Receivable Management – Financial and Strategic Management MCQ

G Ltd. presently gives credit terms of ‘net 30 days’. It has ₹ 600 lakh in credit sales and its average collection period is 45 days. To stimulate sales, the company may give credit terms of ‘net 60 days’ with sales expected to increase by 15%. After the change, the average collection period is expected to be 75 days. The variable cost to sales ratio is 80% and before tax required rate of return on investment in receivables is 20%. Assume 360 days in a year. Debtors are calculated on sales. Should the company extend its credit period?

Present credit terms of P Ltd. are 1/10 Net 30. Its annual sales are ₹ 80 lakhs, its average collection period is 20 days. Its variable and average total costs to sales are 0.85 & 0.95 and its Ko is 10%. The proportion of sales on which customers currently take discount is 0.5. The company is relaxing its discount terms to 2/10 Net 30 which will increase sales by ₹ 5 lakh, reduce the average collection period to 14 days, and increase the proportion of discount to sales to 0.8. What will be the effect on the company’s profit? Take year as 360days. Debtors are calculated on cost.

The current profit of R & Co. is ₹ 3,00,000. It is planning to introduce a discount policy of 2 /10, Net 30. Due to change in policy profit is expected to increase by 150,000. The firm’s current average collection period is 30 days which is expected to fall by 10 days. Present investment in debtor is ₹ 58,333 which will be reduced by ₹ 16,666. However, due to increased sales, the increased working capital required will be ₹ 20,000 (without taking into account the effect of debtors). The total discount likely to be claimed in the new policy will amount to ₹ 11,000. 20% is the required return on investment. What is the impact of change in policy?

H Ltd. has current sales of ₹ 20,00,000. It is planning to introduce a discount policy of 2/10, Net 30. As a result, the Company expects the average collection period to go down by 10 days and 80% of the sales opt for cash discount facility. The required return on investment is 20%, should it introduce the new discount policy?

A company has sales of ₹ 25,00,000. The average collection period is 50 days, bad debt losses are 5% of sales, and collection expenses are ₹ 25,000. The cost of funds is 15%. The company has two alternative collection programs:

XYZ Ltd. has credit sales amounting to ₹ 32,00,000. The sale price per unit is ₹ 40, the variable cost is ₹ 25 while the average cost is ₹ 32. The average age of receivables of the firm is 72 days. The firm is considering tightening the credit standards. It will result in a fall in sales to ₹ 28,00,000, and the average age of receivables to 45 days. Assume 20% of return. The proposed policy will yield –1 Year = 360 days and debtors are calculated on cost.

The sales Manager of AB Ltd. suggests that if the credit period is given for 1.5 months then sales may likely increase by ₹ 1,20,000 per annum. The cost of sales amounted to 90% of sales. The risk of non-payment is 5%. The income tax rate is 30%. The expected return on investment is 13,375 (aftertax). Should the company change its credit policy?

A firm has current sales of ₹ 2,56,48,750. It is considering the relaxation in its credit policy. The proposed terms of credit will be 60 days credit against the present policy of 45 days. As a result, the bad debts will increase from 1.5% to 2% of sales. The firm’s sales are expected to increase by 10%. Variable operating costs are 72% of sales. The firm’s corporate tax rate is 35%, and it requires an after-tax return of 15%. Should the firm change its credit period?Note: Yes calculates its debtor on sales.

A firm has current sales of ₹ 38,22,000. In order to boost its sales, it is considering the relaxation in its credit policy. The proposed terms of credit will be 40 days credit against the present policy of 25 days. The firm’s sales are expected to increase by 10%. As a result, debtors (calculated on sales) will be –

A firm has current sales of ₹ 25,48,000. The firm has an unutilized capacity. In order to boost its sales, it is considering the relaxation in its credit policy. The proposed terms of credit will be 60 days credit against the present policy of 45 days. As a result, debtors (calculated on sales) will be –

In the year 2018, 7% of customers paid the amount due in 5 days from the date of sale; 54% of customers paid the amount in 30 days and 39% of customers paid the amount in 44 days from the date of sale.In the year 2019, 13% of customers paid the amount due in 4 days from the date of sale; 64% of customers paid the amount in 25 days and 23% of customers paid the amount in 58 days from the date of sale.

Analysis of the debtor’s collection history of Karina Ltd. shows the following facts. 42% of debtors pay the amount due within 4 days of sales; 18% of debtors pay within 20 days and 40% of debtors pay within 40 days of sales. What is the average collection period of Karina Ltd.?

