19) ACME Inc., has credit terms of 2/10 net 60. Customers should take the discount and pay in
10 days if they CANNOT earn more than ________ (APR) or ________ (EAR) on their
investments.
A) 14.90% APR or 15.89% EAR
B) 15.89% APR or 14.90% EAR
C) 12.42% APR or 13.08% EAR
D) 13.08% APR or 12.42% EAR
20) The company offering a discount on accounts payable is trying to ________ and the firm that
pays on time rather than taking a discount is attempting to ________.
A) speed up cash outflow; slow down cash inflow
B) speed up cash inflow; slow down cash inflow
C) speed up cash inflow; slow down cash outflow
D) speed up cash outflow; slow down cash outflow
21) Which of the following choices lists the least to most aggressive actions in the pursuit of
overdue debt?
A) 1) a collection agency, 2) court action, 3) a letter requesting overdue payment
B) 1) court action, 2) a collection agency, 3) a letter requesting overdue payment
C) 1) a letter requesting overdue payment, 2) court action, 3) a collection agency
D) 1) a letter requesting overdue payment, 2) a collection agency, 3) court action
Use the table below to answer the following questions about the Jetton Company.
Monthly Sales for the Jetton Company
January
February
March
April
Sales
150,000
180,000
130,000
170,000
(%) Cash Sales
18%
26%
24%
19%
(%) Credit sales received
when due in 30 days.
75%
70%
64%
70%
(%) Credit sales received
late in 60 days.
7%
4%
12%
11%
22) Refer to the Monthly Sales for the Jetton Company. What is the average number of days to
collect February sales for the Jetton Company?
A) 45 days
B) 30 days
C) 23.4 days
D) 19.75 days
23) Refer to the Monthly Sales for the Jetton Company. What is the average number of days to
collect April sales for the Jetton Company?
A) 31.4 days
B) 27.6 days
C) 23.4 days
D) 19.75 days
24) Refer to the Monthly Sales for the Jetton Company. If Jetton were to shorten the amount of
time firms have to pay their accounts receivable, then the firm’s cash conversion cycle would be
shortened.
25) Refer to the Monthly Sales for the Jetton Company. If Jetton were to shorten the amount of
time firms have to pay their accounts receivable, then the firm may lose some credit customers
and lose sales.
26) When managing accounts receivable, a management goal is to slow down the receipt of
future cash flows.
27) When a company deals only in cash transactions (from its customers and to its creditors), the
cash conversion cycle is only the production cycle.
28) In order to shorten the financing period of the cash conversion cycle, a manager can speed up
the collection period or slow down the payable cycle.
29) When a business customer buys on credit from another business, the seller of the product
will often offer an extended payment period for the product or service, but with an incentive to
delay payment of the bill in an effort to earn a finance charge.
30) For positive interest rates, the EAR is greater than the APR when there are multiple
compounding periods within the year.
31) When collecting bad debts, a likely order of effort to collect would be to write a letter,
followed by court action, followed by a collection agency.
32) A company’s future cash inflow from the sale of its products or services are called accounts
payable.
33) To shorten the financing period of the collection cycle a firm can speed up receivables and
speed up payments.
34) We call the process to identify good customers from bad customers credit screening.
35) MDU, A Michigan-based general contractor, bills its clients on the first of the month. Clients
traditionally pay as follows: 60% pay by the end of the first month, 30% by the end of the second
month, 7% by the end of the third month, and 3% default on their bills. For example, a $1.00 sale
made in the month of July is billed August 1st and $0.60 is paid in August, etc. The firm’s CEO
wants to know the anticipated cash flow for the second quarter. Use the following information to
estimate second-quarter cash flows.
36) Labowski’s Long Boards Inc. makes high-quality skateboards for recreational use. It
wholesales its boards in groups of 10 for a package price of $1,500. Many of its customers have
asked for credit terms to aid in purchasing the boards. The firm’s finance department has
estimated the following profile for its long boards and customer base:
Annual sales: 10,000 long board packages
Annual production costs per board package: $1,000
Lost sales if credit is not provided for customers: 1,200 long board packages
Default rate if all customers purchase on credit: 4.00%
What is the profit if the firm has a credit policy? What is the change in the profit if the firm
moves from a cash-only policy to a credit policy? What is the dollar value of bad debts the firm
expects to accumulate over a year? Given the bad-debt dollar amount, what is the maximum
average amount per long board package that the firm should spend on credit screening?
37) Hardy Construction, has credit terms of 1/15 net 45. What is the implied APR and EAR of
the firm’s credit policy? What if the firm extends the discount to 30 days and the full payment to
60 days?
1) Float, from the buyer’s perspective, is called ________ float and from the seller’s perspective,
is called ________ float.
A) financing; crediting
B) disbursement; collection
C) crediting; financing
D) collection; disbursement
2) In terms of the float, the buyer of a product wants to ________ and the seller wants to
________.
A) increase the collection float; decrease the disbursement float
B) decrease the disbursement float; decrease the collection float
C) decrease the collection float; decrease the disbursement float
D) increase the disbursement float; decrease the collection float
3) An important objective of cash management is to ________ the disbursement float and
________ the collection float.
A) lengthen; reduce
B) lengthen; lengthen
C) reduce; reduce
D) reduce; lengthen
4) Which of the following does NOT reduce the length of time of collection float for a firm?
A) Electronic fund transfers (EFT)
B) Lockboxes
C) Direct payment via online checking
D) All of the above reduce the length of time of collection float for a firm.
5) Which of the following does NOT reduce the length of time of collection float for a firm?
A) Direct payment via online checking
B) The firm paying suppliers with a credit card
C) Lockboxes
D) Electronic fund transfers (EFT)
6) The time delay between when a check is written and when funds are available to the payee is
called the float.
7) From the viewpoint of the payee, the delay between when a check is written and when the
money actually leaves the account is called collection float.
8) An important objective of cash management is to lengthen the collection float and reduce the
disbursement float.
9) Many companies use lockboxes to speed up the delivery of the check at their bank.
10) Electronic funds transfer (EFT) substantially reduces the collection float for businesses and
the disbursement float for customers.
11) What is a lockbox system for collecting accounts receivable, and how can it reduce a firm’s
collection float?
1) Which of the following is NOT an inventory management technique?
A) ABC
B) 6 SIGMA
C) JIT
D) EOQ
2) When using the ABC Inventory Management System, Type A items are ________.
A) small-dollar items
B) nonessential inventory items
C) large-dollar or critical inventory items
D) moderate-dollar items
3) A ________ inventory item is an item that is not used in current operations but is serving a
back-up role in case the current item fails during operation.
A) type C
B) redundant
C) reticent
D) beta generation
4) Of the following, which is NOT an accurate statement about the EOQ model?
A) The actual cost of the inventory item is ignored.
B) Costs are divided into two categories: the cost of ordering and the cost of storage.
C) EOQ is an attempt to determine the appropriate level of inventory.
D) The EOQ assumes the sales rate fluctuates with seasonal changes.
5) EOQ focuses on the trade-off between ________.
A) carrying costs and delivery costs
B) seasonality and steady production
C) carrying costs and ordering costs
D) fixed and variable costs