35) An applicant’s capacity to repay its requested credit can be found by ________.
A) analyzing financial statements
B) checking bank account balances
C) analyzing tax payment history
D) checking the covenants
36) A firm is analyzing a relaxation of credit standards that is expected to increase sales 10 percent. The
firm is currently selling 400 units at an average sale price per unit of $575, and the variable cost per unit is
$400 at the current sales volume. The average cost per unit is $425. What is the additional profit
contribution from sales if credit standards are relaxed?
A) $23,000
B) $16,000
C) $6,000
D) $7,000
37) When a firm’s credit standards are relaxed ________.
A) its sales are expected to decrease with a corresponding increase in costs
B) its costs are expected to decrease with a corresponding decrease in sales
C) its costs are expected to increase faster than sales if the standards are not relaxed
D) its profit contribution from sales will be greater than the cost contribution
Table 15.5
Caren’s Canoes is considering relaxing its credit standards to encourage more sales. As a result, sales are
expected to increase 15 percent from 300 canoes per year to 345 canoes per year. The average collection
period is expected to increase to 40 days from 30 days and bad debts are expected to double the current 1
percent level. The price per canoe is $850, the variable cost per canoe is $650 and the average cost per unit
at the 300 unit level is $700. The firm’s required return on investment is 20 percent. (Assume a 360-day
year)
38) What is the firm’s additional profit contribution from sales under the proposed relaxation of credit
standards? (See Table 15.5)
A) $2,250
B) $6,750
C) $9,000
D) $69,000
39) What is the cost of marginal investments in accounts receivable under the proposed plan? (See Table
15.5)
A) $1,817
B) $1,867
C) $1,733
D) $1,617
40) What is the cost of marginal bad debts under the proposed plan? (See Table 15.5)
A) $383
B) $765
C) $3,315
D) $5,100
41) What is the net result of implementing the proposed plan? (See Table 15.5)
A) $3,952
B) $3,869
C) $2,084
D) -$2,084
42) A firm is considering relaxing credit standards, which will result in annual sales increasing from $1.5
million to $1.75 million, the cost of annual sales increasing from $1,000,000 to $1,125,000, and the average
collection period increasing from 40 to 55 days. The bad debt loss is expected to increase from 1 percent of
sales to 1.5 percent of sales. The firm’s required return on investments is 20 percent. The firm’s cost of
marginal investment in accounts receivable is ________. (Assume a 360–day year.)
A) $5,556
B) $9,944
C) $12,153
D) $152,778
43) A firm is considering relaxing credit standards which will result in an increase in annual sales from $3
million to $3.75 million, a decrease in the cost of annual sales from $2,225,000 to $2,000,000, an increase in
additional profit contribution from sales of $10,000, and an increase in the average collection period of 15
days, from 20 to 35 days. The bad debt loss is expected to increase from 1 percent to 1.5 percent of sales.
The firm’s required return on investments is 15 percent. The net result of the firm relaxing its credit
standards is ________. (Assume a 360-day year.)
A) $10,000
B) -$16,250
C) -$26,875
D) -$16,875
44) Credit Scoring Policy
Jia’s Jewelry uses the credit scoring technique to evaluate retail applications. The financial and credit
characteristics considered and weights indicating their relative importance in the credit decision are
shown above. The firm’s credit standards are to accept all applicants with credit scores of 85 or more, to
extend limited credit to applicants with scores ranging from 75 to 84, and to reject all applicants below 75.
The firm is currently processing two applicants. The scores of each applicant on each of the financial and
credit characteristics are summarized above. Would you recommend either of these applicants for credit
extension?
