Q&A Hero

Q: Assume you are viewing a graph that compares costs with the amount of credit extended. Both the carrying costs and the opportunity costs of credit are depicted. What is the function called that represents the summation of these carrying and opportunity costs? A) Opportunity cost curve B) Credit extension curve C) Credit cost curve D) Terms of sale graph E) Optimal sales graph

Q: The optimal amount of credit equates the incremental costs of carrying the increase in accounts receivable to the incremental: A) decrease in the cash cycle. B) benefit from decreasing the inventory level. C) cash flows from increased sales. D) increase in bad debts. E) gain in net profits.

Q: When considering a switch from an all-cash credit policy to a net 30 credit policy all of the following should be considered except the: A) revenue effects. B) effects on the variable costs. C) cost of the discount. D) probability of default. E) change in the fixed costs.

Q: Which one of these statements is correct? A) A firm's cash cycle generally decreases when it switches from a cash to a credit policy, all else equal. B) Most customers will forgo the discount and pay at the end of the credit period. C) Total revenues generally decrease if both the quantity sold and the price per unit increase when credit is granted. D) Only the cost of default should be considered before granting credit. E) A firm may have to increase its long-term borrowing if it decides to grant credit to its customers.

Q: A conditional sales contract: A) passes title to the goods sold to the buyer at the time the contract is signed. B) normally calls for one lump sum payment on the contract payment date. C) allows the seller to retain ownership of the goods sold until the customer has fully paid for the purchase. D) is payable immediately upon receipt. E) is a formal bid for a project.

Q: Which one of the following credit instruments is commonly used in international commerce? A) Open account B) Sight draft C) Time draft D) Banker's acceptance E) Promissory note

Q: The Painted House offers credit terms of 2/10th, EOM. Assume you purchase an item on credit from this store on Monday, November 3. When is payment due for this purchase if you do not take the discount? A) November 3 B) November 13 C) November 30 D) December 31 E) December 10

Q: A 2/10, net 30 credit policy: A) is an expensive form of short-term credit if a buyer forgoes the discount. B) provides cheap financing to the buyer for 30 days. C) is an inexpensive means of reducing the seller's collection period if every customer takes the discount. D) tends to have little effect on the seller's collection period. E) tends to increase the seller's investment in receivables as compared to a straight net 30 policy.

Q: Under credit terms of 1/5, net 15, customers should: A) Always pay on the 15th day. B) take the discount and pay immediately. C) take the discount and pay on the day following the day of sale. D) either take the discount or pay on the 15th day. E) both take the discount and pay on the 15th day.

Q: A trade discount of 2/5th, EOM terms: A) grants customers five days to pay after month end. B) offers no credit to customers. C) means the full amount is due by the 5thof the month following the month of sale. D) means the invoice is overdue only after month-end. E) means the full amount is due the last day of the month following the month of sale.

Q: Which one of the following statements related to credit periods is correct? A) Longer credit periods are granted for sales of perishable items. B) Inexpensive goods tend to have longer credit periods. C) Smaller accounts tend to have longer credit periods. D) Sellers may offer different credit periods to different customers. E) Newer products tend to have shorter credit periods.

Q: Which one of the following factors most supports a longer credit period being offered to customers? A) Higher consumer demand B) Lower priced merchandise C) Increased credit risk D) More perishable merchandise E) Increased competition

Q: Any written proof that a customer owes you money for goods or services provided is referred to as a(n): A) account document. B) sales draft. C) credit instrument. D) commercial paper. E) letter of debt.

Q: Geoff Industries offers its credit customers a two percent discount if they pay within ten days. This discount is referred to as a ________ discount. A) cash B) purchase C) collection D) market E) receivables

Q: Scott purchased a shovel, a rake, and a wheelbarrow from The Local Hardware Store yesterday. Today, the store issued a bill for these items and mailed it to Scott. What is the name given to this bill? A) Ledger statement B) Warranty C) Indenture D) Receipt E) Invoice

Q: Phil's Print Shop grants its customers the right to pay for their print jobs within 30 days of the ROG. Thus, the customers' credit period begins when they: A) review and approve the print order. B) renew their contract on a revolving print order. C) reorder a previously approved print job. D) receive their print jobs. E) request a new job be printed.

