Question 1

Your company has been offered credit terms of 4/30,net 90 days.What will be the nominal annual percentage cost of its non-free trade credit if it pays 105 days after the purchase? (Assume a 365-day year. )

Accepted Answer

A)   20.08%
B)   15.21%
C)   20.28%
D)   23.93%
E)   20.48%F) C) and D)
G) A) and E)

Question 2

Swim Suits Unlimited is in a highly seasonal business,and the following summary balance sheet data show its assets and liabilities at peak and off-peak seasons (in thousands of dollars) : ​
 ​
 From this data we may conclude that

Accepted Answer

A)   Swim Suits' current asset financing policy calls for exactly matching asset and liability maturities.
B)   Swim Suits' current asset financing policy is relatively aggressive;that is,the company finances some of its permanent assets with short-term discretionary debt.
C)   Swim Suits follows a relatively conservative approach to current asset financing;that is,some of its short-term needs are met by permanent capital.
D)   Without income statement data,we cannot determine the aggressiveness or conservatism of the company's current asset financing policy.
E)   Without cash flow data,we cannot determine the aggressiveness or conservatism of the company's current asset financing policy.F) C) and D)
G) All of the above

Question 3

A firm buys on terms of 3/15,net 45.It does not take the discount,and it generally pays after 110 days.What is the nominal annual percentage cost of its non-free trade credit,based on a 365-day year?

Accepted Answer

A)   9.03%
B)   13.78%
C)   10.69%
D)   11.88%
E)   11.17%F) C) and D)
G) C) and E)

Question 4

If one of your firm's customers is "stretching" its accounts payable,this may be a nuisance but it does not represent a real financial cost to your firm as long as the customer periodically pays off its entire balance.

Accepted Answer

A) True 
 B)False

Question 5

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 E)
G) A) and B)

Question 6

On average,a firm collects checks totaling $250,000 per day.It takes the firm approximately 4 days from the day the checks were mailed until they result in usable cash for the firm.Assume that (1)a lockbox system could be employed which would reduce the cash conversion procedure to 2 1/2 days and (2)the firm could invest any additional cash generated at 6% after taxes.The lockbox system would be a good buy if it costs $25,000 annually.

Accepted Answer

A) True 
 B)False

Question 7

Atlanta Cement,Inc.buys on terms of 2/15,net 30.It does not take discounts,and it typically pays 55 days after the invoice date.Net purchases amount to $720,000 per year.What is the nominal annual percentage cost of its non-free trade credit,based on a 365-day year?

Accepted Answer

A)   20.11%
B)   18.62%
C)   22.91%
D)   14.34%
E)   15.27%F) B) and D)
G) C) and D)

Question 8

The maturity matching,or "self-liquidating",approach to financing involves obtaining the funds for permanent current assets with a combination of long-term capital and short-term capital that varies depending on the level of interest rates.When short-term rates are relatively high,short-term assets will be financed with long-term debt to reduce costs.

Accepted Answer

A) True 
 B)False

Question 9

The risk to the firm of borrowing using short-term credit is usually greater than if it used long-term debt.Added risk stems from (1)the greater variability of interest costs on short-term than long-term debt and (2)the fact that even if its long-term prospects are good,the firm's lenders may not be willing to renew short-term loans if the firm is temporarily unable to repay those loans.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)   A firm that makes 90% of its sales on credit and 10% for cash is growing at a constant rate of 10% annually.Such a firm will be able to keep its accounts receivable at the current level,since the 10% cash sales can be used to finance the 10% growth rate.
B)   In managing a firm's accounts receivable,it is possible to increase credit sales per day yet still keep accounts receivable fairly steady,provided the firm can shorten the length of its collection period (its DSO) sufficiently.
C)   Because of the costs of granting credit,it is not possible for credit sales to be more profitable than cash sales.
D)   Since receivables and payables both result from sales transactions,a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio.
E)   Other things held constant,if a firm can shorten its DSO,this will lead to a higher current ratio.F) C) and E)
G) A) and E)

Question 11

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 $475,000 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)   $78,082
B)   $96,822
C)   $60,904
D)   $78,863
E)   $91,356F) C) and D)
G) A) and B)

Question 12

Inmoo Company's average age of accounts receivable is 86 days,the average age of accounts payable is 40 days,and the average age of inventory is 69 days.Assuming a 365-day year,what is the length of its cash conversion cycle?

Accepted Answer

A)   116 days
B)   107 days
C)   115 days
D)   139 days
E)   124 daysF) A) and C)
G) A) and B)

Question 13

A lockbox plan is

Accepted Answer

A)   used to protect cash,i.e. ,to keep it from being stolen.
B)   used to identify inventory safety stocks.
C)   used to slow down the collection of checks our firm writes.
D)   used to speed up the collection of checks received.
E)   used primarily by firms where currency is used frequently in transactions,such as fast food restaurants,and less frequently by firms that receive payments as checks.F) None of the above
G) D) and E)

Question 14

Which of the following statements is CORRECT?

Accepted Answer

A)   Shorter-term cash budgets,in general,are used primarily for planning purposes,while longer-term budgets are used for actual cash control.
B)   The cash budget and the capital budget are developed separately,and although they are both important to the firm,one does not affect the other.
C)   Since depreciation is a non-cash charge,it neither appears on nor has any effect on the cash budget.
D)   The target cash balance should be set such that it need not be adjusted for seasonal patterns and unanticipated fluctuations in receipts,although it should be changed to reflect long-term changes in the firm's operations.
E)   The typical cash budget reflects interest paid on loans as well as income from the investment of surplus cash.These numbers,as well as other items on the cash budget,are expected values;hence,actual results might vary from the budgeted amounts.F) A) and E)
G) B) and E)

Question 15

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 E)
G) D) and E)

Question 16

Data on Shin Inc for last year 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.Do not round your intermediate calculations. ​

Accepted Answer

A)   $11,879
B)   $11,285
C)   $12,949
D)   $12,711
E)   $12,236F) B) and E)
G) C) and D)

Question 17

Which of the following statements is CORRECT?

