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19.2 Trade Credit
1) Collection loat is the amount of time it takes for a irm to be able to use funds after a
customer has paid for its goods.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
2) Trade credit should always be used when it is ofered.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
3) What is trade credit?
A) the credit that a irm extends to its customers
B) the amount a irm is owed by its customers who have received goods and services but
have not yet paid for them
C) the percentage discount ofered to a customer who opts to pay their account early
D) the amount that a irm owes its suppliers for goods which it has received but for which it
has not yet paid.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
4) A irm ofers its customers 2/14 net 28. What is the cost of trade credit to a customer
who chooses to pay on day 28?
A) 32.8%
B) 67.3%
C) 69.3%
D) 72.4%
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
5) What is meant by the term 1.5/14 net 30?
A) If the invoice is paid within 14 days, a discount of 1.5 percent can be taken; otherwise
the invoice is due in 30 days.
B) If the invoice is paid within 30 days, a discount of 14 percent can be taken; otherwise
the invoice is due 14 days after that day.
C) If the invoice is paid within 1.5 days, a discount of 14 percent can be taken; otherwise
11
the invoice is due in 30 days.
D) If the invoice is paid right away, a discount of 14 percent can be taken; otherwise a
discount of 1.5 percent can be taken if paid within the next 30 days.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
6) A irm ofers its customers 3/5 net 25. What is the cost of trade credit to a customer who
chooses to pay on day 25?
A) 32.3%
B) 65.5%
C) 68.4%
D) 74.3%
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
7) A irm ofers its customers 1/10 net 40. What is the cost of trade credit to a customer
who chooses to pay on day 40?
A) 12.8%
B) 13.0%
C) 65.5%
D) 96.0%
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
8) A irm tries to extend its disbursement loat in order to reduce its working capital needs.
Which of the following is a risk that may be associated with this strategy, if it is taken too
far?
A) may attract a late fee
B) may be required to pay before delivery for future supplies
C) may jeopardize the entire relationship with the supplier
D) all of the above
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
12
9) Which of the following best describes the collection loat?
A) how long it takes the irm to receive the check after the customer has mailed it
B) how long it takes the irm to process the check and deposit it in the bank
C) how long it takes before the bank gives the irm credit for the funds
D) how long it takes for a irm to be able to use funds after a customer has paid for its
goods
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
10) Which of the following best describes the availability loat?
A) how long it takes the irm to process the check and deposit it in the bank
B) how long it takes before the bank gives the irm credit for the funds
C) how long it takes before payments to suppliers actually result in a cash outlow for the
irm
D) how long it takes for a irm to be able to use funds after a customer has paid for its
goods
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
11) Collection loat is made up of all of the following EXCEPT ________.
A) disbursement loat
B) processing loat
C) mail loat
D) availability loat
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
12) Which of the following statements is FALSE?
A) Under the Modigliani-Miller assumptions of perfect capital markets, the amounts of
payables and receivables are irrelevant.
B) One factor that contributes to the length of a irm's receivables and payables is the delay
between the time a bill is paid and the cash is actually received.
C) Collection loat is the amount of time it takes before payments to suppliers actually
result in a cash outlow for the irm.
D) The credit that the irm is extending to its customer is known as trade credit.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
13
13) Which of the following statements is FALSE?
A) The Check Clearing for the 21st Century Act (Check 21), which became efective on
October 28, 2004, eliminated the disbursement loat due to the check-clearing process.
B) Trade credit is, in essence, a loan from the selling irm to its customer.
C) The accounts receivable balance represents the amount that a irm owes its suppliers for
goods that it has received but for which it has not yet paid.
D) Providing inancing at below-market rates is an indirect way to lower prices for only
certain customers.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
14
14) What is the meaning of the term 2/10 net 30?
A) If the invoice is paid within 10 days, a 2% discount can be taken. If the invoice is paid
between 11 and 29 days, a 1% discount can be taken. After 30 days, the full invoice is due.
B) If the invoice is paid within 2 days, a 10% discount can be taken; otherwise the full
invoice is due in 30 days.
C) If the invoice is paid within 2 days, a 10% discount can be taken; otherwise a 2%
discount can be taken if the invoice is paid in 30 days.
