Managing Accounts Receivable & Inventory MCQs

Chapter 18—MANAGEMENT OF ACCOUNTS RECEIVABLE AND INVENTORIES
MULTIPLE CHOICE
1. The credit policy variables that a firm can use to exercise control over its level of receivables
investment include
a. credit standards
b. credit terms
c. collection effort
d. credit standards, credit terms, and collection effort
ANS: D PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking
LOC: Knowledge of the finance function; knowledge of financial analysis and cash flows
TOP: Shareholder Wealth and optimal investments in accounts receivable
2. Possible sources of relevant information about a credit applicant include

a. financial statements submitted by the applicant
b. credit reporting organizations
c. U.S. Department of Commerce
d. the applicant’s financial statements and credit reporting agencies
LOC: Knowledge of the finance function; Knowledge of financial markets and interest rates
TOP: Gathering information on the credit applicant
3. ________are useful in monitoring the status and composition of a firm's accounts receivable.
a. Numerical credit scoring systems
b. Aging of accounts schedules
c. Seasonal datings
d. Aging of accounts schedules and seasonal datings
ANS: B PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking
LOC: Understand the role of the finance function; Knowledge of financial analysis and cash flows
TOP: Monitoring accounts receivable
4. The _______ measures the promptness with which customers repay their credit obligations.
a. bad-debt loss ratio
b. average collection period
c. credit term
d. cash discount
TOP: Credit standards
5. Which of the following is(are) not related to the extension of credit to customers?
a. compensating balances
b. cash discounts
c. quantity discounts
d. compensating balances and quantity discounts
LOC: Knowledge of financial analysis and cash flows; Understand the role of the finance function
TOP: Shareholder wealth and optimal investments in accounts receivable
6. The average collection period measures the:

a. number of days between when a typical credit sale is made and when the firm receives the
payment
b. number of days it takes a typical check to "clear" through the banking system
c. number of days beyond the end of the credit period before a typical customer payment is
received
d. number of days before a typical account becomes delinquent
ANS: A PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking
7. Relaxing (i.e., lowering) the firm's credit standards is likely to result in

a. lower sales
b. smaller bad-debt losses
c. a shorter average collection period
d. possible higher pre-tax profits
8. Which of the following is not a cost related to the extension of credit to customers?
a. bad-debt losses
b. cash discounts
c. quantity discounts
d. collection costs
ANS: C PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking
9. The primary objective of offering a cash discount is to

a. reduce the firm's level of receivables investment
b. reduce the number of bad checks received from customers
c. encourage customers to place their orders prior to the peak selling period
d. avoid just-in-time orders
TOP: Cash discounts
10. Lengthening the credit period is likely to result in all of the following except
a. higher sales
b. more cash sales
c. larger investment in receivables
d. longer average collection period
TOP: Credit terms
11. The objective of offering seasonal datings to customers is to

a. encourage customers to place their orders prior to the peak selling period
b. speed up the collection of accounts receivable
c. increase the firm's inventory storage costs
d. reduce the number of bad checks received from customers
TOP: Seasonal datings
12. For the firm with a seasonal sales pattern, offering seasonal datings to its customers is likely to result
in
a. increased sales
b. higher inventory investment and warehousing costs
c. lower receivables investment cost
d. an offer of a cash discount
13. The most widely known credit reporting organization is:

