978-0134083285 Chapter 17 Part 4

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13) The terms of sale identify the possible discount for early payment, the discount period, and the total

credit period.

Keywords: Terms of Sale

Learning Obj.: L.O. 17.2

AACSB: Reflective Thinking

14) A corporation that is short on cash will take a trade discount of 2/10 net 30 only if the corporation‘s

cost of funds is less than 2%.

Keywords: Trade Discount

Learning Obj.: L.O. 17.2

AACSB: Analytical Thinking

15) Because poor creditworthy customers may cause bad debt losses, credit sales to them should not be

allowed.

Keywords: Bad Debts, Creditworthiness

Learning Obj.: L.O. 17.2

AACSB: Reflective Thinking

16) A firm‘s credit and collection policies usually include

A) terms of sale, quality of customers, and collection of credit sales.

B) average collection period, dollar value of aged receivables, and terms of sale.

C) terms of sale and collection of credit sales.

D) terms of sale, level of credit sales, and collection of credit sales.

Keywords: Credit and Collections Policy, Terms of Sale, Quality of Customers

Learning Obj.: L.O. 17.2

AACSB: Reflective Thinking

17) An aging schedule of accounts receivable aids the financial manager in determining

A) the amount of receivables that are past due.

B) the average age of the customers.

C) the receivables turnover.

D) the average length of the discount period.

Keywords: Aging Accounts Receivable

Learning Obj.: L.O. 17.2

AACSB: Reflective Thinking

18) A trade credit discount such as 2/10 net 40 means

A) a 2 percent penalty is due after 40 days.

B) a 2 percent discount if payment is made within 10 days, otherwise, the total amount is due in 40 days.

C) a 2 percent discount for payment within 10 days, and a 3 percent penalty if payment is made after 40

days.

D) 10 percent discount for cash on delivery and a 2 percent discount for payment within 40 days.

Keywords: Trade Credit, Cash Discount

Learning Obj.: L.O. 17.2

AACSB: Analytical Thinking

19) If a firm with credit terms of 1/10 net 30 were to change its terms to 3/10 net 30, the result would

probably be

A) increased bank loans.

B) increased accounts receivable turnover.

C) an increase in the average level of accounts receivable.

D) a decrease in accounts payable.

Keywords: Credit Terms, Cash Discount, Accounts Receivable Turnover

Learning Obj.: L.O. 17.2

AACSB: Analytical Thinking

20) If a firm with credit terms of 2/10 net 30 were to change its terms to 2/10 net 60, the result would

probably be

A) more customers would take advantage of the cash discount.

B) fewer customers would take advantage of the cash discount.

C) increased accounts receivable turnover.

D) a reduction in safety stock.

Keywords: Credit Terms, Cash Discount

Learning Obj.: L.O. 17.2

AACSB: Analytical Thinking

21) Determine the effective annualized cost of forgoing the trade discount on terms 2/15 net 65.

A) 11.30%

B) 14.69%

C) 32.6%

D) 48.98%

Keywords: Cost of Trade Credit, Effective Annual Rate

Learning Obj.: L.O. 17.2

AACSB: Analytical Thinking

22) Determine the effective annualized cost of forgoing the trade discount on terms 1/20 net 45.

A) 14.55%

B) 15.24%

C) 16.780%

D) 20.69%

Keywords: Cost of Trade Credit, Effective Annual Rate

Learning Obj.: L.O. 17.2

AACSB: Analytical Thinking

23) Which of the following is generally under the control of the financial manager?

A) the percentage of credit sales to total sales

B) the actual level of sales

C) the credit policies

D) A and B

Keywords: Accounts Receivable Management

Learning Obj.: L.O. 17.2

AACSB: Reflective Thinking

24) Credit and collection policies affect all of the following EXCEPT

A) level of sales.

B) length of time before credit sales are collected.

C) terms of sales.

D) pricing policies.

Keywords: Credit and Collection Policies

Learning Obj.: L.O. 17.2

AACSB: Reflective Thinking

25) Which of the following might occur when a firm increases its collection efforts?

A) an increase in inventory costs

B) an increase in bad debts

C) an increase in sales

D) a decline in accounts payable

Keywords: Collection Policy, Bad Debts

Learning Obj.: L.O. 17.2

AACSB: Analytical Thinking

26) Which of the following factors determines the amount that a firm would have invested in accounts

receivable?

A) collection efforts

B) the percentage of credit sales to total sales

C) the volume of sales

D) the terms of sale

E) All of the above

Keywords: Accounts Receivable Management

Learning Obj.: L.O. 17.2

AACSB: Reflective Thinking

27) If a firm extends 4/10, net 60-day terms of sale, what is the cost in terms of nominal APR? Assume a

360-day year.

