FIN 540 – Homework Chapter 27 
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Directions: Answer the following five questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link in the course shell. Each question is worth five points apiece for a total of 25 points for this homework assignment. 

 

1. A firm’s credit policy consists of which of the following items?

a. Credit period, cash discounts, credit standards, collection policy.

b. Credit period, cash discounts, receivables monitoring, collection policy.

c. Cash discounts, credit standards, receivables monitoring, collection policy.

d. Credit period, receivables monitoring, credit standards, collection policy.

e. Credit period, cash discounts, credit standards, receivables monitoring. 

 

2. Which of the following is not correct?

A more aggressive collection policy will reduce bad debt expenses, but may also decrease sales.

b. Collection policy usually has little impact on sales since collecting past-due accounts occurs only after the customer has already purchased.

c. Typically a firm will turn over an account to a collection agency only after it has tried several times on its own to collect the account.

d. A lax collection policy will frequently lead to an increase in accounts receivable.

e. Collection policy is how a firm goes about collecting past-due accounts.  

 

3. Which of the following is not correct for a firm with seasonal sales and customers who all pay promptly at the end of 30 days?

a. The quarterly uncollected balances schedule will be the same in each quarter.

b. The level of accounts receivable will be constant from month to month.

c. The ratio of accounts receivable to sales will vary from month to month.

d. The level of accounts receivable at the end of each quarter will be the same. e. DSO will vary from month to month. 

 

4. Which of the following statements is most correct?

a. It is possible for a firm to overstate profits by offering very lenient credit terms which encourage additional sales to financially “weak” firms. A major disadvantage of such a policy is that it is likely to increase uncollectible accounts.

b. A firm with excess production capacity and relatively low variable costs would not be inclined to extend more liberal credit terms to its customers than a firm with similar costs that is operating close to capacity.

c. Firms use seasonal dating primarily to decrease their DSO.

d. Seasonal dating with terms 2/15, net 30 days, with April 1 dating, means that if the original sale took place on February 1st, the customer can take the discount up until March 15th, but must pay the net invoice amount by April 1st.

e. If credit sales as a percentage of a firm’s total sales increases, and the volume of credit sales also increases, then the firm’s accounts receivable will automatically increase.  
  
  
5. Which one of the following aspects of banks is considered most relevant to businesses when choosing a bank?

a. Competitive cost of services provided.

b. Size of the bank’s deposits.

c. Experience of personnel.

d. Loyalty and willingness to assume lending risks.

e. Convenience of location.