Question 1

When deciding whether or not to take a trade discount,the cost of borrowing from a bank or other source should be compared to the cost of trade credit to determine if the cash discount should be taken.

Accepted Answer

A) True 
 B)False

Question 2

Ingram Office Supplies,Inc. ,buys on terms of 2/15,net 50 days.It does not take discounts,and it typically pays on time,50 days after the invoice date.Net purchases amount to $800,000 per year.On average,what is the dollar amount of costly trade credit (total credit - free credit) the firm receives during the year? (Assume a 365-day year,and note that purchases are net of discounts. ) Do not round intermediate calculations.

Accepted Answer

A)   $91,288
B)   $76,712
C)   $83,616
D)   $79,781
E)   $93,589F) C) and D)
G) B) and E)

Question 3

Net operating working capital,defined as operating current assets minus the difference between current liabilities and notes payable,is equal to the current ratio minus the quick ratio.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?

Accepted Answer

A)   Payments lags.
B)   Depreciation.
C)   Cumulative cash.
D)   Repurchases of common stock.
E)   Payment for plant construction.F) B) and E)
G) A) and E)

Question 5

Your firm's cost of goods sold (COGS) average $2,000,000 per month,and it keeps inventory equal to 50% of its monthly COGS on hand at all times.Using a 365-day year,what is its inventory conversion period?

Accepted Answer

A)   15.2 days
B)   14.0 days
C)   15.7 days
D)   13.7 days
E)   14.8 daysF) A) and B)
G) C) and D)

Question 6

The target cash balance is typically (and logically)set so that it does not need to be adjusted for either seasonal patterns or unanticipated random fluctuations.

Accepted Answer

A) True 
 B)False

Question 7

The average accounts receivables balance is a function of both the volume of credit sales and the days sales outstanding.

Accepted Answer

A) True 
 B)False

Question 8

Uncertainty about the exact lives of assets prevents precise maturity matching in an ex post (i.e. ,after the fact)sense even though it is possible to match maturities on an ex ante (expected)basis.

Accepted Answer

A) True 
 B)False

Question 9

Dewey Corporation has the following data,in thousands.Assuming a 365-day year,what is the firm's cash conversion cycle? Do not round intermediate calculations.Round your answer to the nearest day.   Annual sales = $53,000 Annual cost of goods sold = $37,100 Inventory =$4,000 Accounts receivable =$2,000 Accounts payable = $2,400\begin{array}{lr}	ext { Annual sales = } & \$ 53,000 \	ext { Annual cost of goods sold = } & \$ 37,100 \	ext { Inventory }= & \$ 4,000 \	ext { Accounts receivable }= & \$ 2,000 \	ext { Accounts payable = } & \$ 2,400\end{array} Annual sales =  Annual cost of goods sold =  Inventory = Accounts receivable = Accounts payable = ​$53,000$37,100$4,000$2,000$2,400​ 
?

Accepted Answer

A)   29 days
B)   25 days
C)   30 days
D)   36 days
E)   33 days F) B) and D)
G) A) and D)

Question 10

A lockbox plan is most beneficial to firms that

Accepted Answer

A)   have suppliers who operate in many different parts of the country.
B)   have widely dispersed manufacturing facilities.
C)   have a large marketable securities portfolio,and cash,to protect.
D)   receive payments in the form of currency,such as fast food restaurants,rather than in the form of checks.
E)   have customers who operate in many different parts of the country.F) All of the above
G) None of the above

Question 11

Edison Inc.has annual sales of $41,610,000,or $114,000 a day on a 365-day basis.The firm's cost of goods sold are 75% of sales.On average,the company has $9,000,000 in inventory and $8,000,000 in accounts receivable.The firm is looking for ways to shorten its cash conversion cycle.Its CFO has proposed new policies that would result in a 20% reduction in both average inventories and accounts receivable.She also anticipates that these policies would reduce sales by 10%,while the payables deferral period would remain unchanged at 35 days.What effect would these policies have on the company's cash conversion cycle? Do not round intermediate calculations.Round to the nearest whole day.

Accepted Answer

A)   -16 days
B)   -21 days
C)   -17 days
D)   -19 days
E)   -22 daysF) A) and E)
G) C) and D)

Question 12

Weiss Inc.arranged a $9,000,000 revolving credit agreement with a group of banks.The firm paid an annual commitment fee of 0.5% on the unused balance of the loan commitment.On the used portion of the revolver,it paid 1.5% above prime for the funds actually borrowed on a simple interest basis.The prime rate was 9% during the year.If the firm borrowed $6,000,000 immediately after the agreement was signed and repaid the loan at the end of one year,what was the total dollar annual cost of the revolver? Do not round intermediate calculations.

