Question 1

Other things held constant, which of the following would tend to reduce the cash conversion cycle?

Accepted Answer

A)  Carry a constant amount of receivables as sales decline. 
B)  Place larger orders for raw materials to take advantage of price breaks. 
C)  Take all discounts that are offered. 
D)  Continue to take all discounts that are offered and pay on the net date. 
E)  Offer longer payment terms to customers. 
A)  Carry a constant amount of receivables as sales decline. 
B)  Place larger orders for raw materials to take advantage of price breaks. 
C)  Take all discounts that are offered. 
D)  Continue to take all discounts that are offered and pay on the net date. 
E)  Offer longer payment terms to customers.

Question 2

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 3

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)  11.7 days 
B)  13.0 days 
C)  14.4 days 
D)  15.2 days 
E)  16.7 days 
A)  11.7 days 
B)  13.0 days 
C)  14.4 days 
D)  15.2 days 
E)  16.7 days

Question 4

Gonzales Company currently uses maximum trade credit by not taking discounts on its purchases. The standard industry credit terms offered by all its suppliers are 2/10, net 30 days, and the firm pays on time. The new CFO is considering borrowing from its bank, using short-term notes payable, and then taking discounts. The firm wants to determine the effect of this policy change on its net income. Its net purchases are $11,760 per day, using a 365-day year. The interest rate on the notes payable is 10%, and the tax rate is 40%. If the firm implements the plan, what is the expected change in net income?

Accepted Answer

A)  $32,964 
B)  $34,699 
C)  $36,526 
D)  $38,448 
E)  $40,370 
A)  $32,964 
B)  $34,699 
C)  $36,526 
D)  $38,448 
E)  $40,370

Question 5

Zarruk Construction's DSO is 50 days (on a 365-day basis), accounts receivable are $100 million, and its balance sheet shows inventory of $125 million. What is the inventory turnover ratio?

Accepted Answer

A)  4.73 
B)  5.26 
C)  5.84 
D)  6.42 
E)  7.07 
A)  4.73 
B)  5.26 
C)  5.84 
D)  6.42 
E)  7.07

Question 6

A revolving credit agreement is a formal line of credit. The firm must generally pay a fee on the unused balance of the committed funds to compensate the bank for the commitment to extend those funds.

Accepted Answer

A) True 
 B)False

Question 7

The calculated cost of trade credit for a firm that buys on terms of 2/10, net 30, is lower (other things held constant) if the firm plans to pay in 40 days than in 30 days.

Accepted Answer

A) True 
 B)False

Question 8

Other things held constant, if a firm "stretches" (i.e., delays paying) its accounts payable, this will lengthen its cash conversion cycle (CCC).

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?

Accepted Answer

A)  25 days 
B)  28 days 
C)  31 days 
D)  35 days 
E)  38 days 
A)  25 days 
B)  28 days 
C)  31 days 
D)  35 days 
E)  38 days

Question 10

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 11

The relative profitability of a firm that employs an aggressive working capital financing policy will improve if the yield curve changes from upward sloping to downward sloping.

Accepted Answer

A) True 
 B)False

Question 12

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 13

A firm buys on terms of 3/15, net 45. It does not take the discount, and it generally pays after 60 days. What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?

Accepted Answer

A)  25.09% 
B)  27.59% 
C)  30.35% 
D)  33.39% 
E)  36.73% 
A)  25.09% 
B)  27.59% 
C)  30.35% 
D)  33.39% 
E)  36.73%

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. 
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.

Question 15

Atlanta Cement, Inc. buys on terms of 2/15, net 30. It does not take discounts, and it typically pays 60 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)  10.86% 
B)  12.07% 
C)  13.41% 
D)  14.90% 
E)  16.55% 
A)  10.86% 
B)  12.07% 
C)  13.41% 
D)  14.90% 
E)  16.55%

Question 16

The longer its customers normally hold inventory, the longer the credit period supplier firms normally offer. Still, suppliers have some flexibility in the credit terms they offer. If a supplier lengthens the credit period offered, this will shorten the customer's cash conversion cycle but lengthen the supplier firm's own CCC.

