Question[i]. Which of the following statements is most correct?

[i]. Which of the following statements is most correct?

a. A firm that makes 90 percent of its sales on credit and 10 percent for cash is growing at a rate of 10 percent annually. If the firm maintains stable growth it will also be able to maintain its accounts receivable at its current level, since the 10 percent cash sales can be used to manage the 10 percent growth rate.

b. In managing a firm’s accounts receivable it is possible to increase credit sales per day yet still keep accounts receivable fairly steady if the firm can shorten the length of its collection period.

c. If a firm has a large percentage of accounts over 30 days old, it is a sign that the firm’s receivables management needs to be reviewed and improved.

d. Since receivables and payables both result from sales transactions, a firm with a high receivables-to-sales ratio should also have a high payables-to-sales ratio.

e. None of the statements above is correct.

[ii]. Which of the following statements is most correct?

a. 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.

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

c. 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.

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

e. 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.

[iii]. Which of the following statements is most correct?

a. If a firm’s volume of credit sales declines then its DSO will also decline.

b. If a firm changes its credit terms from 1/20, net 40 days, to 2/10, net 60 days, the impact on sales can’t be determined because the increase in the discount is offset by the longer net terms, which tends to reduce sales.

c. The DSO of a firm with seasonal sales can vary. While the sales per day figure is usually based on the total annual sales, the accounts receivable balance will be high or low depending on the season.

d. An aging schedule is used to determine what portion of customers pay cash and what portion buy on credit.

e. Aging schedules can be constructed from the summary data provided in the firm’s financial statements.

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[iv]. Which of the following statements is most correct?

a. Other things held constant, the higher a firm’s days sales outstanding (DSO), the better its credit department.

b. If a firm that sells on terms of net 30 changes its policy and begins offering all customers terms of 2/10, net 30, and if no change in sales volume occurs, then the firm’s DSO will probably increase.

c. If a firm sells on terms of 2/10, net 30, and its DSO is 30 days, then its aging schedule would probably show some past due accounts.

d. Statements a and c are correct.

e. None of the statements above is correct.

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