45) Maggie’s Gold Coins, Inc. is considering shortening its credit period from 30 days to 20 days and
believes, as a result of this change, its average collection period will decrease from 36 days to 30 days. Bad
debt expenses are also expected to decrease from 1.2 percent to 0.8 percent of sales. The firm is currently
selling 300,000 units but believes as a result of the change, sales will decline to 275,000 units. On 300,000
units, sales revenue is $4,200,000, variable costs total $3,300,000, and fixed costs are $300,000. The firm has
a required return on similar-risk investments of 15 percent. Evaluate this proposed change and make a
recommendation to the firm.
46) If the level of bad debt attributable to credit policy is relatively constant, increasing collection
expenditures can be expected to reduce bad debts.
47) 2/15 net 45 translates as 2 percent of the balance is due in 15 days; the remaining balance is due in 45
days.
48) If a firm increases its cash discount period, the firm’s investment in accounts receivable due to non–
discount takers now paying earlier is expected to decrease.
49) If a firm increases its cash discount period, the firm’s investment in accounts receivable due to
discount takers still getting cash discounts but paying later is expected to increase.
50) If a firm’s credit period is decreased, the sales volume, the investment in accounts receivable, and the
bad debt expenses can be expected to increase.
51) When a firm initiates or increases a cash discount, the net effect on the accounts receivable investment
is difficult to determine because the nondiscount takers paying earlier will reduce the accounts receivable
investment, while the new customer accounts will increase this investment.
52) The net effect of changes in a cash discount period is quite difficult to analyze because they are
directly attributable to the three forces affecting a firm’s investment in accounts receivable.
53) An increase in accounts receivable turnover due to an increase in collection efforts will decrease a
firm’s marginal investment in accounts receivable.
54) A decrease in collection efforts will result in an increase in sales volume, an increase in the investment
in accounts receivable, an increase in bad debt expenses, and a decrease in collection expenditures.
55) Increased collection expenditures should reduce the investment in accounts receivable and bad debt
expenses, increasing profits.
56) An aging schedule breaks down accounts receivable into groups on the basis of the first letter of the
name of the company that owes on the account.
57) A company’s ________ are the procedures followed to collect accounts receivable when they come
due.
A) collection policies
B) credit scorings
C) credit policies
D) credit analysis
58) The most stringent step in the collection process is ________.
A) letters
B) personal visits
C) collection agencies
D) legal action
59) The first step in the collection of overdue accounts is ________.
A) a letter
B) contacting a collection agency
C) legal actions
D) a personal visit
60) 2/15 net 45 translates as ________.
A) 15 percent cash discount if paid in 2 days, net 45-day credit period
B) 45 percent of account due in 15 days, payment prior to day 15 receives a 2 percent discount
C) 2 percent cash discount if paid prior to 15 days, if customer does not take a cash discount, the balance
is due in 45 days
D) 2 percent of the balance is due in 15 days, the remaining balance is due in 45 days
61) A technique that provides an analyst with the information concerning the proportion of each type of
account that has been outstanding for a specified period of time is called ________.
A) credit analysis
B) credit scoring
C) aging of receivables
D) the economic order quantity model
62) Which of the following is true of cash discount?
A) It increases bad debts because after availing discounts all customers may not pay.
B) It decreases the investment in accounts receivable and increases the per unit profit.
C) It helps to speed up collections without putting pressure on customers.
D) It reduces sales because the customers feel that the products are of inferior quality.
63) When a firm initiates or increases a cash discount, sales are expected to ________, the investment in
accounts receivable is expected to ________, the bad debt expense is expected to ________, and the profit
per unit is expected to ________.
A) decrease; increase; increase; increase
B) decrease; decrease; increase; increase
C) increase; increase; decrease; decrease
D) increase; decrease; decrease; decrease
64) When a firm decreases or cancels a cash discount, sales are expected to ________, the investment in
accounts receivable is expected to ________, the bad debt expense is expected to ________, and the profit
per unit is expected to ________.