a. Moody's
b. Standard and Poor’s
c. National Association of Credit Management
d. Dun and Bradstreet
14. Capacity, which is one of the traditional "five Cs" of credit analysis, refers to
a. the general economic climate and its effect on the applicant's ability to pay
b. the willingness of the applicant to meet its financial obligations
c. the financial strength of the applicant (i.e., net worth)
d. the ability of an applicant to meet its financial obligations
TOP: Analyzing credit-worthiness and making the credit decision
15. Character, which is one of the traditional "five Cs" of credit analysis, refers to
a. the ability of the applicant to meet its financial obligations (i.e., liquidity and cash flow)
b. the general economic climate and its effect on the applicant's ability to pay
c. the financial strength of the applicant (i.e., net worth)
d. the willingness of the applicant to meet it’s financial obligations
16. Potential losses can occur in the credit evaluation process when
a. credit is denied to a credit-worthy customer
b. the credit decision is delayed too long
c. credit is denied to a customer who is not credit worthy
d. credit is denied to a credit-worthy customer and the credit decision is delayed too long
TOP: Evaluating individual credit applicants
17. The effect of a change in a firm's credit terms from "net 30" to "2/10, net 30" on its customer's balance
sheets is likely to be
a. decreased accounts receivable
b. increased accounts receivable
c. decreased accounts payable
d. increased accounts payable
TOP: Cash discounts
18. The effect of a change in a firm's credit terms from "net 30" to "2/10, net 30" on its own balance sheet
is likely to be
a. decreased accounts receivable
b. increased accounts receivable
c. decreased accounts payable
d. increased accounts payable
TOP: Cash discounts
19. The primary goal of accounts receivable management should be

a. minimizing lost sales
b. maximizing shareholder wealth
c. increasing market share
d. minimizing receivables investment
20. Traditional discussion of guidelines for examining credit worthiness include "the five Cs of credit".
Each of the following is one of the "five Cs" except
a. capacity
b. cooperation
c. character
d. conditions
21. All other things being equal, the application of a seasonal dating to the terms of credit offered by the
firms below would be expected to generate additional sales for each firm except
a. a Christmas novelty manufacturer
b. an agricultural implements manufacturer
c. a wholesale frozen food supplier
d. a swimsuit manufacturer
22. Increasing collection expenditures is likely to result in

a. a shorter average collection period
b. reduced bad-debt losses
c. higher accounts receivable balances
d. a shorter average collection period and reduced bad-debt losses
TOP: Collection effort
23. _______ are the criteria the firm uses to screen credit applicants in order to determine which of its
customers should be offered credit and how much.
a. Credit terms
b. Credit standards
c. Seasonal datings
d. Credit extension policies
24. All the following are assumptions of the basic EOQ model except:
a. annual demand known with certainty
b. ordering costs fluctuate
c. demand is uniform throughout the year
d. orders are filled instantaneously
TOP: Basic EOQ model
25. The _____ is the inventory level at which an order should be placed for replenishment of an item.
a. nonzero inventory level
b. safety stock
c. reorder point
d. inventory quantity
TOP: Nonzero lead time
26. The types of inventories that manufacturing firms generally hold include all the following except:
a. raw materials
b. working stock
c. finished goods
d. work-in-process
TOP: Inventory management
27. In general, the _____ a firm's production cycle, the _____ its work-in-process inventory.
a. longer, larger
b. longer, smaller
c. shorter, larger
d. length of cycle is not related to amount of work-in-process
TOP: Work-in-process inventories
28. When an order is placed for an item that is manufactured internally within a company, ordering costs
consist primarily of _____.
a. storage and handling costs
b. deterioration costs
c. production set-up costs
d. carrying costs
TOP: Ordering costs
29. All of the following are components of carrying costs except:

a. insurance
b. storage costs
c. handling costs
d. set-up costs
TOP: Carrying costs
30. The cost of funds invested in inventories is measured by the _____.
a. cost of insuring the inventory
b. stockout costs
c. required rate of return
d. rate of interest on borrowed funds
TOP: Carrying costs
31. To minimize the possibility of running out of inventory, most companies add a ____ to their inventory.
a. safety stock
b. lead time stock level
c. few days
d. replenishment factor
TOP: Probabilistic inventory control models
32. Safety stock is needed to absorb

a. changes in accounts receivables
b. cyclical changes
c. random fluctuations in sales
d. annual model changes
TOP: Probabilistic inventory control models
33. The reorder point is

