boken kap 27 del 3 Flashcards
What is an open account in credit terms?
Credit where the only formal instrument is the invoice, signed upon receipt of goods.
When is a promissory note used?
For large orders or when there’s an anticipated problem with collections.
How does a commercial draft differ from a promissory note?
A commercial draft requires the customer’s signature before the goods are shipped.
What is a sight draft?
A document requiring payment before goods are shipped.
What is a banker’s acceptance?
When a banker guarantees payment and charges their customer later.
What is a conditional sales contract?
A contract where the seller retains legal ownership until payment is completed.
What are the two main strategies for granting credit?
Refuse credit or offer credit.
What is the net cash flow (NCF) formula when refusing credit?
NCF=P0×Q0−C0×Q0=NPV
What happens to cash flows when offering credit?
Granting credit delays cash inflows equal to h×P0×Q0, while costs are incurred immediately.
When is it best to deny credit to risky customers?
When there is no cost involved in identifying those at risk of default.
How should firms evaluate the cost of checking credit risk?
The cost of checking should be smaller than the gain from denying credit to high-risk customers.
How can firms manage future credit risk based on past payment behavior?
By denying credit in Period 2 to firms that haven’t paid in Period 1.
What defines the optimal amount of credit?
When incremental cash flows from increased sales equal the carrying costs from the increase in accounts receivable.
What are carrying costs in credit policy?
Costs associated with granting credit and investing in receivables.
What are opportunity costs in credit policy?
Lost sales resulting from refusing to offer credit.
