Receivable Management – Financial Management MCQ

Receivable Management – CS Executive Financial and Strategic Management MCQ Questions with Answers you can quickly revise the concepts.

Receivable Management – Financial Management MCQ

Question 1.
Receivables means – ………..
I. Book debts
II. Debtors
III. Account receivables
Select correct answer from the options given below:
(A) I & II
(B) II & III
(C) I & III
(D) All of the above
Answer:
(D) All of the above

Question 2.
Receivables arise -…………….
1. If the goods are sold on credit.
2. If the goods are sold on cash
3. If the services are rendered on credit
4. If the services are rendered on cash.
Select correct answer from the options given below:
(A) 1 only
(B) 1 & 2
(C) 1 & 3
(D) All 1 to 4
Answer:
(C) 1 & 3

Question 3.
A decrease in the firm’s receivable turnover ratio means that –
(A) it is collecting credit sales more quickly than before
(B) it is collecting credit sales more slowly than before
(C) sales have gone down
(D) inventories have gone up
Answer:
(B) it is collecting credit sales more slowly than before
For example, if the hrm goes from 6 turns to 3 turns, the firm is increasing the average collection period from 60 days to 120 days (assuming a 360 day year). Thus, it is collecting more slowly.

Question 4.
The goal of receivables management is to maximize the value of the firm by achieving a trade-off between —
(A) Risk & Profitability
(B) Liquidity & Profitability
(C) Return & Profitability
(D) Return & Liquidity
Answer:
(A) Risk & Profitability

Question 5.
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?
(A) Trade account
(B) Cash discount
(C) Peak trade account
(D) Seasonal dating
Answer:
(D) Seasonal dating

Question 6.
Which of the following function is required to be performed by the finance manager in relation to proper management of receivables?
(A) To obtain optimum (not maximum) value of sales.
(B) To adopt relaxed policy for administrative expense.
(C) To increase opportunity cost of funds blocked in the receivables.
(D) To make more purchases at bigger discounts.
Answer:
(A) To obtain optimum (not maximum) value of sales.

Question 7.
The payment terms 2/10, Net 30 tell us that:
(A) 2% discount will be awarded if the payment is made within 10 days of invoice date; otherwise, the full amount is payable within next 10 days of invoice date.
(B) 10% discount will be awarded if the payment is made within 20 days of invoice date; otherwise, the full amount is payable within 30 days of invoice date.
(C) 2% discount will be awarded if the payment is made within 30 days of invoice date; otherwise, the full amount is payable within next 10 days of invoice date.
(D) 2% discount will be awarded if the payment is made within 10 days of invoice date; otherwise, the full amount is payable within 30 days of invoice date.
Answer:
(D) 2% discount will be awarded if the payment is made within 10 days of invoice date; otherwise, the full amount is payable within 30 days of invoice date.

Question 8.
Risk of non-payment may due to –
(A) Insolvency
(B) Liquidity problems
(C) Intention of cheating
(D) All of the above
Answer:
(D) All of the above

Question 9.
The cash discount is given to customers for:
(A) Early payments
(B) Good business relations
(C) Bulk purchase
(D) Frequent purchases
Answer:
(A) Early payments

Question 10.
Which of the following tool may be used to determine the degree of risk associated with cash collections?
A. Standard deviation
B. Co-efficient of variation
Select the correct answer from the options given below:
(A) B only
(B) Neither A nor B
(C) A only
(D) Both A and B
Answer:
(D) Both A and B

Question 11.
The accounts receivable that cannot be collected because of their bank ruptcy or another reason are termed as:
(A) Collectible accounts
(B) Bad customers
(C) Doubtful accounts
(D) Uncollectible accounts
Answer:
(D) Uncollectible accounts

Question 12.
Which of the following sentence describes correct strategy for proper administration of receivables?
(A) Most of the firms dissuade credit sales to first time customers.
(B) Promoting cash sales
(C) Firms must have special staff ear-marked for recovery efforts.
(D) (A) and (C)
Answer:
(D) (A) and (C)

Question 13.
Accounts receivable are reported in the balance sheet:
(A) At face value
(B) At gross value
(C) At net realizable value
(D) At net credit sales value
Answer:
(C) At net realizable value

Question 14.
……….. may also be offered for the early payment of dues.
(A) Trade discounts
(B) Special discounts
(C) Both (A) and (B)
(D) Cash discounts
Answer:
(D) Cash discounts

Question 15.
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:
(A) An increase in the average collection period.
(B) A decrease in bad debt losses.
(C) An increase in sales.
(D) Higher profits.
Answer:
(A) An increase in the average collection period.

