P2.2

Question 1

Set of rules that includes the firm’s credit period, discounts, credit standards, and collection procedures offered

Answer 1

Credit policy

Question 2

Four variables of credit policy

Answer 2

Credit period
Discounts
Credit standards
Collection policy

Question 3

Length of time customers are given to pay for their purchases

Answer 3

Credit period

Question 4

Customers prefer longer credit period, so lengthening the period will stimulate sales.

Answer 4

Credit period

Question 5

Price reductions given for early payment

Answer 5

Discounts

Question 6

This specifies what the percentage reduction is and how rapidly payment must be made to be eligible for this

Answer 6

Discount

Question 7

Financial strength customers must exhibit to qualify for credit.

Answer 7

Credit standard

Question 8

Factors considered for business customers include ratios such as the customer’s debt and interest coverage ratios, the customer’s credit history

Answer 8

Credit standards

Question 9

Degree of toughness in enforcing the credit terms

Answer 9

Collection policy

Question 10

Why credit policy important?

Answer 10

Major effect on sales
Influences the amount of funds tied up in receivable
Affects bad debt losses

Question 11

Debt arising from credit sales and recorded as an account receivable by the seller and as an account payable by the buyer

Answer 11

Trade credit

Question 12

Types of trade credit

Answer 12

Free trade credit
Costly trade credit

Question 13

Trade credit that is obtained without a cost, and it consist of all trade credit that is available without giving up discount.

Answer 13

Free trade credit

Question 14

Trade credit over and above the free trade credit

Answer 14

Costly trade credit

Question 15

Nominal annual cost of trade credit

Answer 15

[Discount÷(100-discount)]×[365÷(days credit is outstanding-discount period)]

Question 16

Effective annual rate (EAR) or effective annual cost of trade credit

Answer 16

First answer and the second answer is the exponent then less than one.

Question 17

Important source of short-term financing for business organizations, evidenced by promissory notes

Answer 17

Bank loans

Question 18

Document specifying the terms and conditions of a loan including the amount, interest rate, and repayment schedule

Answer 18

Promissory note

Question 19

Key feature of most promissory notes

Answer 19

Amount
Maturity
Interest rate
Frequency of principal and interest payments
Collateral or security for loans

Question 20

Vary for different types of borrowers at any given point in the time and for all borrowers over time

Answer 20

Cost of bank loans

Question 21

Issued by small enterprises

Answer 21

Promissory notes

Question 22

Issued by big companies

Answer 22

Commercial paper

Question 23

Loans that has a collateral

Answer 23

Secured loan

Question 24

General classes of receivables

Answer 24

Trade receivables
Non-trade receivables

Question 25

Refers to claims arising from the sale of merchandise or services in the ordinary course of business operations

Answer 25

Trade Receivables

Question 26

Represent claims arising from sources other than the sale of merchandise or services in the ordinary course of business

Answer 26

Non-trade receivables

Question 27

Factors that affect the size of receivables

Answer 27

Term credits Paying practices of the customers Collection policies Volume of credit sales

Question 28

Level of accounts receivable depends on the length of the term of credit; common expectation is that the longer the term of sale, the higher the level of account receivable

Answer 28

Term credit

Question 29

Firms with customers who prolong payments are expected to have a higher level of receivables

Answer 29

Paying practices of the customer

Question 30

Firms with lenient collection policy have higher levels of receivables than firms with a stricter collection policy

Answer 30

Collection policies

Question 31

Firms that mostly grant sales on credit have a higher level of receivable

Answer 31

Volume of credit sales

Question 32

The process of determining, handling, and administering accounts receivables related to sale and credit policies

Answer 32

Account Receivables Management

Question 33

One of the factors that influence account receivable; exists from the time goods are sold or services are rendered on account

Answer 33

Float on receivable

Question 34

Purposes why firms invest in account receivables

Answer 34

Increase current sales volume Retain the current sales

Question 35

Possible costs to be expected by the company

Answer 35

Bad debt expense Variable and fixed cost Cost of capital Cash discount Credit policy

Question 36

A/R with the possibility of non-collection by the firm selling good or services

Answer 36

Bad debt expense

Question 37

Incurred when companies grant credits to customers who do not have a good credit standing, or customers who fail to pay their obligation because of a downturn in the economy

Answer 37

Bad debt expense

Question 38

As sales increase, variable cost also increase. Fixed cost, on the other hand, do not change as long as they are within the relevant range

Answer 38

Variable and fixed costs

Question 39

As the level of account receivables rises, the cost of funds invested in the accounts receivable also increases. The concept of cost of capital in the account receivable is the same as the concept of placing money in a special time deposit

Answer 39

Cost of capital

Question 40

Normally given to entice prompt payment of obligation

Answer 40

Cash discount

Question 41

Results to a decline in net income due to a deduction of cash discount from the invoice price

Answer 41

Cash discount

Question 42

The ain idea is to accelerate the cash inflows and to reduce the level of level of account receivable

Answer 42

Cash discount

Question 43

Influences a firm's sales, cost of sales and profit

Answer 43

Credit policy

Question 44

Credit policy tend to result to a higher volume of sales due to a higher baseline of customer; higher cost is also imminent

Answer 44

Lax Credit policy

Question 45

Credit policy will have a lower baseline because trade credits are given only to customers with high credit standard; results, to less cost and risk in the process

Answer 45

Tighter credit policy

Question 46

Establishes a firm's proposal on how the goods and services are to be sold

Answer 46

Term credit

Question 47

The length of time in which the credit sales are allowed

Answer 47

Credit period

Question 48

A deduction from the account receivable provided that the customer paid its obligation within the discount period

Answer 48

Cash discount

Question 49

The length of time in which the cash discount is offered

Answer 49

Discount period

Question 50

Means that a more lenient term than from the existing practice of the company is implemented

Answer 50

Relaxing term credit

Question 51

Company should determine whether the rate if return on the incremental income against the incremental capital is greater than or equal to the minimum required rate of return

Answer 51

Relaxing term credit

Question 52

Difference between the proposed increase and the current working capital requirement

Answer 52

Incremental working capital requirement

Question 53

Incremental income÷ incremental working capital requirement

Answer 53

Minimum required rate of return

Question 54

Incremental net income÷incremental working capital

Answer 54

Rate of return

Question 55

A firm may consider offering credit to customers with higher-than-normal risk rating. However, instead of offering a longer credit period, the firm will offer a shortened period compensated by a discount

Answer 55

Shortening credit period

Question 56

Guideline followed by the company in giving credit sales to customer

Answer 56

Credit standards

Question 57

Refers to the financial strength and credit worthiness a customer must exhibit in order to qualify for credit

Answer 57

Credit Standard

Question 58

Customer does not qualify the regular credit term, they still purchase from the firm under??

Answer 58

More restrictive term

Question 59

Uncertainty that the party on the other side of the negotiation will abide by the agreement

Answer 59

Credit risk

Question 60

Five C's of Credit

Answer 60

Character Capacity Capital Condition Collateral

Question 61

Refers to the moral and ethical quality of the individual who is responsible for paying the loan

Answer 61

Character

Question 62

Applicant's ability to pay off the credit extended, as judged by the financial statement analysis focusing on cash flows available to pay debt obligations

Answer 62

Capacity

Question 63

Level of financial resources available to the company seeking the loan

Answer 63

Capital

Question 64

Current general and industry-specific economic states, and any unique situation surrounding a specific transaction

Answer 64

Conditions

Question 65

Consist of assets pledged by the customer; also includes economic value of these assets in the case of default

Answer 65

Collateral

Question 66

Sources of credit information

Answer 66

Financial statements Credit-rating agencies Commercial bank Trade checking