a. the lead time multiplied by the daily usage plus safety stock
b. the EOQ plus safety stock
c. the lead time multiplied by the annual usage
d. a product of daily usage and the lead time
TOP: Nonzero lead time
34. Mace Auto Parts Company sells to retail auto supply stores on credit terms of "net 60". Annual credit
sales are $300 million (spread evenly throughout the year) and its accounts average 28 days overdue.
The firm's variable cost ratio is 0.75 (i.e., variable costs are 75 percent of sales). When converting
from annual to daily data or vice versa, assume there are 365 days per year. Determine Mace's average
collection period.
a. 88 days
b. 44 days
c. 74 days
d. 60 days
ANS: A
Solution:
Average collection period = 60 + 28 = 88 days
PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

TOP: Average collection period
The firm's variable cost ratio is 0.75 (i.e., variable costs are 75 percent of sales). When converting
from annual to daily data or vice versa, assume there are 365 days per year. Determine Mace's average
investment in receivables.
a. $ 821,918
b. $ 3,409,091
c. $72,328,767
d. $ 82,192
ANS: C
Solution:
Average Investment in Receivables = $300,000,000 x 88 /365 = $72,328,767

TOP: Receivables investment
The firm's variable cost ratio is 0.75 (i.e. variable costs are 75 percent of sales). When converting from
annual to daily data or vice versa, assume there are 365 days per year. Suppose that Mace's sales are
expected to increase by 20 percent next year and, through more effective collection methods, the firm
is able to reduce its average collection period by 20 days. Determine the firm's average investment in
receivables for next year under these conditions.
a. $67,068,493
b. $56,666,667
c. $ 5,294,118
d. $ 98,630
ANS: A
Solution:
Average investment in receivables = $360,000,000 /365 x 68 = $67,068,493

TOP: Receivables investment
37. Warren Motor Company sells $30 million of its products to wholesalers on terms of "net 30."
Currently, the firm's average collection period is 48 days. In an effort to speed up the collection of
receivables, Warren is considering offering a cash discount of 2 percent if customers pay their bills
within 10 days. The firm expects 50 percent of it's customers to take the discount and it's average
collection period to decline to 30 days. The firm's required pretax return (i.e. opportunity cost) on
receivables investment is 16 percent. Determine the cost of the cash discounts to Warren.
a. $300,000
b. $ 60,000
c. $ 40,000
d. $ 48,000
ANS: A
Solution:
Cost of cash discounts = $30,000,000 x 0.50 x 0.02 = $300,000

TOP: Cost of cash discounts
receivables investment is 16 percent. Determine Warren's pretax earnings on the funds released from
the reduction in receivables. (Assume a 365 day year)
a. $1,479,452
b. $236,712
c. $266,667
d. $1,082,191
ANS: B
Solution:
Reduction in A/R = $30,000,000/365 x 48 - $30,000,000/365 x 30 = $1,479,452
Earnings on Released Funds = $1,479,452 x 0.16 = $236,712

TOP: Credit terms analysis
receivables investment is 16 percent. Determine the net effect on Warren's pretax profits of offering a 2
percent cash discount.
a. $ 300,000
b. $236,712
c. -$63,288
d. -$236,712
ANS: C
Solution:
Net Change in Pretax Profits = $236,712 - $300,000 = -$63,288

TOP: Credit terms analysis
40. Bluegrass Distilleries, Inc. refuses to extend credit to any wholesale distributors who have a history of
being delinquent in repaying credit extended to them. This policy results in lost sales of $10 million
annually. Based on past experience with these types of customers, the firm estimates that the average
collection period would be 90 days and that the bad-debt loss ratio would be 6 percent. The firm's
variable cost ratio is 0.80, making its profit contribution ratio 0.20. Bluegrass Distilleries' required
pretax return (i.e., opportunity cost) on receivables investments is 20 percent. When converting from
annual to daily or vice versa, assume there are 365 days per year. If Bluegrass Distilleries extends
credit to these (previously delinquent) customers, determine the increase in the investment in
receivables.
a. $27,397
b. $2,465,753
c. $111,111
d. $125,000
ANS: B
Solution:
Additional receivables investment = $10,000,000/365 x 90 = $2,465,753

TOP: Credit terms
41. Whirlwind Company sells to retail appliance stores on credit terms of net 30. Annual credit sales are
$182,500,000 spread evenly throughout the year and its accounts average 20 days overdue. The firm's
variable cost ratio is 0.70. Determine Whirlwind's average investment in receivables. (Assume 365
days per year an all calculations.)
a. $17,500,000
b. $25,000,000
c. $15,000,000
d. cannot be determined from the information provided
ANS: B
Solution:
Average collection period = 30 + 20 = 50 days
Average investment in receivables = ($182,500,000)/365) x 50 = $25,000,000

TOP: Receivables investment calculation
42. If a lawn mower assembly plant orders 25,000 frames per year at a price of $27 each, what is the EOQ
if the ordering cost per order is $35 and the annual inventory carrying cost is 12 percent?
a. 735
b. 255
c. 567
d. 520
ANS: A
Solution:
Q = [(( 2)(35)(25,000))/(.12)(27)].5 = 734.9

TOP: EOQ model
43. What is the optimal length of one inventory cycle for a firm that has an economic order quantity of 750
units, average daily demand of 68 units, and a price of $30 per unit?
a. 25 days
b. 11 days
c. 2.7 days
d. 331 days
ANS: B
Solution:
T = 750/68 = 11.03 or 11 days

TOP: Inventory cycle
44. Tool Mart sells 1400 electronic water pumps every year. These pumps cost $54.30 each. If annual
inventory carrying costs are 12% and the cost of placing an order is $90, what is the firm's EOQ?
a. 139
b. 122
c. 197
d. 148
ANS: C
Solution:
Q = [(2)(90)(1400))/(54.30)(.12)].5 = 196.66 or 197

TOP: EOQ model
inventory carrying costs are 12% and the cost of placing an order is $90, what is the optimal ordering
frequency?
a. 37 days
b. 32 days
c. 40 days
d. 51 days
ANS: D
Solution:
T = 197/(1400/365) = 51.3 or 51 days

TOP: EOQ model
inventory carrying costs are 12% and the cost of placing an order is $90, what is the total annual
inventory costs?
a. $1,923
b. $1,281
c. $3,406
d. $3,762
ANS: B
Solution:
TC = (1400/197)90 + (197/2)(54.30)(.12) = $1,281

TOP: EOQ model
47. Haulsee Inc. builds 800,000 golf carts a year and purchases the electronic motors for these carts for
$370 each. Ordering costs are $540 and Haulsee's inventory carrying costs average 14% of the
inventory value. What is the EOQ for Haulsee?
a. 4,084
b. 1,528
c. 2,890
d. 572
ANS: A
Solution:
Q = [(2)(540)(800,000))/(370)(.14)].5 = 4,084

TOP: EOQ model
inventory value. What is the total inventory costs?
a. $565,445
b. $224,331
c. $211,555
d. $21,155,120
ANS: C
Solution:
TC = 800,000(540) + 4084 (51.80)
4, 084 2
= $211,554

TOP: Inventory costs
inventory value. What is the optimal ordering frequency?
a. 0.70 days
b. 1.86 days
c. 5.18 days
d. 8.64 days
ANS: B
Solution:
T = 365(4084) = 1.86
800,000

TOP: Optimal ordering frequency
50. Technico manufactures about 800,000 solar calculators per year. The computer chip used in the
calculator cost $4.80 each and the cost of placing an order is $65. If the carrying costs are 16%, what is
the EOQ for the chips.
a. 25,495
b. 3,162
c. 8, 229
d. 11,637
ANS: D
Solution:
Q = [((2)(65)(800,000))/.768].5 = 11,637