Question 16.
Credit rating is a study of credit standard of a customer Le. 5 C’s. Which of the following correctly describes those 5 C’s?
(A) Character, Capacity, Capital, Conditions & Collateral security
(B) Character, Capacity, Complaint, Conditions & Collateral security
(C) Character, Charm, Capital, Conditions & Collateral security
(D) Charter, Capacity, Capital, Conditions & Collateral security
Answer:
(A) Character, Capacity, Capital, Conditions & Collateral security

Question 17.
An exercise of credit rating involves –
(A) Doing it internally by a team within the firm
(B) Doing it through external special agencies.
(C) (A) or (B)
(D) None of the above
Answer:
(C) (A) or (B)

Question 18.
Place the methods of collecting on delinquent accounts from the most likely lowest to highest cost.
(A) Letters, phone calls, legal action, and personal visits.
(B) Phone calls, letters, legal action, and personal visits.
(C) Letters, phone calls, personal visits, and legal action.
(D) Personal visits, phone calls, letters, and legal action.
Answer:
(C) Letters, phone calls, personal visits, and legal action.

Question 19.
An important means to get an insight into collection pattern of debtors is the preparation of their –
(A) List of proposed discount
(B) Discount schedule
(C) Schedule of personal information of debtors
(D) Ageing Schedule.
Answer:
(D) Ageing Schedule.

Question 20.
Which of the following may be a reason why you would choose a policy with a higher Average Collection Period (ACP)?
(A) Lower percentage of collections in late dates.
(B) Higher percentage of collections in early dates.
(C) Lower percentage of collections in early dates.
(D) Higher percentage of collections in middle dates
Answer:
(B) Higher percentage of collections in early dates.

Question 21.
………….. is an arrangement to have debts collected by a third party entity for a fee.
(A) Factoring
(B) Aging
(C) Forming
(D) Crediting
Answer:
(A) Factoring

Question 22.
Selling accounts receivable to a third party at a reduced price is part of the collection process known as –
(A) Settling
(B) Writing off
(C) suing
(D) Factoring
Answer:
(D) Factoring

Question 23.
In ……….. type of factoring the bank/ factor takes all the risk and bear all the loss in case of debts becoming bad debts.
(A) Non-Recourse Factoring
(B) Invoice Discounting
(C) Maturity Factoring
(D) Recourse Factoring
Answer:
(A) Non-Recourse Factoring

Question 24.
Which one of the following would help to reduce the number of accounts receivable delinquencies?
(A) Ease the credit approval process
(B) Know your customers’ situations
(C) Refuse to extend payments
(D) Stop sending reminder letters
Answer:
(B) Know your customers’ situations

Question 25.
In factoring arrangement the debts as and when fall due are collected by the –
(A) Debtor
(B) Seller
(C) Factor
(D) Agent
Answer:
(C) Factor

Question 26.
A system used to decide whether to grant credit by assigning a numerical value that is related to the creditworthiness of the applicant is a(n)
(A) Credit Scoring System
(B) ERP System
(C) D & B Rating Classification System
(D) JIT System
Answer:
(A) Credit Scoring System

Question 27.
The factoring transaction involves
(A) Three parties Creditor, Buyer & Factor
(B) Four parties Seller, Buyer, Creditor & Factor
(C) Three parties Seller Buyer & Factor
(D) Four parties Debtor, Seller, Buyer, & Factor
Answer:
(C) Three parties Seller Buyer & Factor

Question 28.
…………. is a process by which a company clubs its different financial assets to form a consolidated financial instrument which is issued to investors. In return, the investors in such securities get interest.
(A) Factoring
(B) Securitization
(C) Bills rediscounting
(D) Forfaiting
Answer:
(B) Securitization

Question 29.
The main purpose of factoring accounts receivable is:
(A) to create an additional guarantee of collection
(B) to establish a legal proof for future use
(C) to meet immediate cash needs
(D) to invest accounts receivable in another business
Answer:
(C) to meet immediate cash needs

Question 30.
Which of the following function is/ are performed by the factor in factoring arrangement?
1. Administration of sellers’ sales ledger.
2. Collection of receivables purchased.
3. Provision of finance.
4. Protection against risk of bad debts.
5. Rendering advisory services in relation to receivables.
Select correct answer from the options given below:
(A) 3, 1, 5
(B) 2,4,3
(C) 4, 1, 3 & 5
(D) All 1 to 5
Answer:
(D) All 1 to 5

Question 31.
In a factoring with recourse, the loss resulting from bad debts is born by –
(A) the organization buying the accounts receivable
(B) the organization selling the accounts receivable
(C) the intermediate organization
(D) all of the above
Answer:
(B) the organization selling the accounts receivable

Question 32.
Under which of the following factoring arrangement the bank/factor purchases the receivables on the condition that any loss arising out or bad debts will be borne by the company which has taken factoring?
(A) Resource Factoring
(B) Recourse Factoring
(C) Non-Recourse Factoring
(D) Maturity Factoring
Answer:
(B) Recourse Factoring

Question 33.
In a factoring without recourse transaction, the loss resulting from bad debts is born by:
(A) Intermediate organization
(B) CEO of the organization
(C) Organization selling the accounts 2 receivable
(D) Organization buying the accounts receivable
Answer:
(D) Organization buying the accounts receivable