D) If the invoice is paid within 10 days, a 2% discount can be taken; otherwise the full
invoice is due in 30 days.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
15) Your irm purchases goods from its supplier on terms of 1/10 net 30. The efective
annual cost to your irm if it chooses not to take advantage of the trade discount ofered is
closest to ________.
A) 16.8%
B) 44.6%
C) 20.1%
D) 13.0%
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
16) Which of the following is NOT an advantage of trade credit versus a standard loan?
A) Trade credit reduces a irm's collection loat.
B) If the buyer defaults, the supplier may be able to seize the inventory as collateral.
C) The supplier may have more information about the credit quality of the customer than a
bank.
D) Providing inancing at below-market rates is an indirect way to lower prices for only
certain customers.
AACSB Objective: Analytic Skills
Author: WC
Question Status: Previous Edition
15
17) Which of the following is a component of disbursement loat but not a component of
collection loat?
A) availability loat
B) mail loat
C) processing loat
D) check-clearing loat
AACSB Objective: Analytic Skills
Author: WC
Question Status: Previous Edition
18) What is cash discount?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
19) What is discount period?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
20) What is credit period?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
21) What is collection loat?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
16
19.3 Receivables Management
1) The three steps in establishing a credit policy are establishing credit standards,
establishing credit terms, and establishing a collection policy.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
2) A irm that chooses a low-risk, restrictive credit policy will tend to have a larger
investment in receivables.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
3) Which of the following are the "5-C's of Credit"?
A) Character, Capacity, Compensation, Collateral, Conditions
B) Character, Cash, Credit, Collateral, Collectability
C) Character, Capacity, Capital, Collateral, Conditions
D) Cash, Capacity, Capital, Compensation, Collectability
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
17
4) A irm currently sells its product with a 2% discount to customers who pay by cash or
credit card when they purchase one of the irm's products; otherwise, the full price is due
within 30 days. Forty percent of customers take advantage of the discount. The irm plans
to drop the discount so the new terms will simply be net 30. In doing so it expects to sell
100 fewer units per month and all customers to pay at day 30. The irm currently sells 1000
units per month at a cost per unit of $45 and a selling price per unit of $80. If the irm's
required return is 2%, what is the net present value (NPV) of making this change? (Assume
that all 1,000 units are sold at the beginning of the month and the cost of producing the
units is paid immediately.)
A) -$169,860
B) -$122,420
C) $64,490
D) $172,320
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
5) What should a irm do after establishing a credit policy?
A) decide what should be done for those customers who do not pay their accounts on time
B) monitor its accounts receivable to analyze whether its credit policy is efective
C) decide on the length of the period before payment must be made
D) determine what percent of monthly sales are collected in the month after that sale
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
6) A irm's credit terms specify "1/10 net 30" and the accounts receivable days outstanding
is 32 days. Which of the following can be concluded on the basis of this information?
A) Most customers pay on time.
B) The average customer pays two days late.
C) All customers have paid within 32 days of purchase.
D) All customers pay late.
Dif: 1 Var: 1
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
7) SwenCorp had sales of $154 million this year and an average accounts receivable of $18
million per day. Its credit terms specify "2/14 net 40." On average, how long does it take to
collect on its sales?
A) 8.5 days
B) 13 days
C) 28 days
D) 43 days
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
8) Jen Industries had sales of $32 million this year and an average accounts receivable of
$0.8 million per day. On average, how long does it take to collect on its sales?
A) 9 days
B) 11 days
C) 12 days
D) 19 days
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
19
9) Commercial Supply Corp. bills its accounts on terms of 2/10 net 30. The irm's accounts
receivable include $200,000 that has been outstanding for ten or fewer days, $126,000
outstanding for 11 to 30 days, $98,000 outstanding for 31 to 40 days, $12,000 outstanding
for 41 to 50 days, $20,000 outstanding for 51 to 60 days, and $7,000 outstanding for more
than 60 days. Is the aging schedule for Commercial Supply Corp. bottom heavy?
A) No, since 70% of the outstanding sales are on time and the percentage of long term
outstanding payments is low.
B) Yes, since the percentage of payments that are late are greater than the percentage of
payments that are on time.
C) No, since since the percentage of payments that are late are greater than the
percentage of payments that are on time.
D) Given information is not suicient to reach any conclusion.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
20