A) decrease; increase; increase; increase
B) decrease; decrease; increase; increase
C) increase; increase; decrease; decrease
D) increase; decrease; decrease; decrease
65) If the cash discount period is increased, a firm’s investment in accounts receivable is expected to
________.
A) increase because existing customers attracted by the new policy will buy more products
B) decrease because of nondiscount takers paying earlier to avail the cash discount
C) decrease because discount takers will pay more in order to get more discount
D) decrease because new customers will doubt the quality of product due to increase in discount
66) If the cash discount period is increased, a firm’s investment in accounts receivable is expected to
________.
A) increase because new customers attracted by the new policy will result in new accounts
receivable
B) decrease because new customers will doubt the quality of product due to increase in discount
C) increase because existing discount takers will pay more to get more discount
D) decrease because of existing discount takers will now pay earlier to avail the cash discount
67) Which of the following is true of changes in cash discount period?
A) If a firm increases its cash discount period, the sales are expected to decrease, the bad debts are
expected to decrease, and the profit per unit is expected to increase.
B) If a firm decreases its cash discount period, the sales are expected to decrease, the bad debts are
expected to decrease, and the profit per unit is expected to increase.
C) If a firm increases its cash discount period, the sales are expected to increase, the bad debts are
expected to decrease, and the profit per unit is expected to decrease.
D) If a firm decreases its cash discount period, the sales are expected to decrease, the bad debts are
expected to increase, and the profit per unit is expected to decrease.
68) Which of the following is true of changes in cash discount period?
A) If a firm decreases its cash discount period, the sales are expected to decrease, the bad debts are
expected to increase, and the profit per unit is expected to increase.
B) If a firm decreases its cash discount period, the sales are expected to increase, the bad debts are
expected to increase, and the profit per unit is expected to decrease.
C) If a firm increases its cash discount period, the sales are expected to decrease, the bad debts are
expected to decrease, and the profit per unit is expected to increase.
D) If a firm increases its cash discount period, the sales are expected to increase, the bad debts are
expected to decrease, and the profit per unit is expected to increase.
69) If a firm’s credit period is increased, the sales volume can be expected to ________, the investment in
accounts receivable can be expected to ________, and the bad debt expenses can be expected to ________.
A) increase; decrease; decrease
B) increase; increase; decrease
C) increase; increase; increase
D) decrease; decrease; decrease
70) If a firm’s credit period is decreased, the sales volume can be expected to ________, the investment in
accounts receivable can be expected to ________, and the bad debt expenses can be expected to ________.
A) increase; decrease; decrease
B) increase; increase; decrease
C) increase; increase; increase
D) decrease; decrease; decrease
Table 15.6
A breakdown of Teffan, Inc.’s outstanding accounts receivable dated June 30, 2019 on the basis of the
month in which the credit sale was initially made follows. The firm extends 30-day credit terms.
71) Accounts receivable over 90 days total ________. (See Table 15.6)
A) $200,000
B) $470,000
C) $300,000
D) $100,000
72) An evaluation of the firm’s collection efforts based on the aging schedule would suggest ________.
(See Table 15.6)
A) poor credit management
B) satisfactory credit management
C) superior credit management
D) overzealous collection efforts
73) An increase in collection efforts by a firm will result in ________ in sales volume, ________ in the
investment in accounts receivable, ________ in bad debt expenses, and ________ in collection
expenditures.
A) an increase; a decrease; an increase; a decrease
B) an increase; a decrease; a decrease; an increase
C) an increase; a decrease; an increase; an increase
D) a decrease; a decrease; a decrease; an increase
74) A decrease in collection efforts by a firm will result in ________ in sales volume, ________ in the
investment in accounts receivable, ________ in bad debt expenses, and ________ in collection
expenditures.