TOP: EOQ model
51. Willoughby Industries, Inc. is considering whether to discontinue offering credit to customers who are
more than 10 days overdue on repaying the credit extended to them. Current annual credit sales are
$10 million on credit terms of "net 30". Such a change in policy is expected to reduce sales by 10
percent, cut the firm's bad-debt losses from 5 to 3 percent, and reduce its average collection period
from 72 days to 45 days. The firm's variable cost ratio is 0.70 (profit contribution ratio is 0.30) and its
required pretax return (i.e. opportunity cost) on receivables investments is 25 percent. Determine the
net effect of this credit tightening policy on the pretax profits of Willoughby. When converting from
annual to daily data or vice versa, assume that there are 365 days per year.
a. -$ 863,014
b. $145,753
c. -$ 70,000
d. $300,000
ANS: B
Solution:
Reduction in Profit Contribution = $1,000,000 x 0.30 = $300,000
Reduction in A/R = $10,000,000/365 x 72 - $9,000,000/365 x 45 = $863,014
Earnings on Released Funds = $863,014 x 0.25 = $215,753
Decrease in Bad-Debt Losses = $10,000,000 x 0.05 - $9,000,000 x 0.03 = $230,000
Net Change in Pretax Profits = $215,753 + $230,000 - $300,000 = $145,753
PTS: 1 OBJ: TYPE: C. Prob. NAT: Analytic skills

TOP: Credit standards analysis
annual to daily data or vice versa, assume there are 365 days per year. If Bluegrass extends full credit
to these (previously delinquent) customers, determine the total increase in credit-related costs.
a. $1,000,000
b. $1,093,151
c. $400,000
d. $600,000
ANS: B
Solution:
Cost of additional receivables investment = $10,000,000/365 x 90 x 0.20 = $493,151
Bad debt losses = 0.06 x $10,000,000 = $600,000
Total costs = $493,151 + $600,000 = $1,093,151

TOP: Credit terms
annual to daily data or vice versa, assume there are 365 days per year. Determine the net effect on
Bluegrass Distilleries' pretax profits of extending credit to these (previously delinquent) customers
a. $906,849
b. $2,000,000
c. $306,849
d. $$1,500,000
ANS: A
Solution:
Net Change in Pretax Profits = $10,000,000 x 0.20 - ($10,000,000/365 x 90 x 0.20) -
0.06 x $10,000,000 = $906,849

TOP: Credit terms
54. The United Shoe Company (USC) does not extend credit to any retail shoe store with a "Fair" or
"Limited" Dun and Bradstreet credit rating. As a result of this policy the company loses $36,500,000 in
sales each year. Based on prior experience with these types of customers, USC estimates that the
average collection period would be 120 days and the bad-debt loss ratio would be 10%. The firm's
variable cost ratio is 0.75. USC's required pretax return on receivables investments is 18%. Determine
the net change in pretax profits of extending credit to these retail shoe stores. (Assume 365 days per
year in any calculations.)
a. $9,125,000
b. $3,315,000
c. -$1,095,000
d. $2,160,000
ANS: B
Solution:
Additional sales = $36,500,000
Marginal profitability of additional sales = 0.25 x $36,500,000 = $9,125,000
Additional investment in receivables = ($36,500,000/365) x 120 = $12,000,000
Cost of additional investment in receivables = $12,000,000 x 0.18 = $2,160,000
Additional bad-debt loss = 0.10 x $36,500,000 = $3,650,000
Net change in pretax profits = $9,125,000 - $2,160,000 - $3,650,000 = $3,315,000

