Question 1

What is denoted in by A in the following graph?

Accepted Answer

A)   JIT point.
B)   Total opportunity cost.
C)   Total carrying costs.
D)   Total credit costs.
E)   Optimal amount of credit.F) B) and E)
G) B) and C)

Question 2

Newell and Company is a manufacturing concern. The company divides its raw materials inventory into four classiﬁcations based upon the cost of each item. Based upon this system, Newell will:

Accepted Answer

A)   Compute the EOQ for each group of items.
B)   Incur more shortage costs on the less expensive items.
C)   Order the more expensive items more frequently than the less expensive items.
D)   Maintain a larger safety stock on the more expensive items.
E)   Apply the JIT inventory approach to the less expensive items.F) A) and C)
G) A) and E)

Question 3

Upon graduation with your ﬁnance degree, you take a position with a medium-sized manufacturing concern. You ﬁnd that there are several pieces of inventory required in the manufacturing process
That make up a small percentage of physical inventory, but a large percentage of inventory value.
Anxious to impress your boss, you suggest the ﬁrm use the ______________ of inventory
Management.

Accepted Answer

A)   EOQ model.
B)   Derived demand model.
C)   Shortage cost model.
D)   Inventory depletion model.
E)   ABC model.F) D) and E)
G) B) and C)

Question 4

The minimum level of inventory a ﬁrm keeps on hand at any given time is called its:

Accepted Answer

A)   Net working capital in inventory.
B)   Shortage cost.
C)   Economic order quantity.
D)   Safety stock.
E)   Reorder point.F) A) and E)
G) A) and C)

Question 5

Relatively standardized products tend to have relatively short credit periods.

Accepted Answer

A) True 
 B)False

Question 6

Which one of the following statements correctly describes a credit instrument?

Accepted Answer

A)   All credit sales of a commercial nature are accompanied by a promissory note.
B)   A time draft requires payment at the time the goods are delivered.
C)   A commercial draft is signed once the goods are received in good shape by the buyer.
D)   A banker's acceptance is a sight draft for which payment has been guaranteed in the future by a bank.
E)   Under a conditional sales contract, the seller retains legal possession of the good sold until the sales invoice has been paid in full.F) A) and B)
G) C) and E)

Question 7

You have the opportunity to make a one-time sale if you will give a new customer 30 days to pay. You suspect that there is a 40 percent chance that this person will never pay you. The sales price of
The item the customer wants to buy is $249. Your variable cost on that item is $174 and your
Monthly interest rate is 1.5 percent. Should you grant credit to this customer? Why or why not?

Accepted Answer

A)   Yes; because the net present value of the potential sale is $75.
B)   Yes; because the net present value of the potential sale is $249.
C)   No; because the net present value of the potential sale is -$27.
D)   No; because the net present value of the potential sale is -$174.
E)   It doesn't matter; because the NPV of the potential sale is zero.F) C) and E)
G) A) and D)

Question 8

Which one of the following statements concerning cash discounts is correct?

Accepted Answer

A)   A cash discount is a means of charging higher prices to credit customers.
B)   Cash discounts increase the amount of credit provided to customers.
C)   If the credit terms are 2/10, net 15, the buyer gains 15 days of credit by forfeiting the discount.
D)   Cash discounts are relatively inexpensive for the seller.
E)   Buyers should forego cash discounts since they are normally only 2% of the purchase price.F) None of the above
G) B) and D)

Question 9

Currently, your ﬁrm sells 280 units a month at a price of $125 a unit. You think you can increase your sales by an additional 70 units if you switch to a net 30 credit policy. The monthly interest rate is .5
Percent and your variable cost per unit is $80. What is the net present value of the proposed credit
Policy switch?

Accepted Answer

A)   $574,237
B)   $575,000
C)   $589,400
D)   $590,313
E)   $592,600F) A) and B)
G) D) and E)

Question 10

Parker's Market sells 9,000 units a year of a product at a price of $4.95 each. The variable cost per unit is $3.30 and the carrying cost per unit is $.65. You have been buying 500 units at a time. Your
ﬁxed cost of ordering is $40. What is the economic order quantity?

Accepted Answer

A)   1,052 units
B)   1,373 units
C)   1,773 units
D)   2,727 units
E)   2,340 unitsF) A) and B)
G) B) and E)

Question 11

The optimal amount of credit to be granted can be located graphically at the point where the:

Accepted Answer

A)   Opportunity costs of credit are minimized.
B)   Sum of the opportunity cost and the carrying cost is minimized.
C)   Difference between the opportunity cost and the carrying costs of credit are maximized.
D)   Sum of the opportunity cost and the carrying costs is maximized.
E)   Carrying costs of credit are equal to zero.F) C) and D)
G) A) and E)

Question 12

What is the effective annual rate of credit terms of 2/20, net 45?

Accepted Answer

A)   32.31%
B)   34.31%
C)   36.31%
D)   38.31%
E)   40.31%F) A) and E)
G) A) and B)

Question 13

The bill for goods and services provided by the seller to the purchaser is called a(n) :

Accepted Answer

A)   Ledger statement.
B)   Warranty.
C)   Indenture.
D)   Indemnity statement.
E)   Invoice.F) A) and E)
G) All of the above

Question 14

The ability of a customer to meet their payment obligation out of their operating cash ﬂows is referred to as their:

Accepted Answer

A)   Character.
B)   Capacity.
C)   Collateral.
D)   Conditions.
E)   Capital.F) B) and E)
G) A) and B)

Question 15

The process of determining the likelihood that customers will not pay is called ____________.

Accepted Answer

A)   The terms of sale.
B)   Credit analysis.
C)   The collection policy.
D)   The payables policy.
E)   Disbursement analysis.F) A) and D)
G) A) and E)

Question 16

One effect of granting credit to customers is that a ﬁrm's cash cycle generally increases if credit is
granted, all else equal.

Accepted Answer

A) True 
 B)False

Question 17

When credit policy is at the optimal point, the:

Accepted Answer

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.F) B) and C)
G) D) and E)

Question 18

Safety stock is deﬁned as the:

Accepted Answer

A)   Minimum quantity for a replacement order.
B)   Maximum level of inventory that exists when a replacement order is received.
C)   Quantity speciﬁed as the reorder point when long delivery times exist.
D)   Level of inventory that triggers a derived demand order when delivery time is involved.
E)   Minimum level of inventory that a ﬁrm keeps on hand.F) A) and E)
G) A) and C)

Question 19

Juno, Inc. sells 50 units a month at a price of $1,250 under a cash only credit policy. If the ﬁrm implements a net 30-day policy, sales are expected to increase by 10%. The variable cost per unit is
$750 and the monthly required rate of return is 2%. What is the cost of switching credit policies?

Accepted Answer

A)   $58,750
B)   $62,500
C)   $63,375
D)   $65,500
E)   $66,250F) D) and E)
G) None of the above

Question 20

When ABC Co. makes a sale of inventory on credit to XYZ Co., then cash is paid to ABC and a
payable is created for ABC.

Accepted Answer

A) True 
 B)False

Exam 20: Credit and Inventory Management

The process of determining the likelihood that customers will not pay is called ____________.

Correct Answer
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Which one of the following statements concerning cash discounts is correct?

Correct Answer
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Relatively standardized products tend to have relatively short credit periods.

Correct Answer
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The minimum level of inventory a ﬁrm keeps on hand at any given time is called its:

Correct Answer
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Correct Answer
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When ABC Co. makes a sale of inventory on credit to XYZ Co., then cash is paid to ABC and a payable is created for ABC.

Correct Answer
verified

The ability of a customer to meet their payment obligation out of their operating cash ﬂows is referred to as their:

Correct Answer
verified

Juno, Inc. sells 50 units a month at a price of $1,250 under a cash only credit policy. If the ﬁrm implements a net 30-day policy, sales are expected to increase by 10%. The variable cost per unit is $750 and the monthly required rate of return is 2%. What is the cost of switching credit policies?

Correct Answer
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One effect of granting credit to customers is that a ﬁrm's cash cycle generally increases if credit is granted, all else equal.

Correct Answer
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Safety stock is deﬁned as the:

Correct Answer
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Correct Answer
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Parker's Market sells 9,000 units a year of a product at a price of $4.95 each. The variable cost per unit is $3.30 and the carrying cost per unit is $.65. You have been buying 500 units at a time. Your ﬁxed cost of ordering is $40. What is the economic order quantity?

Correct Answer
verified

Newell and Company is a manufacturing concern. The company divides its raw materials inventory into four classiﬁcations based upon the cost of each item. Based upon this system, Newell will:

Correct Answer
verified

What is denoted in by A in the following graph?

Correct Answer
verified

The optimal amount of credit to be granted can be located graphically at the point where the:

Correct Answer
verified

The bill for goods and services provided by the seller to the purchaser is called a(n) :

Correct Answer
verified

Which one of the following statements correctly describes a credit instrument?

Correct Answer
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Correct Answer
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What is the effective annual rate of credit terms of 2/20, net 45?

Correct Answer
verified

When credit policy is at the optimal point, the:

Correct Answer
verified

Exam 20: Credit and Inventory Management

The process of determining the likelihood that customers will not pay is called ____________.

Correct AnswerverifiedShow Answer

Which one of the following statements concerning cash discounts is correct?

Correct AnswerverifiedShow Answer

Relatively standardized products tend to have relatively short credit periods.

Correct AnswerverifiedShow Answer

The minimum level of inventory a ﬁrm keeps on hand at any given time is called its:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

When ABC Co. makes a sale of inventory on credit to XYZ Co., then cash is paid to ABC and a payable is created for ABC.

Correct AnswerverifiedShow Answer

The ability of a customer to meet their payment obligation out of their operating cash ﬂows is referred to as their:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

One effect of granting credit to customers is that a ﬁrm's cash cycle generally increases if credit is granted, all else equal.

Correct AnswerverifiedShow Answer

Safety stock is deﬁned as the:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Parker's Market sells 9,000 units a year of a product at a price of $4.95 each. The variable cost per unit is $3.30 and the carrying cost per unit is $.65. You have been buying 500 units at a time. Your ﬁxed cost of ordering is $40. What is the economic order quantity?

Correct AnswerverifiedShow Answer

Newell and Company is a manufacturing concern. The company divides its raw materials inventory into four classiﬁcations based upon the cost of each item. Based upon this system, Newell will:

Correct AnswerverifiedShow Answer

What is denoted in by A in the following graph?

Correct AnswerverifiedShow Answer

The optimal amount of credit to be granted can be located graphically at the point where the:

Correct AnswerverifiedShow Answer

The bill for goods and services provided by the seller to the purchaser is called a(n) :

Correct AnswerverifiedShow Answer

Which one of the following statements correctly describes a credit instrument?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

What is the effective annual rate of credit terms of 2/20, net 45?

Correct AnswerverifiedShow Answer

When credit policy is at the optimal point, the:

Correct AnswerverifiedShow Answer

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