Accepted Answer

A)   $715,950
B)   $793,350
C)   $645,000
D)   $735,300
E)   $703,050F) A) and B)
G) A) and C)

Question 13

Inventory management is largely self-contained in the sense that very little coordination among the sales,purchasing,and production personnel is required for successful inventory management.

Accepted Answer

A) True 
 B)False

Question 14

Firms generally choose to finance temporary current assets with short-term debt because

Accepted Answer

A)   matching the maturities of assets and liabilities reduces risk under some circumstances,and also because short-term debt is often less expensive than long-term capital.
B)   short-term interest rates have traditionally been more stable than long-term interest rates.
C)   a firm that borrows heavily on a long-term basis is more apt to be unable to repay the debt than a firm that borrows short term.
D)   the yield curve is normally downward sloping.
E)   short-term debt has a higher cost than equity capital.F) B) and C)
G) A) and E)

Question 15

Halka Company is a no-growth firm.Its sales fluctuate seasonally,causing total assets to vary from $345,000 to $410,000,but fixed assets remain constant at $260,000.If the firm follows a maturity matching (or moderate) working capital financing policy,what is the most likely total of long-term debt plus equity capital?

Accepted Answer

A)   $345,000
B)   $307,050
C)   $262,200
D)   $369,150
E)   $379,500F) A) and B)
G) None of the above

Question 16

A line of credit can be either a formal or an informal agreement between a borrower and a bank regarding the maximum amount of credit the bank will extend to the borrower during some future period,assuming the borrower maintains its financial strength.

Accepted Answer

A) True 
 B)False

Question 17

The concept of permanent current assets reflects the fact that some components of current assets do not shrink to zero even when a business is at its seasonal or cyclical low.Thus,permanent current assets represent a minimum level of current assets that must be financed.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following statements is CORRECT?

Accepted Answer

A)   Under normal conditions,a firm's expected ROE would probably be higher if it financed with short-term rather than with long-term debt,but using short-term debt would probably increase the firm's risk.
B)   Conservative firms generally use no short-term debt and thus have zero current liabilities.
C)   A short-term loan can usually be obtained more quickly than a long-term loan,but the cost of short-term debt is normally higher than that of long-term debt.
D)   If a firm that can borrow from its bank at a 6% interest rate buys materials on terms of 2/10,net 30,and if it must pay by Day 30 or else be cut off,then we would expect to see zero accounts payable on its balance sheet.
E)   If one of your firm's customers is "stretching" its accounts payable,this may be a nuisance but it will not have an adverse financial impact on your firm if the customer periodically pays off its entire balance.F) A) and B)
G) C) and E)

Question 19

A firm's collection policy,i.e. ,the procedures it follows to collect accounts receivable,plays an important role in keeping its average collection period short,although too strict a collection policy can reduce profits due to lost sales.​

Accepted Answer

A) True 
 B)False

Question 20

Zervos Inc.had the following data for last year (in millions) .The new CFO believes (1) that an improved inventory management system could lower the average inventory by $4,000, (2) that improvements in the credit department could reduce receivables by $2,000,and (3) that the purchasing department could negotiate better credit terms and thereby increase accounts payable by $2,000.Furthermore,she thinks that these changes would not affect either sales or the costs of goods sold.If these changes were made,by how many days would the cash conversion cycle be lowered? Do not round your intermediate calculations.   Original  Revised  Annual sales: unchanged $117,000$117,000 Cost of goods sold: unchanged $80,000$80,000 Average inventory: lowered by $4,000$20,000$16,000 Average receivables: lowered by $2,000$16,000$14,000 Average payables: increased by $2,000$10,000$12,000 Days in year 365365\begin{array} { l r r } & 	ext { Original } & 	ext { Revised } \\hline	ext { Annual sales: unchanged } & \$ 117,000 & \$ 117,000 \	ext { Cost of goods sold: unchanged } & \$ 80,000 & \$ 80,000 \	ext { Average inventory: lowered by } \$ 4,000 & \$ 20,000 & \$ 16,000 \	ext { Average receivables: lowered by } \$ 2,000 & \$ 16,000 & \$ 14,000 \	ext { Average payables: increased by } \$ 2,000 & \$ 10,000 & \$ 12,000 \	ext { Days in year } & 365 & 365\end{array} Annual sales: unchanged  Cost of goods sold: unchanged  Average inventory: lowered by $4,000 Average receivables: lowered by $2,000 Average payables: increased by $2,000 Days in year ​ Original $117,000$80,000$20,000$16,000$10,000365​ Revised $117,000$80,000$16,000$14,000$12,000365​​ 
?

