Fundamentals of Corporate Finance, 12e (Ross)
Chapter 20 Credit and Inventory Management
1) Brown’s Hardware offers a discount of two percent on their commercial accounts if payment
is received within ten days. Otherwise, payment is due within 30 days. This credit offering is
referred to as the:
A) terms of sale.
B) credit analysis.
C) collection policy.
D) payables policy.
E) collection float.
2) Jillian was recently hired to determine the probability that individual customers of a major
retailer will fail to pay for their charge sales. Jillian’s job best relates to which one of the
following?
A) Terms of sale
B) Credit analysis
C) Collection policy
D) Payables policy
E) Customer service
3) Town Hardware sells goods on credit with payment due 30 days after purchase. If payment is
not received by the 30th day, the store mails a friendly reminder to the customer. If payment is
not received by the 45th day, the store calls the customer and requests payment and also stops
offering credit to that customer. These procedures are referred to as the store’s:
A) customer service policy.
B) credit policy.
C) collection policy.
D) payables policy.
E) disbursements policy.
4) The terms of sale generally include all of the following except the:
A) credit period.
B) cash discount.
C) type of credit instrument.
D) discount period.
E) customer’s credit capacity.
5) The primary purpose of credit analysis is to:
A) determine the optimal credit period.
B) analyze the effects of granting a cash discount.
C) determine the optimal discount period, if any.
D) summarize the frequency and amount of sales by customer.
E) evaluate whether or not a customer will pay.
6) The period of time that extends from the day a credit sale is made until the day the bank
credits the seller’s account with the payment for that sale is known as the ________ period.
A) float
B) cash collection
C) sales
D) accounts receivable
E) discount
7) Which one of the following will increase a firm’s investment in accounts receivables?
A) An increase in the number of days for which credit is granted
B) A decrease in credit sales
C) An increase in cash sales
D) A decrease in the average collection period
E) A decrease in average daily credit sales
8) A firm’s total investment in accounts receivables depends primarily on the firm’s:
A) total sales and cash discount period.
B) cash to credit sales ratio.
C) bad debt ratio.
D) average collection period and amount of credit sales.
E) amount of credit sales and cash discount percentage.
9) Which one of the following statements is correct if you purchase an item with credit terms
of 3/15, net 45?
A) If you pay within 3 days, you will receive a discount of 15 percent.
B) If you pay within 15 days, you will receive a discount of 3 percent.
C) If you do not pay within 15 days, you will be charged interest at a rate of 3 percent per month.
D) If you pay 3 percent of your purchases within 15 days, you will have 45 days to pay for the
remainder.
E) One-third of your purchase is due in 15 days and the rest is due in 45 days.
10) Assume you put your purchases on your credit card and then take advantage of any cash
discounts offered. Which one of these credit terms do you prefer?
A) 1/10, net 20
B) 2/5, net 30
C) 2/10, net 30
D) 1/15, net 45
E) 2/15, net 30
11) You need to charge your purchases and know that you will not be able to pay within the
discount period. Which one of these credit terms is best-suited to you?
A) 1/5, net 15
B) 2/5, net 30
C) 2/5, net 20
D) 1/10, net 45
E) 2/10, net 30
12) Which one of the following statements is correct?
A) The credit period begins when the discount period ends.
B) The discount period is the length of time granted to a customer to pay for a purchase.
C) The credit period begins on the invoice date.
D) With terms of 2/10, net 30, the net credit period is 20 days.
E) With EOM dating, all sales are assumed to have occurred on the 15th of each month.
13) Which one of these is frequently cited as an appropriate upper limit to the credit period
offered by a seller?
A) The buyer’s inventory period
B) The seller’s inventory period
C) The seller’s operating cycle
D) The buyer’s operating cycle
E) The buyer’s receivables period
14) Phil’s Print Shop grants its customers the right to pay for their print jobs within 30 days of
the ROG. Thus, the customers’ credit period begins when they:
A) review and approve the print order.
B) renew their contract on a revolving print order.
C) reorder a previously approved print job.
D) receive their print jobs.
E) request a new job be printed.
