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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
21
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
23
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
24
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
25
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
27
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
28
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
29