A Company has prepared the following projections for a year:The company proposes to increase the credit period to 2 months. The change in the policy will increase the sale by 8%. The company desires a return of 25% on its investment. Debtors are calculated on cost. The company may decide to shift to the proposed policy because –

In order to increase sales from the normal level of ₹ 2,40,000 per annum, the marketing manager submits the following two proposals for relaxing the credit policy:A proposal I: Increase the credit period from 30 days to 45 days which will lead to an increase in sales by ₹ 12,000.
Proposal II: Increase the credit period from 30 days to 60 days which will lead to an increase in sales by ₹ 18,000.
P/V Ratio and excepted pre-tax rate of return are 33.33% and 20 respectively.Which of the following statement is correct?

ABC Ltd. is considering certain relaxation in its credit policy from 60 days to 69 days.Required rate of return and P/V ratio are 20% & 30% respectively.Debtors are calculated on cost.

Average cost increases from ₹ 88 to ₹ 92. Incremental profit & incremental debtors are ₹ 48,000 & ₹ 3,04,000 respectively. The cost of capital is 15%. What is the rate of incremental return on change of credit policy?

F Ltd. is examining the relaxation of its credit policy. It sells at present 20,000 units at a price of ₹ 100 per unit, the variable cost per unit is ₹ 88 and the average cost per unit at the current sales volume is ₹ 92. All the sales are on credit, the average collection period being 36 days. A relaxed credit policy is expected to increase sales by 10% and the average age of receivables to 60 days. Assuming a 15% return, should F Ltd. relax its credit policy?Note: 1 Year = 360 days

Apollo Ltd. sells its products allowing a credit period of 15 days only. The average variable cost is 60% of sales value and current sales amount to ₹ 100 lakhs. Data for the year is as follows:Debtors are calculated on cost.

K Ltd. had sales last year of ₹ 26,50,000, including cash sales of ₹ 2,50,000. If its average collection period was 36 days, its ending accounts receivable balance is closest to

Debtors velocity = 3 months Sales = ₹ 25,00,000Bills receivable & Bills payable were ₹ 60,000 and ₹ 36,667 respectively.Sundry debtors =?

Total sales of LMN Ltd. are ₹ 31,248 out of which 25% are cash sales. The closing balance of debtors is ₹ 9,468. Debtors velocity =?

X Ltd. cash sales and credit sales are ₹ 5,67,500 & ? 87,50,000 respectively. Cost of goods sold is ₹ 61,25,000. Debtors are ₹ 8,20,833 and bills receivable are ? 2,00,000.Debtors turnover ratio =?

Romaji Ltd. has sales of ₹ 1,18,00,000 and its debtor turnover ratio is 4:2. The cost of goods sold is ₹ 82,60,000. Debtors =?

If credit sales for the year are ₹ 5,40,000 and Debtors at the end of the year is ₹ 90,000 the Average Collection Period will be –

When net sales for the year are ₹ 2,50,000 and debtors ₹ 50,000, the average collection period is:

In factoring arrangement the debts as and when fall due is collected by the –

Which one of the following would help to reduce the number of accounts receivable delinquencies?

In___type of factoring the bank/factor takes all the risk and bears all the loss in case of debts becoming bad debts.

Selling accounts receivable to a third party at a reduced price is part of the collection process known as –

___ is an arrangement to have debts collected by a third party entity for a fee.

Which of the following may be a reason why you would choose a policy with a higher Average Collection S Period (ACP)?

An important means to get an insight into the collection pattern of debtors is the preparation of their –

Place the methods of collecting on delinquent accounts from the most likely lowest to highest cost.

An exercise of credit rating involves –

Credit rating is a study of the credit standing of a customer i.e. 5 C’s. Which of the following correctly describes those 5 C’s?

Increasing the credit period from 30 to 60 days, in response to a similar action taken by all of our competitors, would likely result in:

____ may also be offered for the early payment of dues.

Accounts receivable are reported in the balance sheet:

Which of the following sentence describes a correct strategy for the proper administration of receivables?

The accounts receivable that cannot be collected because of their bankruptcy or another reason are termed as:

Which of the following tool may be used to determine the degree of risk associated with cash collections?A. Standard deviationB. Co-efficient of variation

The cash discount is given to customers for:

Risk of non-payment may due to –

The payment terms 2/10, Net 30 tell us that:

Which of the following function is required to be performed by the finance manager in relation to proper management of receivables?

What do we call, when a firm extends credit terms that encourage the buyers of certain products to take delivery before the peak sales period and to defer payment until after the peak sales period?

The goal of receivables management is to maximize the value of the firm by achieving a trade-off between –

A decrease in the firm’s receivables turnover ratio means that –

Receivables arise –1. If the goods are sold on credit.2. If the goods are sold in cash3. If the services are rendered on credit4. If the services are rendered in cash.Select the correct answer from the options given below:

Receivables mean ___I. Book debtsII. DebtorsIII. Account receivablesSelect the correct answer from the options given below: