utiliDation ratio. ?irms with low varia(le costs
e<tend credit more li(erally as the cost to do so is limited to the varia(le cost o! the items
sold. ?inally# !irms with repeat customers gain !amiliarity with its customers' a(ility to pay#
there(y !acilitating more li(eral credit terms.
?eed(ack% >e!er to section 20./

Bloom's: Analysis
Section: "#&,
'o(ic: Liberal credit terms

20-7$

::. he 6reen ,ornet sells earnings !orecasts !or international securities. Its credit terms are
2G10# net $0. Based on e<perience# // percent o! all customers will take the discount. he !irm
sells 2#500 !orecasts every month at a price o! L1#100 each. 4hat is the !irm's average (alance
sheet amount in accounts receiva(le-
&. L=.0#27.
B. L1#.0:#272
C. L1#7:5#/21
'. L1#:11#012
). L1#=1/#$:7
&verage collection period O 0.//810 days9 K 0../ 8$0 days9 O 1= days
&verage &G> O 2#500 8L1#1009 812G$5/9 81=9 O L1#7:5#/21

AACSB: Analytic
Difficulty: Basic
0OC :: "#$4
Section: "#&"
'o(ic: Accounts recei!able

:=. & !irm o!!ers terms o! 2G=# net .1. 4hat e!!ective annual interest rate does the !irm earn
when a customer does not take the discount-
&. 1:.57 percent
B. 20../ percent
C. 2$.$7 percent
'. 2/.$. percent
E. 2/.=2 percent
)&> O P1 K 80.02G0.=:9Q
$5/G8.1 - =9
- 1 O 2/.=2 percent

AACSB: Analytic
Difficulty: Basic
0OC :: "#$,
Section: "#&"

20-7.
=0. Music City# Inc. has an average collection period o! /5 days. Its average daily investment
in receiva(les is L/0#000. 4hat are the annual credit sales-
&. L25:#.07
B. L$07#10=
C. L$2/#:=$
'. L72:#21/
). L757#12$
&nnual credit sales O L/0#000 8$5/G/59 O L$2/#:=$

AACSB: Analytic
Difficulty: Basic
0OC :: "#$.
Section: "#&%
'o(ic: 9ecei!ables turno!er

=1. he urn It Ip Corporation sells on credit terms o! net $0. Its accounts are# on average# 5
days past due. &nnual credit sales are L7 million. 4hat is the company's (alance sheet amount
in accounts receiva(le-
A. L5=0#.11
B. L72$#$$$
C. L:/1#557
'. L=1/#.07
). L=2$#/=$
&G> O L7#000#000 P8$0 K 59G$5/Q O L5=0#.11

AACSB: Analytic
Difficulty: Basic
0OC :: "#$/
Section: "#&%
'o(ic: Accounts recei!able

20-7/
=2. Neep M ?lying is a wholesaler that stocks engine components and test e0uipment !or the
commercial aircra!t industry. & new customer has placed an order !or eight high-(ypass
tur(ine engines# which increase !uel economy. he varia(le cost is L1.7 million per unit# and
the credit price is L2.1 million each. Credit is e<tended !or one period. Based on historical
e<perience# payment !or a(out 1 out o! every 2.0 such orders is never collected. he re0uired
return is 2.: percent per period. 4hat is the H1E per unit i! this is a one-time order-
&. L$15#.07
B. L$2:#:1=
C. L$$.#2=0
'. L$.2#:02
). L$/1#0/5
H1E O -L1#700#000 K P1 - 81G2.09Q PL2#100#000QG81 K 0.02:9 O L$$.#2=0

AACSB: Analytic
Difficulty: Basic
0OC :: "#$;
Section: "#&4
'o(ic: Credit (olicy

20-75
=$. Juest# Inc.# is considering a change in its cash-only sales policy. he new terms o! sale
would (e one month. he re0uired return is 1.5 percent per month. Based on the !ollowing
in!ormation# what is the H1E o! the new policy-

&. L2:#7/0
B. L$2#/00
C. L$/#000
'. L$:#2/0
). L.0#000
Bene!it o! switching O 8L:00 - L.2/9 81#1/0 - 1#1109 O L1/#000
Cost o! switching O L:00 81#1109 K L.2/ 81#1/0 - 1#1109 O L=0/#000
Hew policy H1E O L1/#000G0.015 - L=0/#000 O L$2#/00

AACSB: Analytic
Difficulty: Basic
0OC :: "#$%#
Section: "#&4
'o(ic: Credit (olicy e!aluation

20-77
=.. Cohen Industrial 1roducts uses 2#100 switch assem(lies per week and then reorders
another 2#100. he relevant carrying cost per switch assem(ly is L20# and the !i<ed order cost
is L$00. 4hat is the )"J-
&. 1#27=.:.
B. 1#.$..1.
C. 1#:0=.=7
'. 2#27:..2
). 2#5=:.1/
)"J O P82 /2 2#100 $009GL20Q
T
O 1#:0=.=7

AACSB: Analytic
Difficulty: Basic
0OC :: "#$%%
Section: "#&/
'o(ic: 0O<

=/. >oger's 2tore (egins each week with 1/0 phasers in stock. his stock is depleted each
week and reordered. he carrying cost per phaser is L.: per year and the !i<ed order cost is
L70. 4hat is the optimal num(er o! orders that should (e placed each year-
&. .:.5=
B. /1.71
C. /..20
'. 51.10
). 5../0
)"J O P82 /2 1/0 L709GL.:Q
1G2
O 1/0.:$
Hum(er o! orders per year O /281/09G1/0.:$ O /1.71

AACSB: Analytic
Difficulty: Basic
0OC :: "#$%"
Section: "#&/
'o(ic: O(timal order 1uantity

20-7:
=5. he 'ilana Corporation is considering a change in its cash-only policy. he new terms
would (e net one period. he re0uired return is 2 percent per period. 4hat is the H1E o! the
new policy given the !ollowing in!ormation-

&. -L2$0#::0
B. -L11:#.20
C. L$11#/0:
'. L.2:#==7
E. L/55#:.0
Cash !low !rom old policy O 8L70 - L$59 8$#/009 O L11=#000
Cash !low !rom new policy O 8L7. - L$59 8$#/509 O L1$/#2:0
Incremental cash !low O L1$/#2:0 - L11=#000 O L15#2:0
H1E o! new policy O - PL708$#/009 K L$58$#/50 - $#/009Q K L15#2:0G0.02 O L/55#:.0

AACSB: Analytic
Bloom's: Analysis
0OC :: "#$%+
Section: "#&,

20-7=
=7. he Cycle 2hoppe has decided to o!!er credit to its customers during the spring selling
season. 2ales are e<pected to (e $$0 (icycles. he average cost to the shop o! a (icycle is
L$00. he owner knows that only =$ percent o! the customers will (e a(le to make their
payments. o identi!y the remaining 7 percent# she is considering su(scri(ing to a credit
agency. he initial charge !or this service is L/.0# with an additional charge o! L5 per
individual report. 4hat is the amount o! the net savings !rom su(scri(ing to the credit
agency-
&. L$#7=0
B. L$#=20
C. L.#0:0
D. L.#.10
). L.#=/0
Het savings O 8$$0 L$00 0.079 - L/.0 - 8$$0 L59 O L.#.10

AACSB: Analytic
Bloom's: Analysis
0OC :: "#$%.
Section: "#&,

20-:0

Chapter 20 - Credit and Inventory Management

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