Q: Which one of these is frequently cited as an appropriate upper limit to the credit period offered by a seller? A) The buyer's inventory period B) The seller's inventory period C) The seller's operating cycle D) The buyer's operating cycle E) The buyer's receivables period

Q: Which one of the following statements is correct? A) The credit period begins when the discount period ends. B) The discount period is the length of time granted to a customer to pay for a purchase. C) The credit period begins on the invoice date. D) With terms of 2/10, net 30, the net credit period is 20 days. E) With EOM dating, all sales are assumed to have occurred on the 15thof each month.

Q: You need to charge your purchases and know that you will not be able to pay within the discount period. Which one of these credit terms is best-suited to you? A) 1/5, net 15 B) 2/5, net 30 C) 2/5, net 20 D) 1/10, net 45 E) 2/10, net 30

Q: Assume you put your purchases on your credit card and then take advantage of any cash discounts offered. Which one of these credit terms do you prefer? A) 1/10, net 20 B) 2/5, net 30 C) 2/10, net 30 D) 1/15, net 45 E) 2/15, net 30

Q: Which one of the following statements is correct if you purchase an item with credit terms of 3/15, net 45? A) If you pay within 3 days, you will receive a discount of 15 percent. B) If you pay within 15 days, you will receive a discount of 3 percent. C) If you do not pay within 15 days, you will be charged interest at a rate of 3 percent per month. D) If you pay 3 percent of your purchases within 15 days, you will have 45 days to pay for the remainder. E) One-third of your purchase is due in 15 days and the rest is due in 45 days.

Q: A firm's total investment in accounts receivables depends primarily on the firm's: A) total sales and cash discount period. B) cash to credit sales ratio. C) bad debt ratio. D) average collection period and amount of credit sales. E) amount of credit sales and cash discount percentage.

Q: Which one of the following will increase a firm's investment in accounts receivables? A) An increase in the number of days for which credit is granted B) A decrease in credit sales C) An increase in cash sales D) A decrease in the average collection period E) A decrease in average daily credit sales

Q: The period of time that extends from the day a credit sale is made until the day the bank credits the seller's account with the payment for that sale is known as the ________ period. A) float B) cash collection C) sales D) accounts receivable E) discount

Q: The primary purpose of credit analysis is to: A) determine the optimal credit period. B) analyze the effects of granting a cash discount. C) determine the optimal discount period, if any. D) summarize the frequency and amount of sales by customer. E) evaluate whether or not a customer will pay.

Q: The terms of sale generally include all of the following except the: A) credit period. B) cash discount. C) type of credit instrument. D) discount period. E) customer's credit capacity.

Q: Town Hardware sells goods on credit with payment due 30 days after purchase. If payment is not received by the 30th day, the store mails a friendly reminder to the customer. If payment is not received by the 45th day, the store calls the customer and requests payment and also stops offering credit to that customer. These procedures are referred to as the store's: A) customer service policy. B) credit policy. C) collection policy. D) payables policy. E) disbursements policy.

Q: Jillian was recently hired to determine the probability that individual customers of a major retailer will fail to pay for their charge sales. Jillian's job best relates to which one of the following? A) Terms of sale B) Credit analysis C) Collection policy D) Payables policy E) Customer service

Q: Brown's Hardware offers a discount of two percent on their commercial accounts if payment is received within ten days. Otherwise, payment is due within 30 days. This credit offering is referred to as the: A) terms of sale. B) credit analysis. C) collection policy. D) payables policy. E) collection float.

Q: Collection float: A) is more desirable to companies than disbursement float. B) is totally eliminated by the installation of a lockbox system. C) exists when the available balance exceeds the book balance. D) can be avoided by collecting payments electronically at the time of sale. E) is eliminated by implementing a concentration banking system.

Q: Float is defined as the: A) amount of cash a company can immediately withdraw from its bank account. B) difference between book cash and bank cash. C) change in the cash balance from one accounting period to the next. D) amount of cash on hand. E) cash balance according to a company's records.

Q: Disbursements float: A) occurs when a deposit is recorded but the funds are unavailable. B) causes the book balance to exceed the bank balance. C) has tended to increase since the enactment of the Check Clearing Act for the 21st Century. D) is a recommended source of funds for short-term investments. E) is eliminated when payments are made electronically.