Question 34.
Which of the following is transferred in factoring arrangement?
(A) Receivable
(B) Payable
(C) Outstanding liabilities
(D) Prepaid assets
Answer:
(A) Receivable

Question 35.
Credit policy of every company is largely influenced by and
(A) Liquidity, accountability
(B) Liquidity, profitability
(C) Liability, profitability
(D) Liability, liquidity
Answer:
(B) Liquidity, profitability

Question 36.
Which of the following correctly describes ‘maturity factoring’ arrangement?
(A) A factoring arrangement which involves special purpose vehicle.
(B) A process which is governed by private contract between company and factoring firm.
(C) Under this type of factoring the bank provide an advance to the company against the account receivables and in turn charges interest rate from the company for the payment which bank has given to the company.
(D) In this type of factoring bank/factor does not give any advance to the company rather bank/factor collects it from customers and pays to the company either on the date of collection from the customers or on a guaranteed payment date.
Answer:
(D) In this type of factoring bank/factor does not give any advance to the company rather bank/factor collects it from customers and pays to the company either on the date of collection from the customers or on a guaranteed payment date.

Question 37.
In which type of factoring, the customer is not informed of the factoring arrangement?
(A) Private Factoring
(B) Secrete Factoring
(C) Undisclosed Factoring
(D) Untold Factoring
Answer:
(C) Undisclosed Factoring

Question 38.
Which of the following statements (in general) is correct?
(A) A low receivables turnover is desirable.
(B) The lower the total debt-to-equity ratio, the lower the financial risk for a firm.
(C) An increase in net profit margin with no change in sales or assets means a poor ROI.
(D) The higher the tax rate for a firm, the lower the interest coverage ratio.
Answer:
(B) The lower the total debt-to-equity ratio, the lower the financial risk for a firm.

Question 39.
Four parties involved in securitization are –
(A) Obligor, Owner, Special Purpose Vehicle, Investor
(B) Debtor, Owner, Special Purpose Vehicle, Investor
(C) Special Purpose Vehicle, Investor
Creditor & Financial Institution
(D) Investor, Obligor, Agent, Special Purpose Vehicle
Answer:
(A) Obligor, Owner, Special Purpose Vehicle, Investor

Question 40.
Which one of the following would NOT tighten a firm’s credit policy?
(A) Implementing a more stringent credit standard
(B) Shortening the net due period
(C) Lengthening the discount period
(D) Requiring a cash down payment on any purchase
Answer:
(C) Lengthening the discount period

Question 41.
Factoring involves arrangement.
Securitization is arrangement.
(A) Long term finance; long term finance
(B) Short term finance; long term finance
(C) Short term finance; short term finance
(D) Long term finance; short term finance
Answer:
(B) Short term finance; long term finance

Question 42.
Which one of the following correctly applies to a credit scoring system?
(A) Borrowers with low credit scores should be granted higher credit limits.
(B) Borrowers with higher incomes should be granted a higher score than borrowers with lower incomes.
(C) A business selling luxury items should be granted a higher score during periods of weak economic growth.
(D) The more collateral provided by a firm, the lower the credit score assigned.
Answer:
(B) Borrowers with higher incomes should be granted a higher score than borrowers with lower incomes.

Question 43.
(DFHI) aims to impart liquidity to commercial bills, which have already been discounted by commercial banks
(A) Discount & Finance House of India
(B) Discount & Finance Home of India
(C) Discount & Factoring House of India
(D) Discount & Factoring Home of India
Answer:
(A) Discount & Finance House of India

Question 44.
Making a credit decision is based upon all of the following except which?
(A) Character
(B) Capital
(C) Complaint
(D) Collateral
Answer:
(C) Complaint

Question 45.
Bill discounting is always with
(A) recourse
(B) non-recourse
(C) recourse or without recourse
(D) resource
Answer:
(A) recourse

Question 46.
Non-Recourse factoring is called as –
(A) Maturity Factoring
(B) Full Factoring
(C) Material Factoring
(D) Non-Finance Factoring
Answer:
(B) Full Factoring

Question 47.
…………….is a means of financing used by exporters that enables them to receive cash immediately by selling their medium-term receivables (the amount an importer owes the exporter) at a discount, and eliminate risk by making the sale without recourse, meaning the exporter has no liability regarding possible default by the importer on paying the receivables.
(A) Forfaiting
(B) Factoring
(C) Securitization
(D) Reconstruction Factoring
Answer:
(A) Forfaiting

Question 48.
A forfaiter purchase of the receivables, the sum of which is typically guaranteed by the –
(A) exporter’s bank
(B) importer’s bank
(C) buyer’s bank
(D) financer’s bank
Answer:
(B) importer’s bank

Question 49.
Forfaiting eliminates –
(A) Risk of the exporter not receiving payment
(B) Credit risk and transfer risk
(C) Risks posed by foreign exchange rate or interest rate changes.
(D) All of the above
Answer:
(D) All of the above

