Chapter 30 Quiz, Short-term Financial Planning




1. When credit is granted to another firm this gives rise to a(n):
A.Accounts receivable and is called a consumer credit
B.Credit due and is called an installment note
C.Accounts receivable and is called trade credit
D.Trade agreement and is called an installment note


2. Supposing you purchase goods on terms of 10/20, net 60. Taking compounding into account, what annual rate of interest is implied by the cash discount? (Assume a year has 365 days.)
A.91%
B.139%
C.250%
D.162%


3. The net credit period for a company with terms of 3/10 net 60 is:
A.50 days
B.60 days
C.10 days
D.57 days


4. Which of the following statements is true?
A.Bank acceptances are seldom used in overseas trade
B.A time draft is another name for a sight draft
C.An irrevocable letter of credit ensures that funds are available to pay the bill
D.Weak customers often default on commercial drafts
E.None of the above


5. Companies frequently use information from the following sources when conducting their credit analysis except:
A.Financial statement supplied by the customer
B.Payment history supplied by other firms
C.Payment history supplied by banks
D.All of the above are sources of information


6. Exporters who require guarantee of payment will ask for:
A.Trade acceptances
B.Bankers' acceptances
C.An irrevocable letter of credit
D.None of the above


7. A customer has ordered goods with a value of $800. The production cost is $600. Under what conditions should you extend credit if there is no possibility of repeat orders?
A.If the probability of payment exceeds 0.67
B.If the probability of payment exceeds 0.75
C.If the probability of payment exceeds 0.80
D.If the probability of payment exceeds 0.90
E.Should always extend credit – price exceeds the cost


8. Which of the following statements is true?
A.New companies must be prepared to incur more bad debts than established businesses as part of the cost of building up a good customers list
B.To ensure fairness, companies should give each customer the same type of credit analysis
C.Companies with high profit margins need to be particularly careful about extending credit to high-risk customers
D.All of the above


9. Zebra Corp. is currently experiencing a bad debt ratio of 4%. Terry is convinced that, with looser credit controls, this ratio will increase to 8%; however, she expects sales to increase by 10% as a result. The cost of goods sold is 80% of the selling price. Per $100 of current sales, what is Terry's expected profit under the proposed credit standards?
A.$26.0
B.$15.4
C.$13.2
D.$25.6


10. The average collection period for a firm that offers a discount must:
A.Be equal to the net period if customers take the discount or pay on time
B.Be greater than the net period if customers take the discount or pay on time
C.Be less than the net period if customers take the discount or pay on time
D.Be unchanged because the collection period is unaffected by the discount


11. Factoring refers to:
A.Determining the aging schedule of the firm's accounts receivable
B.The sale of a firm's accounts receivable to another firm
C.The determination of the average collection period
D.Scoring a customer based on the 5 C's of credit
E.All of the above


12. If a firm sells goods on terms 2/30 net 60, customers who do not take the cash discount are effectively borrowing money at approximately 2% per year.
A.True
B.False


13. If goods are sold on open account, the customer is asked to sign an IOU.
A.True
B.False


14. A commercial draft is simply an order to pay.
A.True
B.False


15. Credit scoring makes sense when a company has a few large customers.
A.True
B.False



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