978-0133507676 Chapter 19 Part 3

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10)

Customer Amount Owed Age (days)

Abel $10,000 53

Brannick $69,000 12

CLI $45,230 65

Deer $14,800 27

ESR $22,090 39

Flann $14,890 78

Graill $23,180 62

A irm has the accounts on its books shown above. What percentage of debt has been

outstanding for over 60 days?

A) 28%

B) 30%

C) 34%

D) 42%

AACSB Objective: Analytic Skills

Author: DS

Question Status: Previous Edition

11) Which one of the following is NOT one of the three steps involved in establishing a

credit policy?

A) establishing credit payment patterns

B) establishing credit standards

C) establishing a collection policy

D) establishing credit terms

AACSB Objective: Analytic Skills

Author: JN

Question Status: Previous Edition

12) Which of the following statements is FALSE?

A) After a irm decides on its credit standards, it must next establish its credit terms.

B) The decision of how much credit risk to assume plays a large role in determining how

much money a irm ties up in its payables.

C) Knowledge of the payments pattern is also useful for forecasting the irm’s working

capital requirements.

D) An aging schedule categorizes accounts by the number of days they have been on the

irm’s books.

AACSB Objective: Analytic Skills

Author: JN

Question Status: Previous Edition

13) Which of the following statements is FALSE?

A) The aging schedule is also sometimes augmented by analysis of the payments pattern,

which provides information on the percentage of monthly sales that the irm collects in

each month after the sale.

B) Because accounts receivable days can be calculated from the irm’s inancial statement,

outside investors commonly use this measure to evaluate a irm’s credit management

policy.

C) If the aging schedule gets “top-heavy“—that is, if the percentages in the upper half of

the schedule begin to increase, the irm will likely need to revisit its credit policy.

D) Seasonal sales patterns may cause the number calculated for the accounts receivable

days to change depending on when the calculation takes place.

AACSB Objective: Analytic Skills

Author: JN

Question Status: Previous Edition

14) The Holiday Corporation had sales of $450 million this year. Its accounts receivable

balance averaged $30 million. How long, on average, does it take the irm to collect on its

sales?

A) 15.0 days

B) 24.3 days

C) 12.2 days

D) 16.7 days

AACSB Objective: Analytic Skills

Author: WC

Question Status: Previous Edition

15) What are the ive C’s of Credit?

Collateral, and (5) Conditions.

Dif: 2 Var: 1

AACSB Objective: Analytic Skills

Author: SS

Question Status: Previous Edition

19.4 Payables Management

1) A irm should choose to borrow using accounts payable only if trade credit is the

cheapest source of funding.

AACSB Objective: Analytic Skills

Author: DS

Question Status: Previous Edition

2) If a supplier is ofering trade credit of 1/10 net 30, and a buyer chooses not to take the

discount, when should they pay, assuming that they wish to stay on good terms with the

supplier?

A) any time before day 10

B) on day 10

C) on day 30

D) any time after day 30

AACSB Objective: Analytic Skills

Author: DS

Question Status: Previous Edition

3) A irm has an average accounts payable balance of $180,000. Its average daily cost of

goods sold is $12,000. What is the average number of days that the irm takes to pay its

debt?

A) 2 days

B) 8 days

C) 15 days

D) 21 days

AACSB Objective: Analytic Skills

Author: DS

Question Status: Previous Edition

4) What is the efective annual cost of credit terms of 1/10 net 30, if the irm stretches the

accounts payable to 45 days?

A) 8.49 %

B) 10.91%

C) 11.05%

D) 18.03%

AACSB Objective: Analytic Skills

Author: DS

Question Status: Previous Edition

5) What is the efective annual cost of credit terms of 2/20, net 60, if the irm stretches the

accounts payable to 80 days?

A) 6.4 %

B) 13.1%

C) 21.1%

D) 34.2%

AACSB Objective: Analytic Skills

Author: DS

Question Status: Previous Edition

6) What is the efective annual cost of credit terms of 3/15 net 30, if the irm stretches the

accounts payable to 60 days?

A) 1.7%

B) 3.35%

C) 12.65%

D) 28.03%

AACSB Objective: Analytic Skills

Author: DS

Question Status: Previous Edition

7) Bercraft Industries has an average accounts payable balance of $280,000. Its average

annual cost of goods sold is $4,780,000. It receives terms of 1/20 net 40 from its suppliers.

Is Bercraft managing its accounts payables well?

A) Yes, since it, on average, chooses not to take the discount, but pays when payment is

due.

B) Yes, since it, on average, takes the discount, and pays at the end of the discount period.

C) Yes, since it, on average, stretches payment beyond the due payment date.

D) No, since it, on average, does not take advantage of the discount period and pays well

before payment is due.

AACSB Objective: Analytic Skills

Author: DS

Question Status: Previous Edition

8) Ally Manufacturing has an average accounts payable balance of $420,000. Its average

annual cost of goods sold is $10,220,000. It receives terms of 2/15 net 30 from its

suppliers. Is Ally managing its accounts payables well?

A) Yes, since it, on average, chooses not to take the discount, but pays when payment is

due.