Q: Cash management primarily involves: A) optimizing the collections and disbursements of cash. B) maximizing the income earned on cash reserves. C) reconciling a company's book balance with its bank balance. D) determining the optimal level of liquidity that should be maintained. E) determining the best method of raising capital.

Q: Which two of the following require liquidity but do not necessarily require cash reserves? A) Transaction and precautionary motives B) Compensating balance requirement and precautionary motive C) Compensating balance requirement and transaction motive D) Speculative and transaction motives E) Precautionary and speculative motives

Q: The cash used to make change when customers pay for their purchases in cash is an example of the ________ motive for holding cash. A) speculative B) daily float C) compensating balance D) precautionary E) transaction

Q: GT Motors regularly issues short-term debt to finance its daily operations. However, the credit markets suddenly tightened and GT is unable to sell debt at this time. Fortunately, they have some cash reserves that they can use to fund operations until additional credit becomes available. The need to retain cash for situations such as this represents which one of the following motives for holding cash? A) Speculative B) Float C) Compensating D) Precautionary E) Transaction

Q: RB Enterprises (RBE) received an unexpected phone call from a competitor offering all of its assets to RBE at a bargain basement price. While RBE had not anticipated purchasing these assets, the opportunity was too good to pass up. This illustrates which one of the following needs to hold cash? A) Precautionary B) Transaction C) Speculative D) Compensation E) Float

Q: Travel Inn Express spends $89,700 a week to pay bills and maintains a lower cash balance limit of $27,000. The standard deviation of the disbursements is $11,400. The applicable weekly interest rate is .041 percent and the fixed cost of transferring funds is $48. What is the optimal upper cash limit based on the MillerOrr model? A) $49,513 B) $51,359 C) $94,540 D) $106,359 E) $85,118

Q: The Tire Shop spends $47,200 a week to pay bills and maintains a lower cash balance limit of $12,000. The standard deviation of the disbursements is $3,800. The applicable weekly interest rate is .047 percent and the fixed cost of transferring funds is $49. What is the cash balance target based on the MillerOrr model? A) $48,152 B) $18,731 C) $38,909 D) $22,413 E) $47,726

Q: The Burger Stop spends $36,800 a week to pay bills and maintains a lower cash balance limit of $15,000. The standard deviation of the disbursements is $5,400. The applicable weekly interest rate is .046 percent and the fixed cost of transferring funds is $55. What is the optimal average cash balance based on the MillerOrr model? A) $28,906 B) $33,369 C) $38,211 D) $24,700 E) $31,764

Q: Donaldson Inc. spends $87,000 a week to pay bills and maintains a lower cash balance limit of $40,000. The standard deviation of the disbursements is $12,900. The applicable weekly interest rate is .042 percent and the fixed cost of transferring funds is $57. What is your optimal average cash balance based on the MillerOrr model? A) $78,333 B) $74,242 C) $66,667 D) $77,480 E) $72,560

Q: The Moon Hotel spends $157,300 a week to pay bills and maintains a lower cash balance limit of $50,000. The standard deviation of the disbursements is $11,307. The applicable weekly interest rate is 0.043 percent and the fixed cost of transferring funds is $44. What is the optimal upper cash limit based on the MillerOrr model? A) $114,225 B) $107,905 C) $92,748 D) $123,825 E) $99,309

Q: The Cow Pie Spreader Co. spends $238,700 a week to pay bills and maintains a lower cash balance limit of $67,000. The standard deviation of the disbursements is $22,400. The applicable weekly interest rate is 0.052 percent and the fixed cost of transferring funds is $46. What is the target cash balance based on the MillerOrr model? A) $99,169 B) $93,405 C) $122,038 D) $100,406 E) $118,922

Q: AJ's spends $327,800 a week to pay bills and maintains a lower cash balance limit of $50,000. The standard deviation of its disbursements is $36,900. The applicable interest rate is 3.48 percent and the fixed cost of transferring funds is $58. What is the optimal average cash balance based on the BAT model? A) $119,183 B) $138,407 C) $102,209 D) $97,887 E) $127,237

Q: Rosie O'Grady's spends $98,000 a week to pay bills and maintains a lower cash balance limit of $75,000. The standard deviation of the disbursements is $12,200. The applicable interest rate is 4.36 percent and the fixed cost of transferring funds is $38. What is the total cost of holding cash based on the BAT model? A) $4,432 B) $3,862 C) $2,054 D) $4,911 E) $4,109

Q: Lake Side spends $22,406 a week to pay bills and maintains a lower cash balance limit of $15,000. The standard deviation of disbursements is $1,300. The applicable interest rate is 3.46 percent and the fixed cost of transferring funds is $38. What is the opportunity cost of holding cash based on the BAT model? A) $791 B) $875 C) $804 D) $567 E) $728

Q: Penco Supply spends $319,600 a week to pay bills and maintains a lower cash balance limit of $65,000. The standard deviation of its disbursements is $12,900. The applicable interest rate is 3.26 percent and the fixed cost of transferring funds is $43. What is the optimal initial cash balance based on the BAT model? A) $167,154 B) $210,929 C) $168,753 D) $221,506 E) $209,385

Q: Parkway Express needs $172,540 a week to pay bills. The standard deviation of the weekly disbursements is $8,600. The applicable interest rate is 3.72 percent and the fixed cost of transferring funds is $38. Based on the BAT model, what is the opportunity cost of holding cash? A) $3,119 B) $2,518 C) $5,207 D) $6,769 E) $4,508

Q: Theo's Bar & Grill needs $49,500 a week to pay bills and has established a lower cash balance limit of $40,000. The applicable interest rate is 3.26 percent and the fixed cost of transferring funds is $41. Based on the BAT model, what is the optimal average cash balance? A) $36,199. B) $49,568 C) $40,232 D) $43,136 E) $38,927

Q: Buster's needs $168,000 a week to pay bills and has established a lower cash balance limit of $75,000. The applicable interest rate is 3.17 percent and the fixed cost of transferring funds is $34. Based on the BAT model, what is the optimal initial cash balance? A) $112,008 B) $127,515 C) $104,141 D) $136,893 E) $138,407

Q: Davidson, Inc., received dividend income on its stock holdings of $138,400 this year. How much tax does the firm owe on this income if its tax rate is 21 percent? A) $29,064 B) $14,532 C) $8,719 D) $20,345 E) $0

Q: Assume Wilt, Inc. owns 15,000 shares of preferred stock in Dallas Enterprises, Inc. If Dallas Enterprises issues a preferred stock cash dividend of $1.20 per share, what amount per share, if any, is taxable income to Wilt Distributors? A) $.84 B) $.60 C) $1.20 D) $.72 E) $0

Q: Cow Chips Inc. can install a lockbox system to speed up collections by two days for an annual fee of $17,000 plus 21 cents per transaction. The average customer payment is $11,480. Treasury bills are currently yielding 3.5 percent per year. Assume a year has 365 days. Approximately how many customers each day, on average, are needed to make this installation profitable for Cow Chips? A) 56.03 B) 23.43 C) 74.50 D) 83.33 E) 89.20

Q: Mountain top Inc. can reduce its collection time by one day if it installs a lockbox system at a cost of $2,200 a year plus $.52 per transaction. The inn receives an average of 136 payments per day with an average payment of $7,980 each. The interest rate on money market securities is 3.98 percent. Assume a year has 365 days. What is the NPV of the lockbox system? A) $156,727 B) $368,654 C) $274,208 D) $421,730 E) $226,203

Q: Beasley Enterprises has an agreement with Downtown Bank whereby the bank handles $1.02 million in collections a day and requires a $750,000 compensating balance. Beasley is contemplating cancelling the agreement and dividing its eastern region so that two other banks would handle its business. Banks A and B would each handle $.51 million of collections per day and each requires a compensating balance of $400,000. Collections should be accelerated by one day if the eastern region is divided. The T-bill rate is 2.97 percent annually. What is the amount of the annual net savings if this plan is adopted? A) −$20,210 B) $28,809 C) $31,325 D) $29,406 E) −$19,706

Q: Turkey Farms disburses checks every four weeks that have an average total of $68,900 each which take 3.4 days to clear. How much interest can the company earn annually if it delays transfer of funds from an interest-bearing account that pays .014 percent per day while the payments clear? Ignore the effects of compound interest. Assume each year has exactly 52 weeks. A) $33 B) $87 C) $131 D) $364 E) $426

Q: Paper Mfg. is investigating a lockbox system that would reduce its collection time by two days at a cost of $.42 per transaction. The company receives an average of 498 payments per day with an average value of $1,687 each. The Treasury daily interest rate is .012 percent. What is the NPV of adopting the lockbox system? A) $28,506 B) −$71,018 C) $54,234 D) $84,468 E) −$62,748

Q: B&C Co. has an average receipt size of $249. A lockbox service should decrease the average total collection time by 1.6 days at a cost of $95 per day. The company typically receives 2,150 checks per day. The daily Treasury interest rate is .012 percent. What is the NPV of the lockbox project? A) $64,893 B) $34,508 C) $73,013 D) $28,306 E) $58,497

Q: International Shoppes receives an average of 418 checks a day with an average amount per check of $607. A lockbox system is expected to reduce the average collection time by 2.3 days. The daily interest rate on Treasury bills is .011 percent. What is the maximum cost per check that can be charged for the company to break-even on the lockbox system? A) $.154 B) $.167 C) $.159 D) $.163 E) $.147

Q: If Merilee Industries installs a lockbox system it should reduce its average collection time by 2.2 days at a cost of $.75 per check. On an average day, 594 checks with an average value of $4,618 each are received. The daily interest rate on Treasury bills is .009 percent. What is the net present value of this lockbox arrangement? A) $4,073,492 B) $2,011,575 C) $1,387,419 D) $1,084,802 E) $974,608

Q: A lockbox system will cost $.42 per check and reduce the average collection time by 1.4 days for a company that receives 164 checks per day with an average value of $219 per check. The daily interest rate on Treasury bills is .011 percent. What is the anticipated daily cost of the lockbox system? A) $96.43 B) $9.25 C) $23.23 D) $68.88 E) $57.81

Q: Global Markets receives an average of 122 checks a day with an average amount of $498 per check. The installation of a lockbox system should reduce the average collection time by 3.1 days at a cost of $.32 per check. The daily interest rate on Treasury bills is .012 percent. What is the average daily cost of the lockbox system? A) $7.23 B) $44.87 C) $39.04 D) $8.11 E) $121.02

Q: Roger's Distributors receives an average of 82 checks a day with an average check amount of $16,329. If a lockbox system is implemented the average collection time should decrease by an average of 1.7 days. The daily interest rate on Treasury bills is .009 percent. What is the amount of the expected daily savings of the lockbox system? A) $192.04 B) $196.92 C) $114.95 D) $222.42 E) $204.86

Q: Wilson Publishers is considering implementing a lockbox system that is expected to reduce average collection time by 2.5 days. On an average day, the company receives 1,327 checks with an average value of $49 each. The daily interest rate on Treasury bills is .011 percent. What is the anticipated amount of the daily savings if this system is implemented? A) $2.48 B) $13.29 C) $14.45 D) $17.88 E) $15.78

Q: Currently, it requires two days to process the checks received in the mail from your customers. The average mail time is 2.7 days and the check clearing time is .97 days. If you adopt a lockbox system, the mail time will be cut in half. In addition, if employees are reassigned, checks could be processed in one day. How long will your collection time be if both the lockbox system and the job reassignments are implemented? A) 3.63 days B) 3.25 days C) 3.32 days D) 3.29 days E) 3.36 days

Q: It takes your staff 1.5 days to prepare and mail out all the monthly customer statements. On average, the mail time between your office and your customers is 3.3 days. Customer checks take an average of 1.2 days to clear the bank. You have determined that your total average collection time is 6.3 days. How long, on average, does it take your staff to process the payments from customers? A) 1.8 days B) .3 days C) .7 days D) 1.4 days E) 1.1 days

Q: Your average customer is located 2.9 mailing days away from your office. On average, it takes your staff 1.1 days to process incoming payments and an average of .65 days for your funds to be available for use once you have made your bank deposit. What is your total collection time if 98 percent of your customers pay by mail while the others drop their payment off at your office? A) 4.65 days B) 4.63 days C) 4.57 days D) 4.61 days E) 4.59 days

Q: A mail-order company processes 8,200 checks per month. Of these, 64 percent are for $39 while the remainder are for $69. The $39 checks have a collection delay of 2.1 days on average while the $69 checks are delayed 1.8 days on average. Assume each month has 30 days. The interest rate is 5.2 percent per year. What is the maximum amount that should be paid to reduce the weighted average float to 1.5 days? A) $10,990 B) $6,130 C) $8,650 D) $5,825 E) $9,675