Question 50.
Forfaiting is –
(A) either with recourse or without re¬course
(B) always without recourse
(C) pure financing agreement
(D) (B) and (C)
Answer:
(D) (B) and (C)

Question 51.
………. is an arrangement to have export debts collected by a third party entity for a fee.
(A) Export factoring
(B) Forfaiting
(C) Striding
(D) Countertrade
Answer:
(A) Export factoring

Question 52.
The term credit policy is used to refer to decisions variable:
(A) Credit standards
(B) Credit terms
(C) Collection efforts
(D) All of the above
Answer:
(D) All of the above

Question 53.
…………. refers to the use of a firm’s receivable to secure a short term loan.
(A) Factoring
(B) Pledging
(C) Monitoring
(D) Securitization
Answer:
(B) Pledging

Question 54.
Which of the following statement(s) 5 is/are correct?
(A) Control of bad-debts is an important part of controlling the working capital or the current assets of the company
(B) Credit policy should be followed which may not lead to bad-debts and expedite collections
(C) Periodical checks should be maintained by classifying debtors as outstanding from 0-30 days, 30-60 days, 60-90 days and 90 and over
(D) All of the above
Answer:
(D) All of the above

Question 55.
You are considering relaxation of Credit policy ie. increasing credit period from 30 days to 45 days then in which of the following circumstances you will advice to do so -……….
(A) If the present profit increases
(B) If present loss reduces
(C) If present bad debt reduces
(D) All of the above
Answer:
(D) All of the above

Question 56.
What relationship exists between the average collection period and accounts receivable turnover?
(A) Both ratios are expressed in number of days
(B) As average collection period increases (decreases) the accounts receivable turnover decreases (increases)
(C) Both ratios are expressed in number of times receivables are collected per year
(D) There is a direct and proportional relationship
Answer:
(B) As average collection period increases (decreases) the accounts receivable turnover decreases (increases)

Question 57.
Which of the following statement is correct?
(A) The higher the debtors turnover ratio betters the position.
(B) Lower the velocity betters the position.
(C) Both (A) & (B)
(D) None of the above
Answer:
(C) Both (A) & (B)

Question 58.
Select the odd one in relation to topic of management of receivables?
(A) Debtors
(B) Factoring
(C) Creditor
(D) Forfaiting
Answer:
(C) Creditor

Question 59.
If you are proposing to introduce relaxed credit policy, you will adopt it if –
(A) There is increase in profit
(B) There is reduction in loss
(C) Both (A) and (B)
(D) Neither (A) nor (B)
Answer:
(C) Both (A) and (B)

Question 60.
When net sales for the year are ₹ 2,50,000 and debtors ₹ 50,000, the average collection period is:
(A) 60 days
(B) 45 days
(C) 42 days
(D) 73 days
Answer:
(D) 73 days
Average collection period =

Question 61.
If credit sales for the year is ₹ 5,40,000 and Debtors at the end of year is ₹ 90,000 the Average Collection Period will be –
(A) 30 days
(B) 61 days
(C) 90 days
(D) 120 days
Answer:
(B) 61 days

Question 62.
Romoji Ltd. has sales of ₹ 1,18,00,000 and its debtor turnover ratio is 4.2. Cost of goods sold is ₹ 82,60,000. Debtors = ?
(A) ₹ 19,66,725
(B) ₹ 19,66,663
(C) ₹ 19,66,263
(D) ₹ 19,66,667
Answer:
(D) ₹ 19,66,667

Note: Debtors turnover ratio can be calculated by taking ‘credit sales ’ or ‘cost of goods sold’. As per data given in question if ‘credit sales’ figure is used to calculate debtors then it comes to 28,09,524; but no such option is given hence debtors are calculated on ‘cost of goods sold’.

Question 63.
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 = ?
(A) 6.00
(B) 7.46
(C) 10.66
(D) 5.38
Answer:
(A) 6.00

Question 64.
Total sales of LMN Ltd. are ₹ 31,248 out of which 25% are cash sales. Closing balance of debtors are ₹ 9,468. Debtors velocity = ?
(A) 4.2 months
(B) 157 days
(C) 148 days
(D) 4.43 month
Answer:
(C) 148 days

Question 65.
Debtors velocity = 3 months
Sales = ₹ 25,00,000
Bills receivable & Bills payable were ₹ 60,000 and ₹ 36,667 respectively.
Sundry debtors = ?
(A) ₹ 6,25,000
(B) ₹ 5,25,000
(C) ₹ 5,65,000
(D) ₹ 6,65,000
Answer:
(C) ₹ 5,65,000

x Account Receivable = 6,25,000
Debtors + Bills Receivable = Account Receivable
x + 60,000 = 6,25,000
x = Debtors = 5,65,000

Question 66.
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 (Assume a 365 day year.)
(A) ₹ 2,63,127
(B) ₹ 2,40,000
(C) ₹ 2,36,712
(D) ₹ 2,40,721
Answer:
(C) ₹ 2,36,712

