Question 1

If a firm switched from taking trade credit discounts to paying on the net due date, this might cost the firm some money, but such a policy would probably have only a negligible effect on the income statement and no effect whatever on the balance sheet.

Accepted Answer

A) True 
 B)False

Question 2

Because money has time value, a cash sale is always more profitable than a credit sale.

Accepted Answer

A) True 
 B)False

Question 3

The twin goals of inventory management are (1) to ensure that the inventories needed to sustain operations are available, but (2) to hold the costs of ordering and carrying inventories to the lowest possible level.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following actions would be likely to shorten the cash conversion cycle?

Accepted Answer

A)   Adopt a new manufacturing process that speeds up the conversion of raw materials to finished goods from 20 days to 10 days.
B)   Change the credit terms offered to customers from 3/10 net 30 to 1/10 net 50.
C)   Begin to take discounts on inventory purchases; we buy on terms of 2/10 net 30.
D)   Adopt a new manufacturing process that saves some labor costs but slows down the conversion of raw materials to finished goods from 10 days to 20 days.
E)   Change the credit terms offered to customers from 2/10 net 30 to 1/10 net 60.F) A) and C)
G) A) and D)

Question 5

Bumpas Enterprises purchases $4,562,500 in goods per year from its sole supplier on terms of 2/15, net 50. If the firm chooses to pay on time but does not take the discount, what is the effective annual percentage cost of its non-free trade credit? (Assume a 365-day year.)

Accepted Answer

A)   20.11%
B)   21.17%
C)   22.28%
D)   23.45%
E)   24.63%F) None of the above
G) C) and D)

Question 6

Accruals are "free" capital in the sense that no explicit interest must normally be paid on accrued liabilities.

Accepted Answer

A) True 
 B)False

Question 7

"Stretching" accounts payable is a widely accepted, entirely ethical, and costless financing technique.

Accepted Answer

A) True 
 B)False

Question 8

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) A) and D)
G) C) and D)

Question 9

Data on Shin Inc. for 2008 are shown below, along with the inventory conversion period (ICP)  of the firms against which it benchmarks. The firm's new CFO believes that the company could reduce its inventory enough to reduce its ICP to the benchmarks' average. If this were done, by how much would inventories decline? Use a 365-day year.

Accepted Answer

A)   $ 7,316
B)   $ 8,129
C)   $ 9,032
D)   $10,036
E)   $11,151F) A) and B)
G) A) and C)

Question 10

A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption that both cash receipts and cash payments occur uniformly over the month but in reality receipts are concentrated at the beginning of each month.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following items should a company report directly in its monthly cash budget?

Accepted Answer

A)   Its monthly depreciation expense.
B)   Cash proceeds from selling one of its divisions.
C)   Accrued interest on zero coupon bonds that it issued.
D)   New shares issued in a stock split.
E)   New shares issued in a stock dividend.F) A) and B)
G) A) and C)

Question 12

(The following data apply to Problems 136-138.) 
Zorn Corporation is deciding whether to pursue a restricted or relaxed current asset investment policy. The firm's annual sales are expected to total $3,600,000, its fixed assets turnover ratio equals 4.0, and its debt and common equity are each 50% of total assets. EBIT is $150,000, the interest rate on the firm's debt is 10%, and the tax rate is 40%. If the company follows a restricted policy, its total assets turnover will be 2.5. Under a relaxed policy its total assets turnover will be 2.2.
-What's the difference in the projected ROEs under the restricted and relaxed policies?

Accepted Answer

A)   1.20%
B)   1.50%
C)   1.80%
D)   2.16%
E)   2.59%F) B) and E)
G) D) and E)

Question 13

Kirk Development buys on terms of 2/15, net 60 days. It does not take discounts, and it typically pays on time, 60 days after the invoice date. Net purchases amount to $550,000 per year. On average, what is the dollar amount of total trade credit (costly + free)  the firm receives during the year, i.e., what are its average accounts payable? (Assume a 365-day year, and note that purchases are net of discounts.)

Accepted Answer

A)   $ 90,411
B)   $ 94,932
C)   $ 99,678
D)   $104,662
E)   $109,895F) C) and D)
G) B) and E)

Question 14

Loans from commercial banks generally appear on balance sheets as notes payable. A bank's importance is actually greater than it appears from the dollar amounts shown on balance sheets because banks provide nonspontaneous funds to firms.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements is NOT CORRECT?

Accepted Answer

A)   A company may hold a relatively large amount of cash and marketable securities if it is uncertain about its volume of sales, profits, and cash flows during the coming year.
B)   Credit policy has an impact on working capital because it influences both sales and the time before receivables are collected.
C)   The cash budget is useful to help estimate future financing needs, especially the need for short-term working capital loans.
D)   If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10 net 30 to net 60.
E)   Managing working capital is important because it influences financing decisions and the firm's profitability.F) C) and E)
G) B) and E)

Question 16

Accruals are "spontaneous," but unfortunately, due to law and economic forces, firms have little control over the level of these accounts.

Accepted Answer

A) True 
 B)False

Question 17

Whittington Inc. has the following data. What is the firm's cash conversion cycle? Inventory conversion period = 41 days
Average collection period = 31 days
Payables deferral period = 38 days

Accepted Answer

A)   31 days
B)   34 days
C)   37 days
D)   41 days
E)   45 daysF) A) and E)
G) C) and D)

Question 18

Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive current operating asset financing strategy because of the inherent risks of using short-term financing.