B) Yes, since it, on average, takes the discount, and pays at the end of the discount period.

C) Yes, since it, on average, stretches payment beyond the due payment date.

D) No, since it, on average, does not take advantage of the discount period and pays well

before payment is due.

AACSB Objective: Analytic Skills

Author: DS

Question Status: Previous Edition

9) LeokLee Industries has an average accounts payable balance of $720,000. Its average

annual cost of goods sold is $8,760,000. It receives terms of 1/10 net 30 from its suppliers.

Is LeokLee managing its accounts payables well?

A) Yes, since it, on average, chooses not to take the discount, but pays when payment is

due.

B) Yes, since it, on average, takes the discount, and pays at the end of the discount period.

C) Yes, since it, on average, stretches payment beyond the due payment date.

D) No, since it, on average, does not take advantage of the discount period and pays well

before payment is due.

AACSB Objective: Analytic Skills

Author: DS

Question Status: Previous Edition

10) Which of the following is NOT a reason why a irm may typically choose not to stretch

its accounts payable?

A) Delaying payment can increase the efective cost of credit in some circumstances.

B) The supplier may demand COD or CBD in the future.

C) The supplier may choose to discontinue business with delinquent customers.

D) The irm’s credit rating may be damaged.

AACSB Objective: Analytic Skills

Author: DS

Question Status: Previous Edition

11) Which of the following statements is FALSE?

A) The lower the discount percentage ofered, the greater the cost of forgoing the discount

and using trade credit.

B) A irm should choose to borrow using accounts payable only if trade credit is the

cheapest source of funding.

C) A irm should always pay on the latest day allowed.

D) A irm should strive to keep its money working for it as long as possible without

developing a bad relationship with its suppliers or engaging in unethical practices.

AACSB Objective: Analytic Skills

Author: JN

Question Status: Previous Edition

12) Which of the following statements is FALSE?

A) Similar to the situation with its accounts receivable, a irm should monitor its accounts

payable to ensure that it is making its payments at an optimal time.

B) Some irms ignore the payment due period and pay later, in a practice referred to as

pushing the accounts payable.

C) Suppliers may react to a irm whose payments are always late by imposing terms of cash

on delivery (COD) or cash before delivery (CBD).

D) If the accounts payable outstanding is 40 days and the terms are 2/10 net 30, the irm

can conclude that it generally pays late and may be risking supplier diiculties.

AACSB Objective: Analytic Skills

Author: JN

Question Status: Previous Edition

13) 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

and stretches the accounts payable to 45 days is closest to ________.

A) 13.0%

B) 11.1%

C) 15.9%

D) 20.1%

Explanation: B) 1 / 99 = 1.0101%; 45 days -10 days = 35 days;

Number of 35 days in a year = 365 / 35 = 10.4285;

Efective Annual cost = (1.0101)10.4285 – 1 = 11.1%

Dif: 2 Var: 1

AACSB Objective: Analytic Skills

Author: JN

Question Status: Revised

14) Your irm purchases goods from its supplier on terms of 2/10, net 40. The efective

annual cost to your irm if it chooses not to take advantage of the trade discount ofered

and stretches the accounts payable to 60 days is closest to ________.

A) 20.1%

B) 15.9%

C) 13.0%

D) 11.1%

AACSB Objective: Analytic Skills

Author: JN

Question Status: Previous Edition

15) What is the efective cost of credit terms of 2/10, net 30 if the irm stretches the

accounts payable to 45 days?

A) 49.76%

B) 36.12%

C) 23.45%

D) 44.59%

AACSB Objective: Analytic Skills

Author: WC

Question Status: Previous Edition

16) What is the efective cost of credit terms of 3/5 net 45 if the irm stretches the accounts

payable to 60 days?

A) 12.9%

B) 35.6%

C) 39.9%

D) 22.4%

AACSB Objective: Analytic Skills

Author: WC

Question Status: Previous Edition

19.5 Inventory Management

1) Efective inventory management builds up assets through increases in inventory and

thus increases a irm’s value.

AACSB Objective: Analytic Skills

Author: DS

Question Status: Previous Edition

2) Which of the following is NOT a beneit of holding inventory?

A) minimizes the risk that the irm will not be able to obtain an input it needs for

production

B) seasonality of demand, meaning that customer purchases often do not match the most

eicient production cycle, leading to a buildup of inventory in of-peak periods

C) minimizes order cost from placing multiple orders throughout the year

D) minimizes risks involved in spoilage and obsolescence

AACSB Objective: Analytic Skills

Author: DS

Question Status: Previous Edition

3) Evertz Metals buys and stockpiles $4,000,000 worth of dolomite to use in its smelting

processes. How is this inventory cost best categorized?

A) an acquisition cost

B) a carrying cost

C) an order cost

D) a holding cost

AACSB Objective: Analytic Skills

Author: DS

Question Status: Previous Edition

4) Which of the following is/are direct costs associated with inventory?

I. Acquisition costs

II. Carrying costs

III. Order costs

A) I only

B) I and II

C) II and III

D) I, II, and III

AACSB Objective: Analytic Skills

Author: DS

Question Status: Previous Edition