Question 67.
Apollo Ltd. sells its products allowing a 2 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.
(A) Incremental profit ₹ 3.50 lakh
(B) Incremental loss ₹ 3.50 lakh
(C) Incremental profit ₹ 4.20 lakh
(D) Incremental loss ₹ 4.20 lakh
Answer:
(A) Incremental profit ₹ 3.50 lakh

Question 68.
F Ltd. is examining 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 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 15% return, should F Ltd. relax its credit policy?
Note: 1 Year = 360 days
(A) Yes, F Ltd. can change its policy as it lead to 15.79% increase in profit.
(B) No, F Ltd. need not to change its policy as there is no incremental return.
(C) Yes, F Ltd. can change its policy as it lead to incremental return of ₹ 2,400.
(D) None of the above option is correct.
Answer:
(A) Yes, F Ltd. can change its policy as it lead to 15.79% increase in profit.

Question 69.
Average cost increases from ₹ 88 to ₹ 92. Incremental profit & incremental debtors is 148,000 & 13,04,000 respectively. Cost of capital is 15%. What is the rate of incremental return on change of credit policy?
(A) 15.79%
(B) No incremental return
(C) 0.79%
(D) 1.58%
Answer:
(A) 15.79%

Question 70.
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% respective1.
Debtors are calculated on cost
(A) Company should not change policy as debtors are increasing.
(B) Change in policy may lead to profit of ₹ 23,830.
(C) Change in policy may lead to incremental profit of ₹ 18,542.
(D) Company should not change in policy due incremental loss.
Answer:
(C) Change in policy may lead to incremental profit of ₹ 18,542.

Question 71.
In order to increase sales from normal level of ₹ 2,40,000 per annum, the marketing manager submits following two proposal for relaxing credit policy:
Proposal I: Increase credit period from 30 days to 45 days which will lead to increase in sales by ₹ 12,000.
Proposal II : Increase credit period from 30 days to 60 days which will lead to 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?
Debtors are calculated on sales.
(A) Data given in question is not sufficient because without data as to cost no conclusion can be drawn.
(B) As compared to present policy, profit will increase by ₹ 1,800 for Proposal II and by ₹ 2,000 for Proposal II.
(C) As compared to present policy, profit will increase by ₹ 1,700 for Proposal I and by ₹ 2,000 for Proposal II.
(D) As compared to present policy, profit will increase by ₹ 1,700 for Proposal I and by ₹ 1,400 for Proposal II.
Answer:
(D) As compared to present policy, profit will increase by ₹ 1,700 for Proposal I and by ₹ 1,400 for Proposal II.

Question 72.
A Company has prepared the following projections for a year:
Sales — 21,000
Selling price per unit — ₹ 40
Variable costs per unit — ₹ 25
Total costs per unit — ₹ 35
Credit period allowed — 1 month
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 it investment. Debtors are calculated on cost. The company may decide to shift to proposed policy because –
(A) Total profit in proposed policy will be ₹ 1,30,200 whereas it is ₹ 1,05,000 for present policy.
(B) Incremental profit is ₹ 25,200
(C) Incremental return is 36.92%
(D) All of the above
Answer:
(D) All of the above

Question 73.
Analysis of debtor’s collection history of Karina Ltd. shows the following facts. 42% debtors pays the amount due within 4 days of sales; 18% debtors pays within 20 days and 40% debtors pays within 40 days of sales. What is the average collection period of Karina Ltd. ?
(A) 23 days
(B) 28 days
(C) 21 days
(D) 18 days
Answer:
(C) 21 days

Question 74.
In year 2018, 7% customer paid the amount due in 5 days from the date of sale; 54% customer paid the amount in 30 days and 39% customer paid the amount in 44 days from the date of sale.
In year 2019,13% customer paid the amount due in 4 days from the date of sale; 64% customer paid the amount in 25 days and 23% customer paid the amount in 58 days from the date of sale.
The average collection period –
(A) in year 2019 increased by 4 days
(B) in year 2019 decreased by 3 days
(C) in year 2019 increased by 3 days
(D) in year 2019 decreased by 4 days
Answer:
(D) in year 2019 decreased by 4 days

Question 75.
A firm has current sales of ₹ 25,48,000. The firm has 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 –
(A) increased by 1,06,735
(B) decreased by 1,04,712
(C) increased by 1,06,167
(D) increased by 1,04,635
Answer:
(C) increased by 1,06,167
Increase in credit period = 60 – 45 = 15 days
Increase m Debtors = \(\frac{25,48,000}{360} \times 15\) =1,06,167

Question 76.
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) increased by ₹ 1,72,725
(B) decreased by ₹ 1,75,175
(C) decreased by ₹ 1,75,775
(D) increased by ₹ 1,75,175
Answer:
(D) increased by ₹ 1,75,175
Increase m Debtors = \(\frac{38,22,000 \times 1.1}{360} \times 15\) =1,75,175

