Chapter 20 Test bank – Static Key
1.
Large payments between businesses are generally made electronically through either CHIPS or Fedwire.
2.
Inventory makes up the bulk of the current assets of retail firms.
3.
The potential benefits of additional credit analysis should always be weighed against the incremental costs.
4.
the sale.
Absent any possibility of repeat orders, if the default probability is less than the profit margin, you should extend credit for
5.
Firms are more likely to grant credit the higher the probability that a potential customer will become a repeat customer.
6.
The more liberal the terms of the collection policy, the lower the potential for bad debts and unprofitable sales.
7.
A firm that buys on credit is in effect borrowing from its supplier.
8.
Just-in-time inventory management seeks to reduce inventory levels.
9.
Commercial paper is usually used to finance overseas trade.
10.
Extending trade credit can increase the probability of repeat orders.
11.
The decision to offer credit depends on the probability of payment. You should grant credit if the expected profit from doing
so is greater than the profit from refusing.
12.
Bond ratings are an expensive source of credit information on publicly traded companies.
13.
An aging schedule is a statement sent to customers who are delinquent in their payments.
14.
Optimal inventory levels are lower when carrying costs are high, and when the cost of restocking inventories is low.
15.
Since defaults can be costly, it is cost-effective to undertake a full credit analysis of all customers.
16.
Checks that have been mailed but not yet cleared result in float.
17.
Short-term securities have high interest-rate risk.
18.
Lock-box systems allow local banks to collect and process the firm’s remittances from that area.
19.
As the number of inventory orders per year increases, the total order costs decrease.
20.
Checks tend to be a more popular method of payment in the United States than in many other developed countries.
21.
Most money market instruments have a high degree of liquidity.
22.
Repos are long-term unsecured loan agreements.
23.
The cash cycle is the period between a firm‘s payment for materials and collection on its sales.
24.
Bank certificates of deposit are the safest and most liquid of all the money market securities.
25.
A firm’s inventory period can be estimated by the ratio of inventory to daily cost of goods sold.
26.
Which of the following is not a current asset?
27.
The economic order quantity:
28.
Which of these firms will benefit the most from a lock-box service?
29.
A firm that is located in New York receives on average 2,000 checks a day from its customers in the Twin Cities area.
Average payment per check is $1,500. A bank in the Twin Cities is offering a lock-box arrangement for collection and
processing of these checks at a cost of $0.50 per check. This arrangement will reduce the float by 2 days. The daily interest
rate for the firm is 0.02%. What is the net saving from the lock-box arrangement?
30.
Which one of the following terms of sale is the most restrictive?
31.
At what point does a customer’s unpaid account become delinquent when the terms of sale are 2/10, net 60?
32.
Which statement is true about terms of trade credit of 2/10, net 30?
33.
What effective annual rate of interest is being charged to a customer who is granted credit terms of 3/15, net 45 when the
customer foregoes the discount and pays on the last date prior to being delinquent?
34.
What is the cash cycle for a firm with a receivables period of 40 days, a payables period of 30 days, and an inventory period
of 60 days?
35.
With terms of 4/15, net 60, what is the implied interest rate for forgoing a cash discount and paying at the end of the credit
period?
36.
What happens to the implied interest rate on trade credit as the time interval between the discount period and payment period
is decreased?
37.
When sales are made without the accompaniment of a formal debt contract, the sales are said to be on:
38.
Under the terms of a sight draft, the buyer‘s bank:
39.
A time draft that has been signed by the customer is termed:
40.
Which one of the following statements is correct about banker’s acceptances?
41.
Which one of the following is not included in the five Cs of credit?
42.
Credit scoring systems can be used to:
43.
What is the cash cycle for a firm with $3 million average inventories, $1.5 million average accounts payable, a receivables
period of 40 days, and annual sales of $20 million and an annual cost of goods sold of $18 million?
44.
The set of rules that determines whether or not credit should be extended is known as:
45.
What credit decision is appropriate for a potential customer that offers a 75% chance of paying on a $10,000 sale which has
an 80% cost?
46.
What is the expected payoff on a $2,000 sale that has a 30% profit margin if there is a 20% probability of default?
47.
Firms should be more prepared to sell on credit to high-risk customers if:
48.
Which one of the following statements typically describes the break-even probability of collection for repeat sale
customers?
49.
An aging schedule illustrates the relationship between:
50.
Money market securities usually have a maturity of:
51.
A $1,200 invoice dated January 1 has credit terms of 3/10, net 30. If the buyer pays January 4, how much will he need to
pay?
52.
Which of the following is correct concerning terms of trade credit of 4/10, EOM, net 90?
53.
If goods are sold on terms of 5/10, net 90, what effective interest rate is if the purchaser pays on day 90?
54.
Which one of the following changes to the terms of credit would increase the effective annual interest rate charged?
55.
Which one of the following is most likely to discourage purchasers from taking a discount?
56.
Which of the following strategies should a cash-strapped firm adopt if the effective interest rate charged on trade credit is
lower than the bank’s interest rate?
57.
What is the daily net cost of holding a cash balance of $2.5 million, if the daily interest rate is 0.025% and the average
transaction cost of investing money overnight is $50?
58.
Which one of the following credit agreements provides the least protection to the seller?
AACSB: Reflective Thinking