A) 29.40%

B) 30.0%

C) 23.99%

D) 27.86%

Keywords: Cost of Trade Credit, Cash Discount, APR

Learning Obj.: L.O. 17.2

AACSB: Analytical Thinking

28) You purchase $10,000 worth of supplies every 90 days and never take the trade discount of 2/10 net

30. How much could you save each (360-day) year if you took the discount?

Keywords: Trade Credit, Cash Discount

Learning Obj.: L.O. 17.2

AACSB: Analytical Thinking

29) The Bike Store orders $2000 worth of supplies every 30 days. If they take advantage of the 3/10 net 30

discount offered by their supplier, how much would they save over the year? Assume a 360-day year.

Keywords: Trade Credit, Cash Discount

Learning Obj.: L.O. 17.2

AACSB: Analytical Thinking

30) What are the most important types of current assets? List your answer in order of declining liquidity.

Keywords: Current Assets, Liquidity

Learning Obj.: L.O. 17.2

AACSB: Reflective Thinking

31) What are the key decision variables at the firm’s disposal for managing the level of the firm‘s accounts

receivable balance?

Keywords: Accounts Receivable Management

Learning Obj.: L.O. 17.2

AACSB: Reflective Thinking

Learning Objective 17.3

1) Carrying inventory reduces the costs associated with periodic bad debt losses.

Keywords: Inventory, Bad Debt Losses

Learning Obj.: L.O. 17.3

AACSB: Reflective Thinking

2) The EOQ model calculates the size of the firm’s inventory given its expected usage, carrying costs, and

ordering costs.

Keywords: EOQ Model, Usage, Carrying Costs, Ordering Costs

Learning Obj.: L.O. 17.3

AACSB: Reflective Thinking

3) In the EOQ model the optimal ordering quantity is the quantity for which the sum of the costs of

ordering and carrying inventory is minimized.

Keywords: EOQ Model, Ordering Costs, Carrying Costs

Learning Obj.: L.O. 17.3

AACSB: Reflective Thinking

4) Non-uniform demand can be accommodated in the EOQ model by allowing for non-uniform ordering

costs.

Keywords: EOQ Model, Uniform Demand

Learning Obj.: L.O. 17.3

AACSB: Reflective Thinking

5) Safety stock may be included into the EOQ model to alleviate problems caused by violation of the

assumptions of constant demand and instantaneous delivery.

Keywords: EOQ Model, Safety Stock, Uniform Demand, Instantaneous Delivery

Learning Obj.: L.O. 17.3

AACSB: Reflective Thinking

6) Anticipatory buying occurs because of an anticipated decrease in interest rates.

Keywords: Anticipatory Buying

Learning Obj.: L.O. 17.3

AACSB: Reflective Thinking

7) EOQ model recommendations may be replaced by anticipatory buying during periods of high

inflation.

Keywords: Anticipatory Buying, EOQ Model, Inflation

Learning Obj.: L.O. 17.3

AACSB: Reflective Thinking

8) As inflation pushes interest rates up, the cost of carrying inventory rises.

Keywords: Carrying Costs, Inflation

Learning Obj.: L.O. 17.3

AACSB: Analytical Thinking

9) Determination of safety stock involves a trade-off between the risk of a stock-out and increased costs of

carrying additional inventory.

Keywords: Safety Stock, Stock-Out, Carrying Cost

Learning Obj.: L.O. 17.3

AACSB: Reflective Thinking

10) In the EOQ model, the carrying cost on inventory should include the required rate of an investment in

inventory.

Keywords: EOQ Model, Carrying Costs, Required Rate of Return

Learning Obj.: L.O. 17.3

AACSB: Reflective Thinking

11) The EOQ model assumes constant demand and constant unit price.

Keywords: EOQ Model, Constant Demand, Constant Price

Learning Obj.: L.O. 17.3

AACSB: Reflective Thinking

12) The just-in-time inventory control system is just a new approach to the EOQ model which tries to

produce the lowest average inventory possible.

Keywords: Just-In-Time Inventory Control System

Learning Obj.: L.O. 17.3

AACSB: Reflective Thinking

13) The purpose of maintaining a raw materials inventory is to integrate the purchasing and production

functions.

Keywords: Raw Materials Inventory

Learning Obj.: L.O. 17.3

AACSB: Reflective Thinking

14) Two factors that go into the determination of the appropriate order point are the deliver-time stock

and the safety stock required.

Keywords: Order Point, Delivery-Time Stock, Safety Stock

Learning Obj.: L.O. 17.3

AACSB: Reflective Thinking

15) The purpose of finished goods inventory is to uncouple the production and sales functions so that it is

not necessary to produce the goods before a sale can occur.

Keywords: Finished Goods Inventory

Learning Obj.: L.O. 17.3

AACSB: Reflective Thinking