Question 77.
A firm has current sales of 12,56,48,750. 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 is 72% of sales. Firm’s corporate tax rate is 35%, and it requires after-tax return of 15%. Should firm change its credit period?
Note: Firm calculate its debtor on sales.
(A) No, the firm should not change its pol-icy as profit will decline by ₹ 3,50,177
(B) Yes, the firm should change its policy as profit will increase by ₹ 5,39,036
(C) Yes, the firm should change its policy as profit will increase by ₹ 5,38,623
(D) Yes, the firm should change its policy as profit will increase by ₹ 3,50,105
Answer:
(D) Yes, the firm should change its policy as profit will increase by ₹ 3,50,105

Question 78.
Sales Manager of AB Ltd. suggests that if credit period is given for 1.5 months then sales may likely to increase by ₹ 1,20,000 per annum. Cost of sales amounted to 90% of sales. The risk of non-payment is 5%. Income tax rate is 3 0%. The expected return on investment is ₹ 3,375 (after tax). Should the company change its credit policy?
(A) Yes, as total net profit under proposed policy will be ₹ 4,200.
(B) No, as total net profit under proposed policy will be ₹ 4,200.
(C) Yes, as incremental net profit under proposed policy will be ₹ 4,200.
(D) No, as incremental net loss under proposed policy will be ₹ 4,200.
Answer:
(C) Yes, as incremental net profit under proposed policy will be ₹ 4,200.

Question 79.
XYZ Ltd. has credit sales amounting to ₹ 32,00,000. Sale price per unit is ₹ 40, the variable cost is ₹ 25 while the average cost is ₹ 32. Average age of receivables of the firm is 72 days. Firm is considering to tighten 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. Proposed policy will yield –
1 Year= 360days and debtors are calculated on cost.
(A) Incremental profit of ₹ 1,05,350
(B) Incremental loss of ₹ 1,05,350
(C) Incremental profit of ₹ 1,05,530
(D) Incremental loss of ₹ 1,05,530
Answer:
(B) Incremental loss of ₹ 1,05,350

Question 80.
A company has sales of ₹ 25,00,000. Average collection period is 50 days, bad debts losses are 5% of sales and collection expenses are ₹ 25,000. The cost of funds is 15%. The company has two alternative collection programmes:

Debtors are calculated on sales.
Advice the company by selecting the most correct option –
(A) The company should shift toward Programme I as profit is increasing by ₹ 10,274.
(B) The company should shift toward Programme II as profit is increasing by ₹ 15,548.
(C) The company should not change its policy as Programme I & Programme II does not have any incremental profits.
(D) The company may shift to Programme I or Programme II as both have incremental profit of ₹ 10,274 & ₹ 15,548 respectively but Programme II will be selected as it has more incremental profit as compared to Programme I.
Answer:
(D) The company may shift to Programme I or Programme II as both have incremental profit of ₹ 10,274 & ₹ 15,548 respectively but Programme II will be selected as it has more incremental profit as compared to Programme I.

Question 81.
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. Required return on investment is 20%, should it introduce the new discount policy?
(A) Yes, as profit is increasing by ₹ 20,888.
(B) No, as profit is decreasing by ₹ 20,889.
(C) Make no policy change.
(D) No, as profit is decreasing by ₹ 20,837.
Answer:
(B) No, as profit is decreasing by ₹ 20,889.

Question 82.
Current profit of R & Co. is ₹ 3,00,000. It is planning to introduce a discount policy of 2/10, Net 3 0. Due to change in policy profit is expected to increase by ₹ 50,000. 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, increased working capital required will be of ₹ 20,000 (without taking into account the effect of debtors). Total discount likely to be claimed in new policy will amount to ₹ 11,000.20% is the required return on investment. What is the impact of change in policy?
(A) Profit will decrease by ₹ 38,000.
(B) Profit will increase by ₹ 38,000.
(C) Profit will increase by ₹ 38,334.
(D) Profit will decrease by ₹ 38,533.
Answer:
(C) Profit will increase by ₹ 38,334.

Question 83.
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%. Proportion of sales on which customers currently take discount is 0.5. Company is relaxing its discount terms to 2/10 Net 30 which will increase sales by ₹ 5 lakh, reduce average collection period to 14 days and increase the proportion of discount to sales to 0.8. What will be the effect of on company’s profit? Take year as 360 days. Debtors are calculated on cost.
(A) Profit will increase by ₹ 9,900
(B) Profit will increase by ₹ 9,986
(C) Profit will increase by ₹ 8,986
(D) Profit will decrease by ₹ 9,986
Answer:
(D) Profit will decrease by ₹ 9,986

Working Note:
Present discount = 80,00000 × 50% × 1% = 40,000
Proposed discount 8500000 × 80% × 2% = 1,36,000

Question 84.
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. 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?
(A) Yes, as there is incremental return of 26.18%
(B) Yes, as there is incremental return of 26.32%
(C) Yes, as there is incremental return of 26.52%
(D) Yes, as there is incremental return of 26.81%
Answer:
(A) Yes, as there is incremental return of 26.18%

Question 85.
Following are the details regarding then operation of firm:
Sales : ₹ 12,00,000
Selling price p.u. : 10
Variable cost p.u. : 7
Total cost p.u. : 9
Credit period : 1 month
Firm is considering a proposal to change credit period from 1 month to 2 months. The sales are expected to increase by 25%. Firm’s required return is 25%.
Debtors are calculated on cost.
Which of the following statement is correct?
(A) Total profit of the firm after change in policy will be ₹ 2,10,000.
(B) Incremental profit and investment in debtors will be ₹ 90,000 & ₹ 1,25,000 respectively.
(C) Incremental return will be 72%.
(D) All of the above.
Answer:
(D) All of the above.