Q: Assume a check for $127,000 has a collection delay of 1.8 days while a check for $218,900 has a collection delay of 1.5 days. If these are the only two checks received in a 30-day period, what is the weighted average delay? A) 1.63 days B) 1.61 days C) 1.56 days D) 1.58 days E) 1.65 days

Q: Freedom Wine receives an average of $684,006 in checks per day. The delay in clearing is typically 1.3 days. The current interest rate is .024 percent per day. Assume each month has 30 days. What is the highest daily fee the company should be willing to pay to eliminate its float entirely? A) $164 B) $248 C) $219 D) $213 E) $237

Q: Each business day, on average, a company writes checks totalling $41,627 to pay its suppliers. The usual clearing time for these checks is 3.2 days. Meanwhile, the company is receiving payments from its customers each day, in the form of checks, totalling $59,948. The cash from the payments is available after 1.5 days. What is the amount of the average net float? A) $57,772 B) $43,284 C) $42,318 D) $57,366 E) $49,507

Q: On an average day, WW Co. receives $329,418 in checks from customers. These checks clear the bank in an average of 1.46 days. The applicable daily interest rate is .019 percent. What is the highest daily fee that should be paid to completely eliminate the collection float? Assume each month has 30 days. A) $110.72 B) $91.38 C) $97.20 D) $62.59 E) $99.17

Q: On an average day, BJ Footwear receives $26,482 in checks from customers. These checks clear the bank in an average of 1.3 days. The applicable daily interest rate is .016 percent. What is the highest daily fee that should be paid to completely eliminate the collection float? Assume each month has 30 days. A) $4.24 B) $5.51 C) $5.78 D) $4.18 E) $3.29

Q: On an average day, Towne Hardware receives $3,028 in checks from customers. These checks clear the bank in an average of 1.84 days. The applicable daily interest rate is .021 percent. What is the maximum amount this store should pay to completely eliminate its collection float? Assume each month has 30 days. A) $421 B) $1,288 C) $2,109 D) $4,637 E) $5,572

Q: On an average day, GDF Corp. receives $7,218 in checks from customers. These checks clear the bank in an average of 1.6 days. The applicable daily interest rate is .028 percent. What is the present value of eliminating the float? Assume each month has 30 days. A) $3 B) $6 C) $97 D) $11,549 E) $7,218

Q: Specialty Co. deals strictly with three customers who pay monthly amounts of $340,800, $262,900, and $81,300. The $81,300 payment has a collection delay of 2.5 days while the other two have a delay of 1.5 days. What is the weighted average delay assuming each month has 30 days? A) 1.98 days B) 1.78 days C) 2.01 days D) 1.57 days E) 1.62 days

Q: High Brow Express deals strictly with two customers. The payment from Customer A averages $537,400 and has a collection delay of three days. Customer B's average payment is $737,500 and has a one-day delay. What is the weighted average delay assuming every month has 30 days? A) 1.79 days B) 1.62 days C) 2.02 days D) 2.07 days E) 1.84 days

Q: Cross Trucking provides services exclusively for three customers. The monthly amounts paid by these customers along with their respective collection delays are: $81,900 with 1.5 days, $47,300 with 2 days, and $68,400 with 2.5 days. Given this information, what is the weighted average delay? A) 2.11 days B) 1.94 days C) 1.97 days D) 2.06 days E) 2.01 days

Q: Atlas Builders deals strictly with five customers. The average amounts these customers pay per month are $17,400, $15,900, $22,500, $57,800, and $64,300. The smaller two payments have a collection delay of three days while the others only have a one-day delay. Assume each month has 30 days. What is the amount of the average daily receipts? A) $5,930 B) $6,920 C) $8,150 D) $14,140 E) $16,680

Q: Hot Tub Builders sells to three retail dealers under an agreement wherein each dealer pays monthly. The average payments are $148,500, $162,900, and $74,500 from these dealers. Each payment has a collection delay of 1.5 days. What is the amount of the average daily receipts assuming each month has 30 days? A) $12,333 B) $12,863 C) $19,295 D) $16,840 E) $18,218