C)
D)
58) Which of the following statements is FALSE?
A) After a firm 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
firm ties up in its payables.
C) Knowledge of the payments pattern is also useful for forecasting the firm’s working capital
requirements.
D) An aging schedule categorizes accounts by the number of days they have been on the firm‘s books.
59) 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 firm collects in each month after the sale.
B) Because accounts receivable days can be calculated from the firm’s financial statement, outside
investors commonly use this measure to evaluate a firm’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 firm 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.
60) 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 firm to collect on its sales?
A) 15.0 days
B) 24.3 days
C) 12.2 days
D) 16.7 days
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
61) What are the five C’s of Credit?
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.
62) A firm should choose to borrow using accounts payable only if trade credit is the cheapest source of funding.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
63) If a supplier is offering 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) anytime before day 10
B) on day 10
C) on day 30
D) any time after day 30
64) A firm 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 firm takes to pay its debt?
A) 2 days
B) 8 days
C) 15 days
D) 21 days
65) What is the effective annual cost of credit terms of 1/10 net 30, if the firm stretches the accounts payable to 45
days?
A) 8.49 %
B) 10.91%
C) 11.05%
D) 18.03%
66) What is the effective annual cost of credit terms of 2/20, net 60, if the firm stretches the accounts payable to 80
days?
A) 6.4 %
B) 13.1%
C) 21.1%
D) 34.2%
67) What is the effective annual cost of credit terms of 3/15 net 30, if the firm stretches the accounts payable to 60
days?
A) 1.7%
B) 3.35%
C) 12.65%
D) 28.03%
68) 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.
69) 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.
70) 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.
71) Which of the following is NOT a reason why a firm may typically choose not to stretch its accounts payable?
A) Delaying payment can increase the effective cost of credit in some circumstances.
B) The supplier may demand COD or CBD in future.
C) The supplier may choose to discontinue business with delinquent customers.
D) The firm’s credit rating may be damaged.
72) Which of the following statements is FALSE?
A) The lower the discount percentage offered, the greater the cost of forgoing the discount and using trade
credit.
B) A firm should choose to borrow using accounts payable only if trade credit is the cheapest source of
funding.
C) A firm should always pay on the latest day allowed.
D) A firm 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.
73) Which of the following statements is FALSE?
A) Similar to the situation with its accounts receivable, a firm should monitor its accounts payable to
ensure that it is making its payments at an optimal time.
B) Some firms ignore the payment due period and pay later, in a practice referred to as pushing the
accounts payable.
C) Suppliers may react to a firm 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 firm can conclude that
it generally pays late and may be risking supplier difficulties.
74) Your firm purchases goods from its supplier on terms of 1/10 net 30. The effective annual cost to your firm
if it chooses not to take advantage of the trade discount offered and stretches the accounts payable to 45 days
is closest to:
A) 13.0%
B) 11.1%
C) 15.9%
D) 20.1%
75) Your firm purchases goods from its supplier on terms of 2/10, net 40. The effective annual cost to your firm
if it chooses not to take advantage of the trade discount offered and stretches the accounts payable to 60 days
is closest to:
A) 20.1%
B) 15.9%
C) 13.0%
D) 11.1%
76) What is the effective cost of credit terms of 2/10, net 30 if the firm stretches the accounts payable to 45 days?
A) 49.76%
B) 36.12%
C) 23.37%
D) 44.59%
77) What is the effective cost of credit terms of 3/5 net 45 if the firm stretches the accounts payable to 60 days?
A) 12.9%
B) 35.6%
C) 39.9%
D) 22.4%
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.
78) Effective inventory management builds up assets through increases in inventory and thus increases a firm’s
value.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
79) Which of the following is NOT a benefit of holding inventory?
A) minimizes the risk that the firm 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 efficient
production cycle, leading to a build up of inventory in off–peak periods
C) minimizes order cost from placing multiple orders throughout the year
D) minimizes risks involved in spoilage and obsolescence
80) 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
81) 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
82) Evertz Metals buys and stockpiles dolomite to use in its smelting processes. Before all this dolomite is used,
however, they alter their smelting process so that calcite limestone is used instead. How is the inventory cost
of the unused dolomite best categorized?
A) an acquisition cost
B) a carrying cost
C) an order cost
D) a holding cost
83) What of the following best describes just–in–time inventory management?
A) Inventory is maintained as a buffer to meet uncertainties in demand, supply, and movements of goods.
B) Production inefficiencies arising when production capacity stands idle for lack of materials are
minimized by holding a small stock of essentials at all times.
C) A firm acquires inventory precisely when needed so that its inventory balance is always at, or close to,
zero.
D) A firm minimizes the time lags present in the supply chain by maintaining a certain amount of
inventory to use in these lag times.
84) Which of the following is the major benefit to a firm of using just–in–time inventory management?
A) minimizes the risk of stock–outs
B) minimizes the total number of orders that the firm places
C) reduces acquisition costs for placing goods in inventory
D) largely eliminates the carrying costs of maintaining a large inventory
85) Which of the following is not a direct costs associated with inventory?
A) acquisition costs
B) order costs
C) carrying costs
D) stock–out costs
86) Which of the following statements is FALSE?
A) Under the Modigliani–Miller assumptions of perfect capital markets, the amount of inventory is
irrelevant.
B) Unlike trade credit, inventory represents one of the required factors of production.
C) It is the firm’s financial manager who must arrange for the financing necessary to support the firm’s
inventory policy and who is responsible for ensuring the firm’s overall profitability.
D) Inventory management receives extensive coverage in courses on operations management.
87) Which of the following statements is FALSE?
A) Firms may hold inventory because factors such as seasonality in demand mean that customer
purchases do not perfectly match the most efficient production cycle.
B) Inventory helps minimize the risk that the firm will not be able to obtain an input it needs for
production.
C) If a firm holds too much inventory, stock–outs, the situation when a firm runs out of product, may
occur, leading to lost sales.
D) Because excessive inventory uses cash, efficient management of inventory increases firm value.
88) ALT had $25 million in sales last year. Its cost of goods sold was $15 million and its average inventory
balance was $3 million. What was its average days of inventory?
A) 43.8 days
B) 36.5 days
C) 73.0 days
D) 9.1 days
89) ALT had $25 million in sales last year. Its cost of goods sold was $15 million and its average inventory
balance was $3 million. The average days of inventory in the industry is 65 days. What would ALT’s
average inventory need to be so that it would meet the industry average?
A) $4.45 million
B) $3.65 million
C) $3.33 million
D) $2.67 million
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
90) What are the advantages of holding inventory?
91) What are the costs of holding inventory?