Question 86.
S Ltd. currently has sales of ₹ 30,00,000 with an average collection period of 2 months. At present, no discounts are offered. Management of the company is thinking to allow a discount of 2% on sales which will result as under:
(i) The average collection period would reduce to one month.
(ii) 50% of customers would take advantage of 2% discount.
Company would normally require a 25% return on its investment. Advise whether to extend the discount on sales.
Debtors are calculated on sales.
(A) Yes, as profit will increase by ₹ 32,500
(B) Yes, as profit will increase by ₹ 30,500
(C) Yes, as profit will increase by ₹ 31,500
(D) Yes, as profit will increase by ₹ 32,000
Answer:
(A) Yes, as profit will increase by ₹ 32,500

Question 87.
A group of new customers with 10% risk of non-payment, desires to establish business connection with you. The group desires 1.5 months credit and is likely to increase the sales of your concern by ₹ 1,20,000 p.a. Cost of sales would be 80% of sales. Tax rate is 40% and required rate of return after tax is 40%. Debtors are calculated on cost. Should new business connection be established?
(A) Yes, as there is reduction in loss
(B) No, as profit is increasing
(C) Yes, profit is increasing by ₹ 7,200
(D) No, loss will increase by ₹ 7,200
Answer:
(C) Yes, profit is increasing by ₹ 7,200

Question 88.
A manufacturing firm has credit sales of ₹ 360 lakh and its average collection period is 30 days. Firm estimates bad debt losses at around 2% of credit sales. Firm spends ₹ 1,40,000 annually on debtors’ administration.
A factoring firm has offered to buy the firm’s receivables. The factor will charge 1% commission and will pay an advance against receivables on an interest @15% p.a. after withholding 10% as reserve. How much net amount will be paid by the Factor to the Firm ₹ 3 Assume 360 days in a year.
(A) ₹ 26,36,625
(B) ₹ 26,63,625
(C) ₹ 26,36,526
(D) ₹ 26,63,265
Answer:
(A) ₹ 26,36,625

Question 89.
A manufacturing firm has credit sales of ₹ 360 lakh and its average collection period is 30 days. Firm estimates bad debt losses at around 2% of credit sales. Firm spends ₹ 1,40,000 annually on debtors’ administration. A factoring firm has offered to buy the firm’s receivables. The factor will charge 1% commission and will pay an advance against receivables on an interest @15% p.a. after withholding 10% as reserve. Net saving/loss to the Firm due to factoring arrangement = ?
(A) (99,500)
(B) (8,60,000)
(C) 99,500
(D) 7,60,500
Answer:
(C) 99,500

Question 90.
Based on the current credit policy, 25% of the customers pay in 15 days, 50% pay in 60 days, and 25% pay in 150 days. Based on the new proposal, 22% of the customers would pay in 20 days, 50% would pay in 30 days, and 28% would pay in 90 days. What is the approximate effect of the new credit policy proposal on the average collection period (ACP)?
(A) ACP would decrease by 5 days.
(B) ACP would decrease by 15 days.
(C) ACP would decrease by 20 days.
(D) ACP would decrease by 26 days.
Answer:
(D) ACP would decrease by 26 days.

Question 91.
Amit Gupta, a trader is considering changing its credit policy. The incremental cash flows associated with this change are as follows:
Increase in sales of ₹ 13,100, increase in cost of goods sold of ₹ 6,900, increase in bad debts of ₹ 1,500, increase in other costs of ₹ 2,700 and an increase in taxes of ₹ 750. The incremental initial cash outflow at time zero is ₹ 16,450. The applicable discount rate is 9.5%. What is the net present value (NPV) of this proposed change in the credit policy?
(A) (3,292)
(B) (1,089)
(C) (1,444)
(D) (15,200)
Answer:
(A) (3,292)
Cash flow = 13,100 – 6,900- 1,500 – 2,700 – 750 = 1,250
Present value of cash flow = 1250 ÷ 0.095 = 13,158
Net present value = 13,158 – 16,450 = – 3292

Question 92.
You are analyzing two separate credit policies. Policy A will produce annual sales of ₹ 6,45,000 and annual interest expense of ₹ 11,500. Cost of goods sold will equal 53% of sales and bad debts will be 3% of sales. The tax rate is 35%. In comparison, Policy B would have 5% less in sales, interest expense of ₹ 6,000, 53% cost of goods sold, and bad debts equal to 1 % of sales. All other expenses are equal to ₹ 1,21,000 under both policies. Which one of the following statements is correct concerning these two credit policies?
(A) Policy A produces ₹ 34,250 more in sales than Policy B.
(B) Policy B produces ₹ 8,317 more in net income than Policy A.
(C) Policy B produces ₹ 8,317 more in net income than Policy A.
(D) Policy B produces ₹ 2,317 more in net income than Policy A.
Answer:
(D) Policy B produces ₹ 2,317 more in net income than Policy A.

