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Exam 22: Credit Management and Collection

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Question 21

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When sales are made without the accompaniment of a formal debt contract,the sales are said to be on:

A) Conditional sale terms
B) Open account
C) Trade credit
D) Sight draft

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Question 22

Multiple Choice

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What is the minimum probability of collection that should be accepted by firms that have a 25% profit margin? Ignore the time value of money.

A) 20%
B) 25%
C) 50%
D) 75%

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Question 23

Multiple Choice

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What is the break-even probability of collection for a firm that has a 40% profit margin (ignore present value) ?

Which of the following is correct concerning terms of trade credit of 4/10,EOM,net 90?

Which of the following statements is typically correct concerning the break-even probability of collection for repeat sale customers?

What is the break-even probability of collection if the present value of the revenues from the sale is $2,200 rather than $2,400? Why does the break-even probability increase? Use your answer to decide whether firms that sell high-profit margin or low-margin goods should be more willing to issue credit.

A firm offered 3/10,net 30 as terms of trade credit on a $1,000 invoice dated January 1.How much must the purchaser offer to pay in full on January 4^th?

The more liberal the terms of the collection policy,the less the potential for bad debts and unprofitable sales.

At what point does a customer's unpaid account become delinquent when the terms of sale are 2/10,net 60?

A breakdown of accounts receivable according to the length of time outstanding is known as a(n) :

Which of the following changes to the terms of credit would make the effective annual rate increase?

Which of the following financial ratios is not used to develop Altman's Z score from multiple discriminate analysis?

Select the earliest date below which does not deserve a cash discount if the terms of a January 1 sale are 2/10,EOM,net 60?

Ajax predicts that if a customer pays on the first sale,it is assured that it is a reliable customer.As such,it expects that customer to generate a net profit of $350 per year for 12 years.Ajax calculates present value with a 15% rate of return.There is a 90% probability that Ajax will secure a reliable customer.However,if the customer defaults,Ajax will have to incur a loss of $500.Determine the expected benefit if credit is granted.

The "five C's of credit" represent a framework for analyzing credit risk.

Discuss the premise behind the validity of a numerical credit scoring system.

Saxon Corporation sells a product for $48 with costs of $33 per unit.Saxon uses a 9% rate of return for all its calculations.The CFO estimates that there is a 20% probability of a prospective new customers seeking credit will go bankrupt within the next 6 months.Customer wishes to place an order for 1,000 units of the product.

Progress payments allow the customers to choose the payment schedule.

What happens to the implied interest rate on trade credit as the time interval between the discount period and payment period is decreased?

The purpose of credit analysis is to: