Question 1

If the firm's credit period is decreased, the sales volume can be expected to ________, the investment in accounts receivable can be expected to ________, and the bad debt expenses can be expected to ________.

Accepted Answer

Decreasing the credit period typically leads to a decrease in sales volume as customers have less time to pay, a decrease in accounts receivable as payments are collected faster, and a decrease in bad debt expenses as there is less risk of non-payment.

Question 2

Table 15.6
A breakdown of Teffan, Inc.'s outstanding accounts receivable dated June 30, 2003 on the basis of the month in which the credit sale was initially made follows. The firm extends 30-day credit terms. 
-Accounts receivable over 90 days total ________. (See Table 15.6)

Accepted Answer

The answer of Table 15.6
A breakdown of Teffan, Inc.'s outstanding...

Question 3

Table 15.7
Dizzy Animators, Inc. currently makes all sales on credit and offers no cash discount. The firm is considering a 3 percent cash discount for payment within 10 days. The firm's current average collection period is 90 days, sales are 400 films per year, selling price is $25,000 per film, variable cost per film is $18,750 per film, and the average cost per film is $21,000. The firm expects that the change in credit terms will result in a minor increase in sales of 10 films per year, that 75 percent of the sales will take the discount, and the average collection period will drop to 30 days. The firm's bad debt expense is expected to become negligible under the proposed plan. The bad debt expense is currently 0.5 percent of sales. The firm's required return on equal-risk investments is 20 percent.
-What is the firm's marginal profit contribution from sales under the proposed plan of initiating the cash discount? (See Table 15.7)

Accepted Answer

Step 1: Calculate the current net profit per film
Current net profit per film = Selling price - Variable cost per film - Bad debt expense per film - Fixed cost per film
= $25,000 - $18,750 - ($25,000*0.005) - ($21,000/400)
= $4,140

Step 2: Calculate the current annual net profit
Current annual net profit = Current net profit per film * Sales
= $4,140 * 400
= $1,656,000

Step 3: Calculate the net profit per film with the proposed plan
Net profit per film with proposed plan = Selling price - Variable cost per film - Bad debt expense per film - Cash discount of 3% per film
= $25,000 - $18,750 - 0 - ($25,000*0.03)
= $3,250

Step 4: Calculate the required increase in sales to break even
Required increase in sales to break even = (Fixed costs under proposed plan/Contribution margin per film) - Current sales
= ($21,000*400/(($25,000-$18,750-$750)*(1-0.75)*0.75)) - 400
= 62.5

Step 5: Calculate the new annual net profit with the proposed plan
New annual net profit = (Net profit per film with proposed plan * Sales) - Fixed costs under proposed plan
= ($3,250*(400+10)) - ($21,000*400)
= $1,718,500

Step 6: Calculate the marginal profit contribution from sales under the proposed plan
Marginal profit contribution = New annual net profit - Current annual net profit
= $1,718,500 - $1,656,000
= $62,500

Therefore, the best choice is to initiate the cash discount as it results in a marginal profit contribution of $62,500.

Question 4

If the firm's credit period is increased, the sales volume can be expected to ________, the investment in accounts receivable can be expected to ________, and the bad debt expenses can be expected to ________.

Accepted Answer

Increasing the credit period typically leads to higher sales volume as customers have more time to pay. This results in higher accounts receivable as more sales are made on credit. However, it also increases the risk of bad debts as customers may default on payments.

Question 5

When a firm decreases or cancels a cash discount, sales are expected to ________, the investment in accounts receivable is expected to ________, the bad debt expense is expected to ________, and the profit per unit is expected to ________.

Accepted Answer

When a firm decreases or cancels a cash discount, sales are expected to decrease because the incentive for early payment is reduced. The investment in accounts receivable is expected to increase as more customers take longer to pay. The bad debt expense is expected to increase because with longer payment terms, there's a higher risk of defaults. The profit per unit is expected to increase because the firm is no longer offering a discount, thus maintaining a higher margin on sales.

Question 6

A technique that provides the analyst with the information concerning the proportion of each type of account that has been outstanding for a specified period of time is called

Accepted Answer

The technique described is commonly known as aging of receivables, which involves categorizing accounts by age to determine which ones are overdue and for how long. This information is useful for assessing the effectiveness of a company's credit policies and collection efforts, as well as identifying potential bad debts. Credit analysis and credit scoring involve assessing the creditworthiness of individual accounts or customers, while the economic order quantity model is a tool for optimizing inventory management.

