Question 1

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.

Accepted Answer

When a firm extends its cash discount period, customers have a longer timeframe to pay their invoices and still receive a discount. This extension encourages customers to delay payments within the new extended period, thereby increasing the firm's investment in accounts receivable as funds are tied up for a longer duration.

Question 2

If the level of bad debt attributable to credit policy is relatively constant, increasing collection expenditures can be expected to reduce bad debts.

Accepted Answer

If the level of bad debt attributable to credit policy is relatively constant, increasing collection expenditures would likely result in more effective collection efforts, therefore reducing bad debts.

Question 3

A firm's credit terms cover ________.
A) credit standards
B) lines of credit
C) cash discount period
D) credit scoring

Accepted Answer

Credit terms generally refer to the terms and conditions that a company sets for its customers when they purchase goods or services on credit. This includes the cash discount period, which is the time during which a customer can pay the invoice early and receive a discount. Credit standards, lines of credit, and credit scoring are all important factors in determining a company's credit policies, but they are not necessarily included in the credit terms themselves.

Question 4

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

Accepted Answer

The answer of A firm is considering relaxing credit standards...

Question 5

The most stringent step in the collection process is ________.
A) letters
B) personal visits
C) collection agencies
D) legal action

Accepted Answer

Legal action is the most stringent step in the collection process as it involves taking legal recourse to recover the debt. It is a formal and serious step which involves the intervention of the court system and can have serious consequences for the debtor, including wage garnishment and property seizure. Therefore, it is usually considered a last resort in the collection process.

Question 6

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?

Accepted Answer

The answer of Credit Scoring Policy   Jia's Jewelry...

Question 7

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

Accepted Answer

The first step in the collection of overdue accounts is usually sending a letter to the debtor requesting payment. This is a common practice that allows the debtor to address the situation and make arrangements to fulfill their obligations.

Question 8

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.

Accepted Answer

Changes in cash discount period can have an impact on a firm's investment in accounts receivable, which is influenced by three forces - customer creditworthiness, terms of sale, and economic conditions. Therefore, it can be difficult to analyze the net effect of changes in cash discount period.

Question 9

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.

Accepted Answer

If the firm's credit period is decreased, it means that customers have less time to pay their bills. This can lead to a decrease in sales volume as customers may choose to take their business elsewhere if they are unable to make timely payments. Additionally, reducing the credit period can also lead to a decrease in the investment in accounts receivable as customers are paying sooner. While bad debt expenses may decrease due to the shorter credit period, it is not certain as customers who are unable to pay on time may still default on their payments leading to bad debt expenses. Therefore, the statement is false.

Question 10

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.

Accepted Answer

The net effect on accounts receivable investment from initiating or increasing a cash discount is complex because while early payments from nondiscount takers reduce the accounts receivable balance, attracting new customers or encouraging more sales on credit can increase it, making the overall impact uncertain.

Question 11

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

Accepted Answer

Collection policies are specifically designed to address the process of collecting accounts receivable when they are due. Credit policies refer to the guidelines a company follows when evaluating a customer's creditworthiness. Credit scoring is a method of evaluating a customer's credit risk. Credit analysis is the process of assessing the creditworthiness of potential customers.

Question 12

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.

Accepted Answer

A decrease in collection efforts can lead to more sales as credit terms are relaxed, but it also increases the risk of unpaid debts, leading to higher accounts receivable and bad debt expenses, while reducing collection costs.

Question 13

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

Accepted Answer

Aging of receivables is a technique used to provide an analyst with information on the proportion of each type of account (e.g. current, 30-60 days overdue, 60-90 days overdue, 90+ days overdue) that has been outstanding for a specified period of time. This information can help the analyst evaluate the company's creditworthiness and identify potential issues with collections. Credit analysis and credit scoring are related but different techniques that evaluate a borrower's creditworthiness, while the economic order quantity model is a technique used in inventory management.

Question 14

2/15 net 45 translates as 2 percent of the balance is due in 15 days; the remaining balance is due in 45 days.

Accepted Answer

2/15 net 45 means a 2 percent discount is available if the invoice is paid within 15 days; otherwise, the full amount is due within 45 days.

Question 15

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.

Accepted Answer

By increasing the cash discount period, the firm encourages customers to pay their invoices earlier to take advantage of the discount, which reduces the amount of time that money is tied up in accounts receivable.

Question 16

An increase in accounts receivable turnover due to an increase in collection efforts will decrease a firm's marginal investment in accounts receivable.

Accepted Answer

An increase in accounts receivable turnover means that the firm is collecting its outstanding debts quickly. This translates to a shorter time lag between when credit is given and when payment is received. As a result, the firm's marginal investment in accounts receivable will decrease as it needs to invest less in accounts receivable to maintain its credit services. Therefore, an increase in collection efforts will decrease a firm's marginal investment in accounts receivable.

Question 17

Increased collection expenditures should reduce the investment in accounts receivable and bad debt expenses, increasing profits.

Accepted Answer

Increasing collection expenditures means businesses are putting more effort into collecting outstanding payments from customers. This can result in a decrease in accounts receivable and bad debt expenses, which in turn can increase profits as businesses can realize more income from their sales.

Question 18

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.

Accepted Answer

An aging schedule breaks down accounts receivable into groups based on the length of time they have been outstanding, such as 30-60 days, 61-90 days, etc. It does not categorize them by the first letter of the company name.

Question 19

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.

Accepted Answer

2/15 net 45 means that the buyer can take a 2% cash discount if they pay within 15 days, otherwise the full amount is due in 45 days.

Question 20

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.

Accepted Answer

The answer of Maggie's Gold Coins, Inc. is considering shortening...

Quiz 15: Working Capital and Current Assets Management

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.

If the level of bad debt attributable to credit policy is relatively constant, increasing collection expenditures can be expected to reduce bad debts.

A firm's credit terms cover ________.

The most stringent step in the collection process is ________.

The first step in the collection of overdue accounts is ________.