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FINMAN > P2.2 > Flashcards

P2.2 Flashcards

1
Q

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

A

Credit policy

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2
Q

Four variables of credit policy

A

Credit period
Discounts
Credit standards
Collection policy

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3
Q

Length of time customers are given to pay for their purchases

A

Credit period

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4
Q

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

A

Credit period

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5
Q

Price reductions given for early payment

A

Discounts

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6
Q

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

A

Discount

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7
Q

Financial strength customers must exhibit to qualify for credit.

A

Credit standard

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8
Q

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

A

Credit standards

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9
Q

Degree of toughness in enforcing the credit terms

A

Collection policy

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10
Q

Why credit policy important?

A

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

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11
Q

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

A

Trade credit

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12
Q

Types of trade credit

A

Free trade credit
Costly trade credit

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13
Q

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

A

Free trade credit

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14
Q

Trade credit over and above the free trade credit

A

Costly trade credit

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15
Q

Nominal annual cost of trade credit

A

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

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16
Q

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

A

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

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17
Q

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

A

Bank loans

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18
Q

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

A

Promissory note

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19
Q

Key feature of most promissory notes

A

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

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20
Q

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

A

Cost of bank loans

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21
Q

Issued by small enterprises

A

Promissory notes

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22
Q

Issued by big companies

A

Commercial paper

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23
Q

Loans that has a collateral

A

Secured loan

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24
Q

General classes of receivables

A

Trade receivables
Non-trade receivables

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25
Q

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

A

Trade Receivables

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26
Q

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

A

Non-trade receivables

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27
Q

Factors that affect the size of receivables

A

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

28
Q

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

A

Term credit

29
Q

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

A

Paying practices of the customer

30
Q

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

A

Collection policies

31
Q

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

A

Volume of credit sales

32
Q

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

A

Account Receivables Management

33
Q

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

A

Float on receivable

34
Q

Purposes why firms invest in account receivables

A

Increase current sales volume
Retain the current sales

35
Q

Possible costs to be expected by the company

A

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

36
Q

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

A

Bad debt expense

37
Q

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

A

Bad debt expense

38
Q

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

A

Variable and fixed costs

39
Q

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

A

Cost of capital

40
Q

Normally given to entice prompt payment of obligation

A

Cash discount

41
Q

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

A

Cash discount

42
Q

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

A

Cash discount

43
Q

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

A

Credit policy

44
Q

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

A

Lax Credit policy

45
Q

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

A

Tighter credit policy

46
Q

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

A

Term credit

47
Q

The length of time in which the credit sales are allowed

A

Credit period

48
Q

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

A

Cash discount

49
Q

The length of time in which the cash discount is offered

A

Discount period

50
Q

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

A

Relaxing term credit

51
Q

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

A

Relaxing term credit

52
Q

Difference between the proposed increase and the current working capital requirement

A

Incremental working capital requirement

53
Q

Incremental income÷ incremental working capital requirement

A

Minimum required rate of return

54
Q

Incremental net income÷incremental working capital

A

Rate of return

55
Q

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

A

Shortening credit period

56
Q

Guideline followed by the company in giving credit sales to customer

A

Credit standards

57
Q

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

A

Credit Standard

58
Q

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

A

More restrictive term

59
Q

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

A

Credit risk

60
Q

Five C’s of Credit

A

Character
Capacity
Capital
Condition
Collateral

61
Q

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

A

Character

62
Q

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

A

Capacity

63
Q

Level of financial resources available to the company seeking the loan

A

Capital

64
Q

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

A

Conditions

65
Q

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

A

Collateral

66
Q

Sources of credit information

A

Financial statements
Credit-rating agencies
Commercial bank
Trade checking

FINMAN (6 decks)

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