Question 7

Table 15.7
Dizzy Animators, Inc. currently makes all sales on credit and offers no cash discount. The firm is considering a 3 percent cash discount for payment within 10 days. The firm's current average collection period is 90 days, sales are 400 films per year, selling price is $25,000 per film, variable cost per film is $18,750 per film, and the average cost per film is $21,000. The firm expects that the change in credit terms will result in a minor increase in sales of 10 films per year, that 75 percent of the sales will take the discount, and the average collection period will drop to 30 days. The firm's bad debt expense is expected to become negligible under the proposed plan. The bad debt expense is currently 0.5 percent of sales. The firm's required return on equal-risk investments is 20 percent.
-What is the cost of marginal investment in accounts receivable under the proposed plan? (See Table 15.7)

Accepted Answer

The cost of the marginal investment in accounts receivable under the proposed plan can be calculated by finding the difference in the investment in accounts receivable before and after the proposed changes. Initially, the investment in accounts receivable (A/R) is based on the average collection period of 90 days, with sales of 400 films at $25,000 each, leading to an annual sales volume of $10,000,000. The initial A/R investment is ($10,000,000/360) * 90 = $2,500,000. After the proposed changes, sales increase to 410 films, with 75% taking the discount, leading to discounted sales of $9,862,500 (310 films at $25,000 each with a 3% discount) and full-price sales of $2,500,000 (100 films at $25,000 each). The new average collection period is 30 days, so the new A/R investment is (($9,862,500 + $2,500,000)/360) * 30 = $1,025,000. The cost of the marginal investment in A/R is the difference between the initial and new A/R investments: $2,500,000 - $1,025,000 = $1,475,000. However, since none of the provided options match this calculation, it appears there may have been a misunderstanding in the calculation process or an error in the provided options. The correct approach involves calculating the average investment in accounts receivable before and after the proposed changes, considering the impact of the discount on sales volume and the average collection period.

Question 8

If the cash discount period is increased, the firm's investment in accounts receivable due to non-discount takers now paying earlier is expected to

Accepted Answer

When the cash discount period is increased, it becomes more attractive for customers to take advantage of the discount by paying earlier. This reduces the amount of time that accounts receivable (or the money that customers owe the firm) is outstanding, which in turn reduces the firm's investment in accounts receivable. Therefore, the firm's investment in accounts receivable is expected to decrease when the cash discount period is increased.

Question 9

Table 15.7
Dizzy Animators, Inc. currently makes all sales on credit and offers no cash discount. The firm is considering a 3 percent cash discount for payment within 10 days. The firm's current average collection period is 90 days, sales are 400 films per year, selling price is $25,000 per film, variable cost per film is $18,750 per film, and the average cost per film is $21,000. The firm expects that the change in credit terms will result in a minor increase in sales of 10 films per year, that 75 percent of the sales will take the discount, and the average collection period will drop to 30 days. The firm's bad debt expense is expected to become negligible under the proposed plan. The bad debt expense is currently 0.5 percent of sales. The firm's required return on equal-risk investments is 20 percent.
-What is the marginal investment in accounts receivable under the proposed plan? (See Table 15.7)

Accepted Answer

The answer of Table 15.7
Dizzy Animators, Inc. currently makes all...

Question 10

If the firm's cash discount period is decreased or cancelled, the sales volume can be expected to ________, the bad debt expenses can be expected to ________, and the profit per unit can be expected to ________.

Accepted Answer

Decreasing or cancelling the cash discount period would likely decrease sales volume because customers may not feel as incentivized to pay quickly. However, bad debt expenses may increase because customers may take longer to pay or may default on their payments altogether. Profit per unit may increase because the firm is not offering a discount on the sale, but the overall decrease in sales volume and increase in bad debt expenses may offset this. Choice C reflects these expected outcomes.

Question 11

If the cash discount period is increased, the firm's investment in accounts receivable due to discount takers still getting cash discounts but paying later is expected to

Accepted Answer

If the cash discount period is increased, more customers will be incentivized to take the discount and pay later. As a result, the firm's investment in accounts receivable increases due to the increased number of customers who take the discount but don't pay immediately.

Question 12

Table 15.6
A breakdown of Teffan, Inc.'s outstanding accounts receivable dated June 30, 2003 on the basis of the month in which the credit sale was initially made follows. The firm extends 30-day credit terms. 
-An increase in collection efforts will result in ________ in sales volume, ________ in the investment in accounts receivable, ________ in bad debt expenses, and ________ in collection expenditures.

Accepted Answer

An increase in collection efforts typically leads to a decrease in sales volume as stricter credit terms may deter some customers. It also decreases the investment in accounts receivable as collections are made more promptly. Bad debt expenses decrease because more debts are collected, and collection expenditures increase due to the additional resources needed for the enhanced collection efforts.

Question 13

Table 15.6
A breakdown of Teffan, Inc.'s outstanding accounts receivable dated June 30, 2003 on the basis of the month in which the credit sale was initially made follows. The firm extends 30-day credit terms. 
-A decrease in collection efforts will result in ________ in sales volume, ________ in the investment in accounts receivable, ________ in bad debt expenses, and ________ in collection expenditures.

Accepted Answer

A decrease in collection efforts typically makes it easier for customers to purchase on credit, potentially increasing sales volume. However, it also leads to higher accounts receivable as more sales are made on credit, increases bad debt expenses due to less stringent collection, and decreases collection expenditures as less effort is put into collecting debts.

