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Exam 15: Working Capital Management

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Question 91

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Which of the following statements is correct?

A) Other things held constant,the higher a firm's days sales outstanding (DSO) ,the better its credit department.
B) A firm will relax its credit standards only if it expects bad debts will not increase because of the change.
C) If a firm which sells on terms of "net 30" changes its policy and begins offering all customers terms of "2/10,net 30," and if no change in sales volume occurs,then the firm's DSO will probably increase.
D) If a firm sells on terms of 2/10,net 30,and its DSO is 30 days,then its aging schedule would probably show some past due accounts.
E) Statements a,b,c,and d are all false.

F) B) and D)
G) B) and E)

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Question 92

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You go to three different banks to borrow $10,000 for one year.Each says it will lend you the money at 10 percent,but their terms differ as follows: Bank A: Simple interest Bank B: Add-on interest Bank C: Discounted interest Banks A and C require a single payment at the end of the year.Bank B requires 12 equal monthly payments beginning at the end of the first month.What is the difference between the highest and lowest effective annual rate in this case?

A) 13.0%
B) 9.5%
C) 9.0%
D) 8.5%
E) 8.0%

F) A) and E)
G) C) and D)

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Question 93

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The average accounts receivables balance is determined jointly by the volume of credit sales and the days sales outstanding.

Crystal Clear Company purchases 50,000 gallons of distilled water each year.Ordering costs are $100 per order,and the carrying cost,as a percentage of inventory value,is 80 percent.The purchase price to CCC is $0.50 per gallon.Management currently orders the EOQ each time an order is placed.The supplier is now offering a quantity discount of $0.03 per gallon if CCC orders 10,000 gallons at a time.Should CCC take the discount?

Cash is often referred to as a "non-earning" asset.Thus,one goal of cash management is to minimize the amount of cash necessary to conduct business.

Other things held constant,which of the following will cause an increase in working capital?

Trade credit can be separated into two components: free trade credit,which involves credit received after the discount period ends,and costly trade credit,which is the cost of discounts not taken.

Inventory management focuses on three basic questions: (1)how many units to hold in stock, (2)how many units of each item to order,and (3)at what point to reorder.

A lockbox plan is most beneficial to firms that

Offering trade credit discounts is costly to a firm and as a result,firms that offer trade discounts are usually those that are performing poorly and need cash quickly.

If a firm's terms are 2/10,net 30 days,and its DSO is 28 days,we can be certain that the credit department is functioning efficiently and the percentage of past due accounts is minimal.

The amount of safety stocks held by a firm generally

The working capital cash flow cycle encompasses order and receipt of raw materials,conversion of raw material into inventory,and finally,conversion of inventory into sales and accounts receivable.

Net working capital is defined as current assets minus current liabilities.This also defines the current ratio.