Concepts Review and Critical Thinking Questions

1. Credit Instruments Describe each of the following:

a. Sight draft b. Time draft c. Banker's acceptance d. Promissory note e. Trade acceptance

2. Trade Credit Forms In what form is trade credit most commonly offered? What is the credit instrument in this case?

3. Receivables Costs What are the costs associated with carrying receivables? What are the costs associated with not granting credit? What do we call the sum of the costs for different levels of receivables?

4. Five Cs of Credit What are the five Cs of credit? Explain why each is important.

5. Credit Period Length What are some of the factors that determine the length of the credit period? Why is the length of the buyer's operating cycle often considered an upper bound on the length of the credit period?

6. Credit Period Length In each of the following pairings, indicate which firm would probably have a longer credit period and explain your reasoning.

a. Firm A sells a miracle cure for baldness; Firm B sells toupees.

b. Firm A specializes in products for landlords; Firm B specializes in products for renters.

c. Firm A sells to customers with an inventory turnover of 10 times; Firm B sells to customers with an inventory turnover of 20 times.

d. Firm A sells fresh fruit; Firm B sells canned fruit.

e. Firm A sells and installs carpeting; Firm B sells rugs.

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