Question 14

The most stringent step in the collection process is

Accepted Answer

Legal action is the most stringent step in the collection process as it involves taking the matter to court and can result in the seizure of assets or garnishment of wages. This step is usually taken only after all other attempts at collecting the debt have failed.

Question 15

Table 15.6
A breakdown of Teffan, Inc.'s outstanding accounts receivable dated June 30, 2003 on the basis of the month in which the credit sale was initially made follows. The firm extends 30-day credit terms. 
-An increase in accounts receivable turnover due to an increase in collection efforts will

Accepted Answer

An increase in accounts receivable turnover implies a decrease in the number of days the firm takes to collect its outstanding receivables. This could be achieved through more aggressive collection efforts, which would decrease the firm's marginal investments in accounts receivable (i.e., the amount of resources tied up in funding credit sales). A higher turnover would also decrease the firm's collection expense, as it would require fewer resources to pursue delinquent customers. However, an increase in accounts receivable turnover should not lead to an increase in bad debt expense, as this refers to losses incurred due to customers' failure to pay their debts and should not be impacted by collection efforts.

Question 16

If the firm's cash discount period is increased, the sales volume can be expected to ________, the bad debt expenses can be expected to ________, and the profit per unit can be expected to ________.

Accepted Answer

If the firm's cash discount period is increased, customers may delay paying their bills, which increases accounts receivable and reduces cash flow. This may result in a decrease in sales volume since customers may prefer the longer payment period. Bad debt expenses may increase because there is a longer delay in receiving payment, increasing the risk that the customer may not pay at all. Finally, the profit per unit may decrease because the cost of financing accounts receivable increases with longer payment periods. Therefore, A is the correct answer.

Question 17

When a firm initiates or increases a cash discount, sales are expected to ________, the investment in accounts receivable is expected to ________, the bad debt expense is expected to ________, and the profit per unit is expected to ________.

Accepted Answer

When a firm initiates or increases a cash discount, sales are expected to increase due to the incentive for customers to buy more. The investment in accounts receivable is expected to decrease because customers are encouraged to pay earlier, reducing the amount of outstanding receivables. The bad debt expense is expected to decrease as well, since earlier payments reduce the risk of defaults. Finally, the profit per unit is expected to decrease because the cash discount reduces the amount of revenue received per unit sold.

Question 18

The first step in the collection of overdue accounts is

Accepted Answer

The first step should always be a letter reminding the customer of the payment due and requesting immediate payment. This gives the customer a chance to rectify the situation without any extra charges or legal complications.

Question 19

Table 15.6
A breakdown of Teffan, Inc.'s outstanding accounts receivable dated June 30, 2003 on the basis of the month in which the credit sale was initially made follows. The firm extends 30-day credit terms. 
-An evaluation of the firm's collection efforts based on the aging schedule would suggest ________. (See Table 15.6)

Accepted Answer

The answer of Table 15.6
A breakdown of Teffan, Inc.'s outstanding...

Question 20

2/15 net 45 translates as

Accepted Answer

"2/15 net 45" means that the customer can take a 2% cash discount if they pay within 15 days, and if they do not, the entire balance is due in 45 days.

Quiz 15: Working Capital and Current Assets Management

If the firm's credit period is decreased, the sales volume can be expected to , the investment in accounts receivable can be expected to , and the bad debt expenses can be expected to .

Table 15.6 A breakdown of Teffan, Inc.'s outstanding accounts receivable dated June 30, 2003 on the basis of the month in which the credit sale was initially made follows. The firm extends 30-day credit terms. -Accounts receivable over 90 days total ________. (See Table 15.6)

If the firm's credit period is increased, the sales volume can be expected to , the investment in accounts receivable can be expected to , and the bad debt expenses can be expected to .

When a firm decreases or cancels a cash discount, sales are expected to , the investment in accounts receivable is expected to , the bad debt expense is expected to , and the profit per unit is expected to .

A technique that provides the analyst with the information concerning the proportion of each type of account that has been outstanding for a specified period of time is called

If the cash discount period is increased, the firm's investment in accounts receivable due to non-discount takers now paying earlier is expected to

If the firm's cash discount period is decreased or cancelled, the sales volume can be expected to , the bad debt expenses can be expected to , and the profit per unit can be expected to .

If the cash discount period is increased, the firm's investment in accounts receivable due to discount takers still getting cash discounts but paying later is expected to

The most stringent step in the collection process is

Table 15.6 A breakdown of Teffan, Inc.'s outstanding accounts receivable dated June 30, 2003 on the basis of the month in which the credit sale was initially made follows. The firm extends 30-day credit terms. -An increase in accounts receivable turnover due to an increase in collection efforts will

If the firm's cash discount period is increased, the sales volume can be expected to , the bad debt expenses can be expected to , and the profit per unit can be expected to .

When a firm initiates or increases a cash discount, sales are expected to , the investment in accounts receivable is expected to , the bad debt expense is expected to , and the profit per unit is expected to .

The first step in the collection of overdue accounts is

2/15 net 45 translates as