TOP: Credit extension decision
55. Wallace Company sells $73 million of its products to retailers on credit terms of "net 30". Its average
collection period is 55 days. To speed up the collection of receivables, the company is considering
changing its credit terms to "2/10, net 30". The company expects 40% of its customers to take the cash
discount and its average collection period to decline to 35 days. Wallace's required pretax rate of return
on receivables investments is 15%. Determine the net effect on Wallace's pretax profits of the change
in credit terms. (Assume 365 days per year in any calculations.)
a. -$860,000
b. $600,000
c. $16,000
d. $584,000
ANS: C
Solution:
Decrease in average receivables balance = ($73,000,000/365) x 55
- ($73,000,000/365) x 35 = $4,000,000
Earnings on funds released by the decrease in receivables
= $4,000,000 x 0.15 = $600,000
Cost of cash discount = $73,000,000 x 0.4 x 0.02 = $584,000
Net change in pretax profits = $600,000 - $584,000 = $16,000

TOP: Credit terms
56. RCMP has annual credit sales of $37 million. The credit terms are "net 30" and the current average
collection period is 45 days. RCMP is considering changing its terms to 1/10, net 30 in an effort to
reduce the average collection period. RCMP believes that 35% of its customers will take the discount,
reducing the average collection period to 33 days. Should RCMP offer the discount? Assume the firm's
required rate of return on its receivables investment is 14%.
a. No, pretax profits decrease $88,700
b. Yes, pretax profits increase $53,600
c. Yes, pretax profits increase $40,801
d. No, pretax profits decrease $40,801
ANS: C
Solution:
Reduction is rec. bal. = ($37,000,000/365)(45 - 33) = $1,216,438
Return on reduction = $1,216,438(0.14) = $170,301
Cost of discount = $37,000,000(0.35)(0.01) = $129,500
Net change = $170,301 - $129,500 = $40,801

TOP: Credit terms
57. Covers, Inc. (CI) sells its stainless steel products on terms of "2/10, net 40". CI is considering granting
credit to retailers with total assets as low as $500,000. Currently the lowest asset limit is $750,000. CI
believes sales will increase $7 million from the new credit group but the average collection period for
this new group will be 60 days versus the current average collection period of 35 days. If management
estimates that 20% of the new customers will take the cash discount but 4% of the new business will
be written off as a bad-debt loss, should CI lower its credit standards? Assume CI's variable cost ratio
is 0.7 and its required pretax rate of return on receivables investment is 15%.
a. Yes, pretax profits increase $1,619,397
b. Yes, pretax profits increase $1,703,397
c. Yes, pretax profits increase $1,755,178
d. No, Pretax profits will decrease
ANS: A
Solution:
Profit on new sales = $7,000,000(1 - 0.7) = $2,100,000
Cost of new rec. = ($7,000,000/365)(60)(0.15) = $172,603
Cost new bad debt losses = $7,000,000(0.04) = $280,000
Additional cash discounts = 7,000,000(0.20)(0.02) = $28,000
Net change in pretax profit = $1,619,397

58. Cycles de Oro produces 120,000 high-tek bikes a year and orders the brake assembly from IKON for
$15.40 each. The order cost is $84 and Cycles estimates their inventory carrying costs are 15%. What
is their total ordering cost per year?
a. $7,968
b. $3,412
c. $4,118
d. $6,437
ANS: B
Solution:
Q = [((2)(84)(120,000))/2.31].5 = 2,954
Order costs = 120,000 (84) = $3,412
2,954

