Corporate Finance, 12e (Ross)
1) Selling goods and services on credit is:
A) an investment in a customer.
B) never necessary unless customers cannot pay for the goods.
C) a decision independent of customers.
D) permissible only if your bank lends the money.
E) never a wise decision.
2) When credit is granted by one firm to another firm this gives rise to a(n):
A) accounts receivable and is called consumer credit.
B) credit due and is called an installment note.
C) accounts receivable and is called trade credit.
D) trade receivable and is called an installment note.
E) trade receivable and is called a secured loan.
3) The average collection period measures the average:
A) time necessary to collect a credit sale.
B) number of customers per day who charge their purchases.
C) time for a credit customer to return to make a second purchase.
D) number of times a credit customer charges a purchase during a year.
E) number of items purchased in each credit transaction.
4) The three components of credit policy are:
A) collection policy, credit analysis, and interest rate determination.
B) collection policy, credit analysis, and terms of the sale.
C) collection policy, interest rate determination, and repayment analysis.
D) credit analysis, repayment analysis, and terms of the sale.
E) interest rate determination, repayment analysis, and terms of sale.
5) Credit analysis is best described as the process of:
A) collecting an accounts receivable.
B) determining the optimal credit terms.
C) establishing the length of the credit period.
D) setting the amount of discount to be granted.
E) determining the probability that a customer will not pay.
6) Seasonal dating is used to promote sales during the off-season. This process involves:
A) extending the credit period until after the season ends.
B) extending both the discount period and the credit period by two months.
C) accepting orders early but withholding shipment until the peak season.
D) accepting orders early but dating the invoice when the goods are actually shipped.
E) dating an invoice at a later date than when the goods are shipped.
7) Credit terms of 1/5, net 15 should be interpreted as granting:
A) a 1/5 percent discount for payments within 15 days.
B) a five percent discount for next day payments.
C) a total credit period of 20 days.
D) a credit period of 10 days.
E) a one percent discount for payments received within five days.
8) The credit period begins on the:
A) shipping date.
B) purchase order date.
C) shipping arrival date.
D) order process date.
E) invoice date.
9) On September 1, a firm grants credit with terms of 2/10 net 30. The creditor:
A) must pay a penalty of 2/10 of one percent when payment is made later than October 1.
B) must pay a penalty of 10 percent when payment is made later than 2 days after October 1.
C) receives a discount of 2 percent when payment is made at least 10 days prior to October 1.
D) receives a discount of 2 percent when payment is made on September 1 and pays a penalty of
10 percent if payment is made after October 1.
E) receives a discount of 2 percent when payment is made within 10 days.
10) The length of the credit period offered by a firm is influenced by all of the following except
the:
A) level of consumer demand.
B) buyer’s operating cycle.
C) standardization of the goods being sold.
D) FTC guidelines for trade credit.
E) customer type.
11) Seasonal dating of accounts receivable:
A) is used by all firms that grant credit.
B) sets the first date of the relevant season as the final due date for an invoice for seasonal goods.
C) sets a relevant seasonal date as the invoice date for an earlier order.
D) refers to firms that invoice every quarter for sales made in the prior three months.
E) requires all purchasers of seasonal goods to have their purchases paid by the end of the prior
season.
12) Which one of the following statements is false as it relates to considerations firms use when
establishing a credit policy?
A) A firm that supplies a perishable product will tend to offer restrictive credit terms.
B) A firm whose customers are in a high-risk business will tend to offer restrictive credit terms.
C) Lengthening the credit period effectively reduces the price paid by the customer.
D) Small accounts, associated with firms that find it difficult to acquire a line of credit, tend to
receive longer credit periods.
E) Larger accounts tend to receive more favorable credit terms.
13) The upper limit to the credit period is best expressed as the length of the:
A) seller’s operating cycle.
B) seller’s cash cycle.
C) seller’s payables period.
D) buyer’s operating cycle.
E) buyer’s cash cycle.
14) Cash discounts:
A) increase the amount of credit offered.
B) increase profit margins on sales.
C) speed up the collection of receivables.
D) were first offered in the early 1900s.
E) are a cost-free means of increasing sales.
15) With an open account the formal instrument of credit is the:
A) purchase order.
B) invoice.
C) promissory note.
D) banker’s acceptance.
E) secured loan document.
16) Which one of these statements is true regarding promissory notes?
A) Most trade credit arrangements use promissory notes.
B) Promissory notes are used when firms do not anticipate a problem with collections.
C) Promissory notes usually involve no cash discount.
D) A promissory note must be signed and delivered prior to goods being shipped.
E) Promissory notes are used for small orders only.
17) A commercial draft typically:
A) specifies the payment amount and payment due date.
B) specifies that the purchaser use the seller’s bank as the guarantor.
C) requires payment prior to the delivery of the goods.
D) is signed upon delivery of the goods.
E) involves a lien on the purchasers’ current assets.
18) Which one of the following statements is false?
A) Commercial drafts represent a way to obtain a credit commitment from a customer before the
goods are delivered.
B) When a banker’s acceptance is discounted in the secondary market it becomes a commercial
note.
C) Sight drafts require immediate payment.
D) Banker’s acceptances arise when a bank guarantees payment on a commercial draft.
E) A commercial draft becomes a trade acceptance once the buyer accepts the draft and promises
to pay.
19) One characteristic of a conditional sales contract is that the:
A) seller retains legal ownership until the buyer completes payment for the goods.
B) buyer is compensated for its opportunity costs.
C) seller receives a prepayment in full.