A) an increase; an increase; an increase; a decrease
B) an increase; a decrease; an increase; an increase
C) an increase; a decrease; an increase; a decrease
D) a decrease; a decrease; a decrease; an increase
75) An increase in accounts receivable turnover for a firm due to an increase in collection efforts will
________.
A) decrease the firm’s marginal investments in accounts receivable
B) increase the firm’s marginal investments in accounts receivable
C) decrease the firm’s collection expense
D) increase the firm’s bad debt expense
Table 15.7
Fizzy Animators, Inc. currently makes all sales on credit and offers no cash discount. The firm is
considering a 3 percent cash discount for payment within 10 days. The firm’s current average collection
period is 90 days, sales are 400 films per year, selling price is $25,000 per film, variable cost per film is
$18,750, and the average cost per film is $21,000. The firm expects that the change in credit terms will
result in a minor increase in sales of 10 films per year, that 75 percent of the sales will take the discount,
and the average collection period will drop to 30 days. The firm’s bad debt expense is expected to become
negligible under the proposed plan. The bad debt expense is currently 0.5 percent of sales. The firm’s
required return on equal-risk investments is 20 percent. (Assume a 360-day year.)
76) What is the firm’s marginal profit contribution from sales under the proposed plan of initiating the
cash discount? (See Table 15.7)
A) $22,500
B) $40,000
C) $62,500
D) $100,000
77) What is the marginal investment in accounts receivable under the proposed plan? (See Table 15.7)
A) $1,234,375
B) $1,382,500
C) $1,567,300
D) $1,841,570
78) What is the cost of marginal investment in accounts receivable under the proposed plan? (See Table
15.7)
A) $313,460
B) $276,500
C) $246,875
D) $368,314
79) What are the savings of marginal bad debts under the proposed plan? (See Table 15.7)
A) $500,000
B) $50,000
C) $10,000
D) $5,000
80) What is the cost of the marginal cash discount? (See Table 15.7)
A) $768,750
B) $300,000
C) $307,500
D) $230,625
81) What is the net result of increasing the cash discount? (See Table 15.7)
A) +$33,750
B) -$33,750
C) +$128,750
D) -$58,750
82) Ashley’s Ad Agency’s accounts receivable totaled $451,000 on January 30, 2019. An aging summary of
receivables at this date follows:
The firm extends 30-day credit terms to all its credit customers.
(a) Prepare an aging schedule for Ashley’s Ad Agency.
(b) Evaluate the firm’s collection performance.
15.5 Management of receipts and disbursements
1) Receipts and disbursements management techniques are aimed at minimizing a firm’s financing
requirements by taking advantage of certain imperfections in the collection and payment system.
2) The entire process resulting from a check issue and mail by a payer company to a payee company (i.e.,
mail float, processing float, and clearing float) is disbursement float to the payer company and is
collection float to the payee company.
3) Processing float is the delay between the receipt of a check by a payee and its deposit in firm’s account.
4) Mail float is the delay between the deposit of a check by a payee and the actual availability of the
funds.
5) Assuming that a firm has done all it can to stimulate customers to pay promptly and to select vendors
offering the most attractive and flexible credit terms, it can further speed collections and slow
disbursements by taking advantage of the “float” existing in the collection and payment systems.
6) Float exists when a payee has received funds in a spendable form but these funds have not been
withdrawn from the account of the payer.
7) Collection float is experienced by a payer and is a delay in the receipt of funds.
8) Disbursement float is experienced by a payee and is a delay in the actual withdrawal of funds.
9) Collection float results from the lapse between the time that a firm deducts a payment from its
checking account ledger and the time that funds are actually withdrawn from its accounts.
10) Disbursement float results from the delay between the time that a payer or customer deducts a
payment from its checking account ledger (disburses it) and the time that a payee or vendor actually
receives these funds in a spendable form.
11) A lockbox system is used to reduce collection float by shortening all three basic float components (i.e.,
mail, processing, and clearing).
12) Controlled disbursing involves the strategic use of mailing points and bank accounts to lengthen mail
float and clearing float, respectively.
13) Controlled disbursing is a method of consciously anticipating the mail, processing, and clearing time
involved with the payment process.