Accepted Answer

A)   Accruals are an expensive but commonly used way to finance working capital.
B)   A conservative financing policy is one where the firm finances part of its fixed assets with short-term capital and all of its net working capital with short-term funds.
C)   If a company receives trade credit under terms of 2/10,net 30,this implies that the company has 10 days of free trade credit.
D)   One cannot tell if a firm has a conservative,aggressive,or moderate current asset financing policy without an examination of its cash budget.
E)   If a firm has a relatively aggressive current asset financing policy vis-à-vis other firms in its industry,then its current ratio will probably be relatively high.F) A) and B)
G) A) and C)

Question 18

A conservative financing approach to working capital will result in permanent current assets and some seasonal current assets being financed using long-term securities.

Accepted Answer

A) True 
 B)False

Question 19

The three alternative current asset investment policies discussed in the text differ regarding the size of current asset holdings.

Accepted Answer

A) True 
 B)False

Question 20

Not taking cash discounts is costly,and as a result,firms that do not take them are usually those that are performing poorly and have inadequate cash balances.

Accepted Answer

A) True 
 B)False

Exam 16: Working Capital Management

Correct Answer
verified

A lockbox plan is

Correct Answer
verified

Atlanta Cement,Inc.buys on terms of 2/15,net 30.It does not take discounts,and it typically pays 55 days after the invoice date.Net purchases amount to $720,000 per year.What is the nominal annual percentage cost of its non-free trade credit,based on a 365-day year?

Correct Answer
verified

A conservative financing approach to working capital will result in permanent current assets and some seasonal current assets being financed using long-term securities.

Correct Answer
verified

Correct Answer
verified

A firm buys on terms of 3/15,net 45.It does not take the discount,and it generally pays after 110 days.What is the nominal annual percentage cost of its non-free trade credit,based on a 365-day year?

Correct Answer
verified

Correct Answer
verified

Inmoo Company's average age of accounts receivable is 86 days,the average age of accounts payable is 40 days,and the average age of inventory is 69 days.Assuming a 365-day year,what is the length of its cash conversion cycle?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
verified

Not taking cash discounts is costly,and as a result,firms that do not take them are usually those that are performing poorly and have inadequate cash balances.

Correct Answer
verified

If one of your firm's customers is "stretching" its accounts payable,this may be a nuisance but it does not represent a real financial cost to your firm as long as the customer periodically pays off its entire balance.

Correct Answer
verified

Correct Answer
verified

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

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

The three alternative current asset investment policies discussed in the text differ regarding the size of current asset holdings.

Correct Answer
verified

Swim Suits Unlimited is in a highly seasonal business,and the following summary balance sheet data show its assets and liabilities at peak and off-peak seasons (in thousands of dollars) : From this data we may conclude that

Correct Answer
verified

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

Correct Answer
verified

Your company has been offered credit terms of 4/30,net 90 days.What will be the nominal annual percentage cost of its non-free trade credit if it pays 105 days after the purchase? (Assume a 365-day year. )

Correct Answer
verified

Exam 16: Working Capital Management

Correct AnswerverifiedShow Answer

A lockbox plan is

Correct AnswerverifiedShow Answer

Atlanta Cement,Inc.buys on terms of 2/15,net 30.It does not take discounts,and it typically pays 55 days after the invoice date.Net purchases amount to $720,000 per year.What is the nominal annual percentage cost of its non-free trade credit,based on a 365-day year?

Correct AnswerverifiedShow Answer

A conservative financing approach to working capital will result in permanent current assets and some seasonal current assets being financed using long-term securities.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A firm buys on terms of 3/15,net 45.It does not take the discount,and it generally pays after 110 days.What is the nominal annual percentage cost of its non-free trade credit,based on a 365-day year?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Inmoo Company's average age of accounts receivable is 86 days,the average age of accounts payable is 40 days,and the average age of inventory is 69 days.Assuming a 365-day year,what is the length of its cash conversion cycle?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Not taking cash discounts is costly,and as a result,firms that do not take them are usually those that are performing poorly and have inadequate cash balances.

Correct AnswerverifiedShow Answer

If one of your firm's customers is "stretching" its accounts payable,this may be a nuisance but it does not represent a real financial cost to your firm as long as the customer periodically pays off its entire balance.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

The three alternative current asset investment policies discussed in the text differ regarding the size of current asset holdings.

Correct AnswerverifiedShow Answer

Swim Suits Unlimited is in a highly seasonal business,and the following summary balance sheet data show its assets and liabilities at peak and off-peak seasons (in thousands of dollars) : ​ ​ From this data we may conclude that

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Your company has been offered credit terms of 4/30,net 90 days.What will be the nominal annual percentage cost of its non-free trade credit if it pays 105 days after the purchase? (Assume a 365-day year. )

Correct AnswerverifiedShow Answer

Correct Answer
verified

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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

Swim Suits Unlimited is in a highly seasonal business,and the following summary balance sheet data show its assets and liabilities at peak and off-peak seasons (in thousands of dollars) : From this data we may conclude that

Correct Answer
verified

Correct Answer
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Correct Answer
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