Accepted Answer

A) True 
 B)False

Question 19

Short-term marketable securities are held for two separate and distinct purposes: (1) to provide liquidity as a substitute for cash and (2) as a non-operating investment. Marketable securities held while awaiting reinvestment are not available for liquidity purposes.

Accepted Answer

A) True 
 B)False

Question 20

Buskirk Construction buys on terms of 2/15, net 60 days. It does not take discounts, and it typically pays on time, 60 days after the invoice date. Net purchases amount to $450,000 per year. On average, how much "free" trade credit does the firm receive during the year? (Assume a 365-day year, and note that purchases are net of discounts.)

Accepted Answer

A)   $18,493
B)   $19,418
C)   $20,389
D)   $21,408
E)   $22,479F) A) and B)
G) A) and C)

Exam 16: Working Capital Management

Because money has time value, a cash sale is always more profitable than a credit sale.

Correct Answer
verified

The twin goals of inventory management are (1) to ensure that the inventories needed to sustain operations are available, but (2) to hold the costs of ordering and carrying inventories to the lowest possible level.

Correct Answer
verified

Accruals are "free" capital in the sense that no explicit interest must normally be paid on accrued liabilities.

Correct Answer
verified

A lockbox plan is most beneficial to firms that

Correct Answer
verified

Correct Answer
verified

Short-term marketable securities are held for two separate and distinct purposes: (1) to provide liquidity as a substitute for cash and (2) as a non-operating investment. Marketable securities held while awaiting reinvestment are not available for liquidity purposes.

Correct Answer
verified

"Stretching" accounts payable is a widely accepted, entirely ethical, and costless financing technique.

Correct Answer
verified

Correct Answer
verified

Whittington Inc. has the following data. What is the firm's cash conversion cycle? Inventory conversion period = 41 days Average collection period = 31 days Payables deferral period = 38 days

Correct Answer
verified

Loans from commercial banks generally appear on balance sheets as notes payable. A bank's importance is actually greater than it appears from the dollar amounts shown on balance sheets because banks provide nonspontaneous funds to firms.

Correct Answer
verified

Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive current operating asset financing strategy because of the inherent risks of using short-term financing.

Correct Answer
verified

If a firm switched from taking trade credit discounts to paying on the net due date, this might cost the firm some money, but such a policy would probably have only a negligible effect on the income statement and no effect whatever on the balance sheet.

Correct Answer
verified

Correct Answer
verified

A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption that both cash receipts and cash payments occur uniformly over the month but in reality receipts are concentrated at the beginning of each month.

Correct Answer
verified

Correct Answer
verified

Which of the following statements is NOT CORRECT?

Correct Answer
verified

Accruals are "spontaneous," but unfortunately, due to law and economic forces, firms have little control over the level of these accounts.

Correct Answer
verified

Which of the following actions would be likely to shorten the cash conversion cycle?

Correct Answer
verified

Bumpas Enterprises purchases $4,562,500 in goods per year from its sole supplier on terms of 2/15, net 50. If the firm chooses to pay on time but does not take the discount, what is the effective annual percentage cost of its non-free trade credit? (Assume a 365-day year.)

Correct Answer
verified

Which of the following items should a company report directly in its monthly cash budget?

Correct Answer
verified

Exam 16: Working Capital Management

Because money has time value, a cash sale is always more profitable than a credit sale.

Correct AnswerverifiedShow Answer

The twin goals of inventory management are (1) to ensure that the inventories needed to sustain operations are available, but (2) to hold the costs of ordering and carrying inventories to the lowest possible level.

Correct AnswerverifiedShow Answer

Accruals are "free" capital in the sense that no explicit interest must normally be paid on accrued liabilities.

Correct AnswerverifiedShow Answer

A lockbox plan is most beneficial to firms that

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Short-term marketable securities are held for two separate and distinct purposes: (1) to provide liquidity as a substitute for cash and (2) as a non-operating investment. Marketable securities held while awaiting reinvestment are not available for liquidity purposes.

Correct AnswerverifiedShow Answer

"Stretching" accounts payable is a widely accepted, entirely ethical, and costless financing technique.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Whittington Inc. has the following data. What is the firm's cash conversion cycle? Inventory conversion period = 41 days Average collection period = 31 days Payables deferral period = 38 days

Correct AnswerverifiedShow Answer

Loans from commercial banks generally appear on balance sheets as notes payable. A bank's importance is actually greater than it appears from the dollar amounts shown on balance sheets because banks provide nonspontaneous funds to firms.

Correct AnswerverifiedShow Answer

Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive current operating asset financing strategy because of the inherent risks of using short-term financing.

Correct AnswerverifiedShow Answer

If a firm switched from taking trade credit discounts to paying on the net due date, this might cost the firm some money, but such a policy would probably have only a negligible effect on the income statement and no effect whatever on the balance sheet.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption that both cash receipts and cash payments occur uniformly over the month but in reality receipts are concentrated at the beginning of each month.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is NOT CORRECT?

Correct AnswerverifiedShow Answer

Accruals are "spontaneous," but unfortunately, due to law and economic forces, firms have little control over the level of these accounts.

Correct AnswerverifiedShow Answer

Which of the following actions would be likely to shorten the cash conversion cycle?

Correct AnswerverifiedShow Answer

Bumpas Enterprises purchases $4,562,500 in goods per year from its sole supplier on terms of 2/15, net 50. If the firm chooses to pay on time but does not take the discount, what is the effective annual percentage cost of its non-free trade credit? (Assume a 365-day year.)

Correct AnswerverifiedShow Answer

Which of the following items should a company report directly in its monthly cash budget?

Correct AnswerverifiedShow Answer

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