TOP: EOQ order costs
59. Accounts receivable consist of the credit of the business. It can take the form of which of the
following?
I. Trade credit
II. Consumer credit
a. I only
b. II only
c. Both I and II
d. Neither I nor II
LOC: Knowledge of financial analysis and cash flows
TOP: Accounts receivable management
60. When a company measures its marginal costs and marginal returns it is developing:
a. target capital structure
b. optimal credit extension policy
c. required rate of return
d. a financing decision
61. The proportion of the total receivables volume a company never collects is the:
a. bad-debt loss ratio
b. mismanaged accounts payable
c. uncollectable bills
d. recorded debts
LOC: Understand financial analysis and cash flows TOP: Credit standards
62. All of the following are possible solutions to a large bad-debt loss ratio EXCEPT:
a. Loosening credit
b. Offering cash discounts for prompt payment
c. Seasonal datings
d. Determine creditworthiness of customers
LOC: Understand financial analysis and cash flows TOP: Credit standards
63. All of the following are reliable sources of the creditworthiness of a customer EXCEPT:
a. Credit reporting organizations
b. Company’s experience
c. Banks
d. General credit application
64. A numerical credit scoring system may rate all of the following EXCEPT:
a. D & B credit rating
b. location of the business
c. financial characteristics of the applicant
d. current ratio of the applicant
TOP: Analyzing credit worthiness and making the credit decision
65. _______________ serves as a buffer between the various phases in the procurement-production-sales
cycle of a manufacturing firm.
a. cash
b. accounts receivable
c. notes payable
d. inventories
LOC: Knowledge of financial analysis and cash flows TOP: Inventory management
ESSAY
1. How does an optimal credit extension policy impact a company’s accounts receivables?
ANS:
An optimal credit extension policy requires the company to examine and measure the marginal costs
and marginal benefits associated with alternative policies. A more liberal extension of credit to a
company’s customers stimulates sales and leads to increased profits, assuming all other factors remain
constant. There may also be increased investment in inventory. These profits are offset by credit-
related marginal costs including opportunity costs of the funds needed to support the higher level of
receivables and increased bad-debt expenses .
PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking

TOP: Shareholder Wealth and optimal investments in accounts receivable
2. What information could be used to judge the credit worthiness of a customer?
ANS:
Information is available from a variety of sources:
1. Financial statements submitted by the customer.
2. Credit reporting organizations
3. Banks
4. A company’s own past experience with the customer

3. What are the “five Cs of credit”and how are they used?
ANS:
1. Character
2. Capacity
3. Capital
4. Collateral
5. Conditions
A credit manager must be able to sort through a great deal of information to determine the
creditworthiness of the customer. He/she must be able to extract key elements and make a reliable
overall assessment. The “five C’s of credit” facilitate credit decisions and serve as a framework for
analysis.

4. In trying to collect on past-due accounts, the firm may use several methods. List them.
ANS:
A firm may:
1. Send notices or letters informing the customer of the past-due status of the account and requesting
payment.
2. Telephone or visit the customer in an effort to obtain payment.
3. Employ a collection agency.
4. Take legal action against the customer.

LOC: Knowledge of financial analysis and cash flows TOP: Collection effort
5. Describe how an aging of accounts is a useful monitoring technique for accounts receivable.
ANS:
In an aging analysis, a company’s accounts are classified into different categories based on the
number of days they are past due. These classifications show both the aggregate amount of
receivables and the percentage of the total receivables outstanding in each category. Aging of accounts
receivable provides more information than summary ratios, as in the average collection period.
Comparing aging schedules at successive points in time can help the credit manager monitor any
changes in the quality of the company’s accounts.

TOP: Monitoring accounts receivable

Managing Accounts Receivable & Inventory MCQs

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Managing Accounts Receivable & Inventory MCQs

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Chapter 18—MANAGEMENT OF ACCOUNTS RECEIVABLE AND INVENTORIES

2. Possible sources of relevant information about a credit applicant include

6. The average collection period measures the:

7. Relaxing (i.e., lowering) the firm's credit standards is likely to result in

9. The primary objective of offering a cash discount is to

11. The objective of offering seasonal datings to customers is to

13. The most widely known credit reporting organization is:

19. The primary goal of accounts receivable management should be

22. Increasing collection expenditures is likely to result in

29. All of the following are components of carrying costs except:

32. Safety stock is needed to absorb

33. The reorder point is

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking

2. What information could be used to judge the credit worthiness of a customer?

PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking

3. What are the “five Cs of credit”and how are they used?

PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking

2. Telephone or visit the customer in an effort to obtain payment.

3. Employ a collection agency.

4. Take legal action against the customer.

PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking

PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking

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