15) Scott purchased a shovel, a rake, and a wheelbarrow from The Local Hardware Store
yesterday. Today, the store issued a bill for these items and mailed it to Scott. What is the name
given to this bill?
A) Ledger statement
B) Warranty
C) Indenture
D) Receipt
E) Invoice
16) Geoff Industries offers its credit customers a two percent discount if they pay within ten
days. This discount is referred to as a ________ discount.
A) cash
B) purchase
C) collection
D) market
E) receivables
17) Any written proof that a customer owes you money for goods or services provided is referred
to as a(n):
A) account document.
B) sales draft.
C) credit instrument.
D) commercial paper.
E) letter of debt.
18) Which one of the following factors most supports a longer credit period being offered to
customers?
A) Higher consumer demand
B) Lower priced merchandise
C) Increased credit risk
D) More perishable merchandise
E) Increased competition
19) Which one of the following statements related to credit periods is correct?
A) Longer credit periods are granted for sales of perishable items.
B) Inexpensive goods tend to have longer credit periods.
C) Smaller accounts tend to have longer credit periods.
D) Sellers may offer different credit periods to different customers.
E) Newer products tend to have shorter credit periods.
20) A trade discount of 2/5th, EOM terms:
A) grants customers five days to pay after month end.
B) offers no credit to customers.
C) means the full amount is due by the 5th of the month following the month of sale.
D) means the invoice is overdue only after month-end.
E) means the full amount is due the last day of the month following the month of sale.
21) Under credit terms of 1/5, net 15, customers should:
A) Always pay on the 15th day.
B) take the discount and pay immediately.
C) take the discount and pay on the day following the day of sale.
D) either take the discount or pay on the 15th day.
E) both take the discount and pay on the 15th day.
22) A 2/10, net 30 credit policy:
A) is an expensive form of short-term credit if a buyer forgoes the discount.
B) provides cheap financing to the buyer for 30 days.
C) is an inexpensive means of reducing the seller’s collection period if every customer takes the
discount.
D) tends to have little effect on the seller’s collection period.
E) tends to increase the seller’s investment in receivables as compared to a straight net 30 policy.
23) The Painted House offers credit terms of 2/10th, EOM. Assume you purchase an item on
credit from this store on Monday, November 3. When is payment due for this purchase if you do
not take the discount?
A) November 3
B) November 13
C) November 30
D) December 31
E) December 10
24) Which one of the following credit instruments is commonly used in international commerce?
A) Open account
B) Sight draft
C) Time draft
D) Banker’s acceptance
E) Promissory note
25) A conditional sales contract:
A) passes title to the goods sold to the buyer at the time the contract is signed.
B) normally calls for one lump sum payment on the contract payment date.
C) allows the seller to retain ownership of the goods sold until the customer has fully paid for the
purchase.
D) is payable immediately upon receipt.
E) is a formal bid for a project.
26) Which one of these statements is correct?
A) A firm’s cash cycle generally decreases when it switches from a cash to a credit policy, all
else equal.
B) Most customers will forgo the discount and pay at the end of the credit period.
C) Total revenues generally decrease if both the quantity sold and the price per unit increase
when credit is granted.
D) Only the cost of default should be considered before granting credit.
E) A firm may have to increase its long-term borrowing if it decides to grant credit to its
customers.
27) When considering a switch from an all-cash credit policy to a net 30 credit policy all of the
following should be considered except the:
A) revenue effects.
B) effects on the variable costs.
C) cost of the discount.
D) probability of default.
E) change in the fixed costs.
28) The optimal amount of credit equates the incremental costs of carrying the increase in
accounts receivable to the incremental:
A) decrease in the cash cycle.
B) benefit from decreasing the inventory level.
C) cash flows from increased sales.
D) increase in bad debts.
E) gain in net profits.
29) Assume you are viewing a graph that compares costs with the amount of credit extended.
Both the carrying costs and the opportunity costs of credit are depicted. What is the function
called that represents the summation of these carrying and opportunity costs?
A) Opportunity cost curve
B) Credit extension curve
C) Credit cost curve
D) Terms of sale graph
E) Optimal sales graph
30) Assume that RSF is a wholly owned subsidiary of the Rolled Steel Company. RSF provides
credit financing solely for large ticket items purchased from the Rolled Steel Company. Which
one of the following terms describes RSF?
A) Credit department
B) Parent company
C) Captive finance company
D) Credit union
E) Service unit
31) When credit policy is at the optimal point, the:
A) total costs of granting credit will be maximized.
B) carrying costs of credit will be equal to zero.
C) opportunity cost of credit will be equal to zero.
D) carrying costs will equal the opportunity costs.
E) total costs will equal the opportunity costs.
32) Which of the following characteristics are most associated with a firm that adopts a liberal
credit policy?
A) Mostly one-time customers and excess capacity
B) Low carrying costs and full production
C) Low carrying costs and high variable costs
D) Low variable costs and predominately repeat customers
E) Excess capacity and high variable costs
33) If you extend credit for a one-time sale to a new customer, you risk an amount equal to the:
A) sales price of the item sold.
B) variable cost of the item sold.
C) fixed cost of the item sold.
D) profit margin on the item sold.
E) fixed and variable costs of the item sold.
34) Which one of the following statements is correct?
A) If the majority of a firm’s new customers become repeat customers, then there is a strong
argument against extending credit even if the default rate is low.
B) A customer’s past payment history reveals little information in relation to his or her future
tendency to pay.
C) A suggested policy for offering credit to new customers is to limit the amount of their initial
credit purchase.
D) The risk of issuing credit is the same for a new customer as it is for an existing customer.
E) The recommended policy for new customers is to extend an offer of a high credit limit as an
enticement to get their business.
35) When evaluating the creditworthiness of a customer, the term capital refers to the:
A) type of goods the customer wishes to obtain.
B) customer’s financial reserves.
C) types of assets the customer wants to pledge as collateral.
D) customer’s willingness to pay bills in a timely fashion.
E) nature of the customer’s line of work.
36) Which one of the five Cs of credit refers to a customer’s willingness to pay its bills?
A) Character
B) Capacity
C) Collateral
D) Conditions
E) Capital
37) Which one of the five Cs of credit refers to the general economic situation in the customer’s
line of business?
A) Capacity
B) Character
C) Conditions
D) Capital
E) Collateral
38) The basic factors to be evaluated in the credit evaluation process, the five Cs of credit, are:
A) conditions, control, cessation, capital, and capacity.
B) conditions, character, capital, control, and capacity.
C) capital, collateral, control, character, and capacity.
D) character, capacity, control, cessation, and collateral.
E) capacity, character, collateral, capital, and conditions.
39) Roger’s Home Appliances offers credit to customers it deems qualified based on a numerical
value that estimates the probability that the customer will default if credit is granted to them. The
process of computing this numerical value is referred to as:
A) credit scoring.
B) Credit capacity.
C) receipts assessment.
D) conditions for credit.
E) consumer analysis.
40) You are an accounting intern and today you are compiling a spreadsheet with column
headings of: Invoice number; Customer number; < 30 days; 31-60 days; 61-90 days; > 90 days.
You will list every unpaid invoice with the amount owed entered into the appropriate column
based on the number of days between the sale date and today. Once you have completed that,
you will sort the report by customer number and total the amounts listed in each column. What is
this report called?
A) Credit report
B) Aging schedule
C) Risk assessment report
D) Turnover delineation
E) Receivables consolidation report
41) Which one of the following statements is correct?
A) Firms may opt to refuse additional credit to a delinquent customer.
B) Seasonal sales have little, if any, impact on aging schedule percentages.
C) Normally, firms call their delinquent customers prior to sending them a past due letter.
D) If a firm wishes to sell a delinquent receivable, it must do so prior to the customer filing for
bankruptcy.
E) Expected decreases in the average collection period are a cause of concern.
42) Which one of the following inventory items is probably the least liquid?
A) Plywood held in inventory by a home builder
B) A wheel barrow held in inventory by a garden center
C) A partially assembled interior for a new vehicle
D) A set of tires owned by an automobile manufacturer
E) A toy owned by a retail toy store