D) invoice is paid in one lump sum at the end of the credit period.
E) ownership of the goods changes to the buyer immediately upon delivery.
20) The net credit period for a company with terms of 2/10, net 45 is:
A) 10 days.
B) 45 days.
C) 35 days.
D) 55 days.
E) 40 days.
21) The decision to grant credit should consider all the following except the:
A) delay in revenues from granting credit.
B) immediate costs of granting credit.
C) probability of nonpayment.
D) cost of short-term borrowing.
E) fixed costs incurred during the credit period.
22) When analyzing the NPV of a decision to switch from a cash-only sales policy to a credit
policy with an early payment discount, the firm is least apt to consider the:
A) size of the discount.
B) length of the credit period.
C) firm’s variable costs.
D) expected change in sales.
E) fixed salaries of the sales force.
23) When analyzing the decision to change the cash discount policy, the firm should select the
policy that has the:
A) highest order size.
B) lowest variable cost per unit.
C) lowest NPV.
D) highest NPV.
E) lowest cash discount.
24) Assume you graph the costs of granting credit against the amount of credit extended. The
optimal credit amount is then determined by the point which:
A) minimizes the total cost curve.
B) maximizes the carrying costs associated with granting credit.
C) maximizes the opportunity costs associated with granting credit.
D) minimizes the carrying costs of granting credit.
E) minimizes the opportunity costs of granting credit.
25) Determining the optimal credit policy is based on a trade-off between the carrying costs of
granting credit and the:
A) lost profits from refusing credit.
B) cash flows delayed from granting credit.
C) opportunity cost of the delayed payments.
D) variable costs associated with the delayed payments.
E) present value of uncollected sales.
26) One key reason for establishing a captive finance company is the:
A) reduction of legal restrictions on the amount of debt that can be incurred.
B) increased opportunities for internal sales.
C) lower level of required financial insurance.
D) anticipated decrease in accounts receivable.
E) expected decrease in the cost of the debt required to finance receivables.
27) All the following can provide credit information about a customer except:
A) the customer’s financial statements.
B) credit reports.
C) the customer’s current payment history with the seller.
D) the amount of goods the customer desires to purchase.
E) banks.
28) Since the credit decision usually includes riskier customers, the decision should adjust for
this by:
A) determining the probability of nonpayment and reducing the expected cash flows accordingly.
B) discounting the net cash flows at a lower discount rate.
C) discounting the cash inflows at a higher discount rate.
D) increasing the variable cost per unit.
E) decreasing the variable cost per unit.
29) All the following are one of the “Five C’s of Credit” except:
A) capability.
B) capacity.
C) capital.
D) character.
E) conditions.
30) Which one of the following statements is false?
A) An aging schedule includes only overdue accounts.
B) Aging schedules are used to monitor accounts receivable.
C) If sales are seasonal, the percentages shown on an aging schedule will vary during the year.
D) Collection efforts may involve legal action.
E) Investments in accounts receivable equal average daily sales times average collection period.
31) To collect on the accounts receivable due to the firm, a firm can do all the following except:
A) send a delinquency letter of past due status to the customer.
B) make personal contact by telephone.
C) employ a collection agency.
D) take legal action against the customer as necessary.
E) forcibly remove property from the buyer’s premises.
32) Windshield glass purchased by an automaker and sitting on a shelf ready for use is classified
as:
A) finished goods inventory.
B) raw materials.
C) assembly materials.
D) work-in-progress.
E) partial-goods inventory.
33) Which one of these statements is correct?
A) Finished goods are classified as a commodity.
B) Work-in-progress may have less resell value than the individual component parts did.
C) Raw materials that are considered to be a commodity are generally illiquid.
D) Raw materials consist of only those goods that are found in nature.
E) Finished goods are highly liquid because they are completed.
34) All of these are carrying costs of inventory except:
A) storage costs.
B) insurance.
C) restocking costs.
D) theft.
E) the opportunity cost of capital.
35) The basic assumption of the ABC approach to inventory management is that:
A) inventory should be divided dependent on the type of cash or credit sale anticipated.
B) most items are ordered, stocked, and sold in a relatively short period of time.
C) firms should receive A customer’s order Before incurring inventory Costs.
D) a small portion of inventory represents a large portion of inventory costs.
E) firms should Always Be Consistent in the amount of inventory ordered.
36) At the optimal inventory level, the:
A) inventory is held to its daily minimum level.
B) inventory is maintained at a level equal to one week’s production needs.
C) carrying costs equal the restocking costs.
D) inventory opportunity costs are zero.
E) shortage costs are eliminated.
37) The EOQ model considers all the following except the:
A) cost of the inventory.
B) carrying cost.
C) fixed cost of an order.
D) restocking cost.
E) annual sales units.
38) The EOQ model assumes inventory:
A) is held at a constant level.
B) is sold at a steady rate until it is depleted.
C) will be available just as it is needed for production.
D) has seasonal fluctuations.
E) can be delivered immediately upon order.
39) The minimum level of inventory that a firm wants to keep on hand at all times is referred to
as:
A) the base level.
B) safety stock.
C) the opportunity cost.
D) the reorder point.
E) keiretsu.
40) The total restocking cost is calculated as:
A) Fixed cost per order × Number of orders.
B) Order size × Variable cost per unit.
C) Carrying costs + Fixed costs.
D) Number of orders × Variable cost per unit.
E) Fixed cost per unit × Average inventory.
41) The reorder point considers all the following except the:
A) safety stock.
B) variable costs per unit.
C) delivery time.
D) minimum desired inventory level.
E) rate of sales.