Accepted Answer

A)   40.3 days
B)   37.6 days
C)   39.7 days
D)   33.6 days
E)   32.6 days F) B) and D)
G) A) and D)

Exam 16: Working Capital Management

Correct Answer
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Correct Answer
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Correct Answer
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A line of credit can be either a formal or an informal agreement between a borrower and a bank regarding the maximum amount of credit the bank will extend to the borrower during some future period,assuming the borrower maintains its financial strength.

Correct Answer
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Correct Answer
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Correct Answer
verified

Your firm's cost of goods sold (COGS) average $2,000,000 per month,and it keeps inventory equal to 50% of its monthly COGS on hand at all times.Using a 365-day year,what is its inventory conversion period?

Correct Answer
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Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?

Correct Answer
verified

Net operating working capital,defined as operating current assets minus the difference between current liabilities and notes payable,is equal to the current ratio minus the quick ratio.

Correct Answer
verified

A lockbox plan is most beneficial to firms that

Correct Answer
verified

Firms generally choose to finance temporary current assets with short-term debt because

Correct Answer
verified

Uncertainty about the exact lives of assets prevents precise maturity matching in an ex post (i.e. ,after the fact)sense even though it is possible to match maturities on an ex ante (expected)basis.

Correct Answer
verified

The target cash balance is typically (and logically)set so that it does not need to be adjusted for either seasonal patterns or unanticipated random fluctuations.

Correct Answer
verified

Inventory management is largely self-contained in the sense that very little coordination among the sales,purchasing,and production personnel is required for successful inventory management.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

The average accounts receivables balance is a function of both the volume of credit sales and the days sales outstanding.

Correct Answer
verified

The concept of permanent current assets reflects the fact that some components of current assets do not shrink to zero even when a business is at its seasonal or cyclical low.Thus,permanent current assets represent a minimum level of current assets that must be financed.

Correct Answer
verified

When deciding whether or not to take a trade discount,the cost of borrowing from a bank or other source should be compared to the cost of trade credit to determine if the cash discount should be taken.

Correct Answer
verified

Correct Answer
verified

A firm's collection policy,i.e. ,the procedures it follows to collect accounts receivable,plays an important role in keeping its average collection period short,although too strict a collection policy can reduce profits due to lost sales.

Correct Answer
verified

Exam 16: Working Capital Management

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A line of credit can be either a formal or an informal agreement between a borrower and a bank regarding the maximum amount of credit the bank will extend to the borrower during some future period,assuming the borrower maintains its financial strength.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Your firm's cost of goods sold (COGS) average $2,000,000 per month,and it keeps inventory equal to 50% of its monthly COGS on hand at all times.Using a 365-day year,what is its inventory conversion period?

Correct AnswerverifiedShow Answer

Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?

Correct AnswerverifiedShow Answer

Net operating working capital,defined as operating current assets minus the difference between current liabilities and notes payable,is equal to the current ratio minus the quick ratio.

Correct AnswerverifiedShow Answer

A lockbox plan is most beneficial to firms that

Correct AnswerverifiedShow Answer

Firms generally choose to finance temporary current assets with short-term debt because

Correct AnswerverifiedShow Answer

Uncertainty about the exact lives of assets prevents precise maturity matching in an ex post (i.e. ,after the fact)sense even though it is possible to match maturities on an ex ante (expected)basis.

Correct AnswerverifiedShow Answer

The target cash balance is typically (and logically)set so that it does not need to be adjusted for either seasonal patterns or unanticipated random fluctuations.

Correct AnswerverifiedShow Answer

Inventory management is largely self-contained in the sense that very little coordination among the sales,purchasing,and production personnel is required for successful inventory management.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

The average accounts receivables balance is a function of both the volume of credit sales and the days sales outstanding.

Correct AnswerverifiedShow Answer

The concept of permanent current assets reflects the fact that some components of current assets do not shrink to zero even when a business is at its seasonal or cyclical low.Thus,permanent current assets represent a minimum level of current assets that must be financed.

Correct AnswerverifiedShow Answer

When deciding whether or not to take a trade discount,the cost of borrowing from a bank or other source should be compared to the cost of trade credit to determine if the cash discount should be taken.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A firm's collection policy,i.e. ,the procedures it follows to collect accounts receivable,plays an important role in keeping its average collection period short,although too strict a collection policy can reduce profits due to lost sales.​

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
verified

A firm's collection policy,i.e. ,the procedures it follows to collect accounts receivable,plays an important role in keeping its average collection period short,although too strict a collection policy can reduce profits due to lost sales.

Correct Answer
verified