Question 93.
M Ltd. expects annual sales of ₹ 2.45 million next year. They have a strict credit policy of 2/10, net 20. Based on a 365-day year, 1 % of their customers pay in 1 day, 41 % pay in 10 days, 56% pay in 23 days and 2% pay in 60 days. What is the expected value of their accounts receivable for next year?
(A) ₹ 1,22,097
(B) ₹ 1,26,583
(C) ₹ 4,09,639
(D) ₹ 4,55,699
Answer:
(A) ₹ 1,22,097

Question 94.
Firoz has been analyzing the accounts receivables of his firm. Based on the current credit policy, 21% of the customers pay in 14 days, 76% pay in 41 days and 3% pay in 112 days. Based on his best estimates and a new policy that he is proposing, Firoz feels that 42% of the customers would pay in 21 days, 56% would pay in 35 days and 2% would pay in 90 days. What is the effect of the new credit policy proposal on the average collection period?
(A) Average collection period would decrease by 7 days.
(B) Average collection period would decrease by 4 days.
(C) Average collection period would increase by 4 days.
(D) Average collection period would increase by 7 days.
Answer:
(A) Average collection period would decrease by 7 days.

Question 95.
Ninety-per cent of X company’s total sales of ₹ 6,00,000 is on credit. If its year-end receivables turnover is 5, the average collection period (based on a, 365 day year) and the year-end receivables are, respectively:
(A) 365 days and ₹ 1,08,000
(B) 73 days and ₹ 1,20,000
(C) 73 days and ₹1,08,000
(D) 81 days and ₹ 1,08,000
Answer:
(C) 73 days and ₹1,08,000

Question 96.
K Ltd. had sales last year of ₹ 265 million, including cash sales of ₹ 25 million. If its average collection period was 36 days, its ending accounts receivable balance is closest to – (Assume a 365-day year)
(A) ₹ 26.1 million
(B) ₹ 23.7 million
(C) ₹ 7.4 million
(D) ₹ 18.7 million
Answer:
(B) ₹ 23.7 million

Question 97.
The credit policy of S Ltd. is “1.5/10, Net 35.” At present 30% of the customers take the discount, 62% pay within the net period, and the rest pay within 45 days of invoice. What would receivables be if all customers took the cash discount?
(A) Lower than the present level.
(B) No change from the present level.
(C) Higher than the present level.
(D) Unable to determine without more information.
Answer:
(A) Lower than the present level.

Question 98.
A firm sells ₹ 5,00,000 p.a. with 3% bad debt losses. Two alternative policies are available. Policy A would increase sales by ₹ 3,00,000, but bad debt losses on additional sales would be 8%. Policy B would increase sales by an additional ₹ 1,20,000 over Policy A and bad debt losses on the additional ₹ 1,20,000 of sales would be 15%. The average collection period will remain at 60 days (6 turns per year) no matter the policy decision made. Profit margin will be 20% of sales and no other expenses will increase. Opportunity cost is 20%.
(A) Make no policy change.
(B) Change to only Policy A.
(C) Change to Policy B (means also taking Policy A first).
(D) All policies lead to the same total firm profit, thus all policies are equal.
Answer:
(C) Change to Policy B (means also taking Policy A first).

Question 99.
Elite Corporation Ltd. is considering a change in their credit terms. The firm is considering offering a 1.5% discount. Most likely competitors will follow suit, so sales will remain at ₹ 1 Million and 40% of sales will be eligible to take advantage of the discount. The firm anticipates that receivables will be reduced by ₹ 30,000 and the firm has an opportunity cost of 18%. Should the firm change its credit terms?
(A) Yes
(B) No
(C) It does not really matter as the benifits and the costs are identical.
(D) It cannot be determined from the given information.
Answer:
(B) No

Question 100.
A firm has total credit sales of ₹ 80 lakh and its average collection period is 80 days. The past experience indicates that bad debt losses are around 1% of the credit sales. The firm spends ₹ 1,20,000 per year on administering its credit sales which is avoidable costs. A factor is prepared to buy the firm’s receivables. He will charge 2% commission. He will advance against receivables to the firm at 18% after withholding 10% as reserve. How much net amount will be paid by the Factor to the Firm? (Assume 360 days in year)
(A) ₹ 17,77,778
(B) ₹ 15,64,444
(C) ₹ 15,01,866
(D) ₹ 15,46,667
Answer:
(C) ₹ 15,01,866