Accepted Answer

A) True 
 B)False

Question 17

Dimon Products' sales are expected to be $5 million this year, with 90% on credit and 10% for cash. Sales are expected to grow at a stable, steady rate of 10% annually in the future. Dimon's accounts receivable balance will remain constant at the current level, because the 10% cash sales can be used to support the 10% growth rate, other things held constant.

Accepted Answer

A) True 
 B)False

Question 18

The calculated cost of trade credit can be reduced by paying late.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following statements is CORRECT?

Accepted Answer

A)  Other things held constant, the higher a firm's days sales outstanding (DSO), the better its credit department. 
B)  If a firm that sells on terms of net 30 changes its policy to 2/10, net 30, and if no change in sales volume occurs, then the firm's DSO will probably increase. 
C)  If a firm sells on terms of 2/10, net 30, and its DSO is 30 days, then the firm probably has some past due accounts. 
D)  If a firm sells on terms of net 60, and if its sales are highly seasonal, with a sharp peak in December, then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be lower in January than in July. 
E)  If a firm changed the credit terms offered to its customers from 2/10, net 30 to 2/10, net 60, then its sales should increase, and this should lead to an increase in sales per day, and that should lead to a decrease in the DSO. 
A)  Other things held constant, the higher a firm's days sales outstanding (DSO), the better its credit department. 
B)  If a firm that sells on terms of net 30 changes its policy to 2/10, net 30, and if no change in sales volume occurs, then the firm's DSO will probably increase. 
C)  If a firm sells on terms of 2/10, net 30, and its DSO is 30 days, then the firm probably has some past due accounts. 
D)  If a firm sells on terms of net 60, and if its sales are highly seasonal, with a sharp peak in December, then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be lower in January than in July. 
E)  If a firm changed the credit terms offered to its customers from 2/10, net 30 to 2/10, net 60, then its sales should increase, and this should lead to an increase in sales per day, and that should lead to a decrease in the DSO.

Question 20

Which of the following statements is most consistent with efficient inventory management? The firm has a

Accepted Answer

A)  below-average inventory turnover ratio. 
B)  low incidence of production schedule disruptions. 
C)  below-average total assets turnover ratio. 
D)  relatively high current ratio. 
E)  relatively low DSO. 
A)  below-average inventory turnover ratio. 
B)  low incidence of production schedule disruptions. 
C)  below-average total assets turnover ratio. 
D)  relatively high current ratio. 
E)  relatively low DSO.

Other things held constant, which of the following would tend to reduce the cash conversion cycle?

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

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?

Zarruk Construction's DSO is 50 days (on a 365-day basis), accounts receivable are $100 million, and its balance sheet shows inventory of $125 million. What is the inventory turnover ratio?

A revolving credit agreement is a formal line of credit. The firm must generally pay a fee on the unused balance of the committed funds to compensate the bank for the commitment to extend those funds.

The calculated cost of trade credit for a firm that buys on terms of 2/10, net 30, is lower (other things held constant) if the firm plans to pay in 40 days than in 30 days.

Other things held constant, if a firm "stretches" (i.e., delays paying) its accounts payable, this will lengthen its cash conversion cycle (CCC).

Dewey Corporation has the following data, in thousands. Assuming a 365-day year, what is the firm's cash conversion cycle?

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.

The relative profitability of a firm that employs an aggressive working capital financing policy will improve if the yield curve changes from upward sloping to downward sloping.

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.

A firm buys on terms of 3/15, net 45. It does not take the discount, and it generally pays after 60 days. What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?

Which of the following statements is CORRECT?

Atlanta Cement, Inc. buys on terms of 2/15, net 30. It does not take discounts, and it typically pays 60 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?

The calculated cost of trade credit can be reduced by paying late.

Which of the following statements is CORRECT?

Which of the following statements is most consistent with efficient inventory management? The firm has a

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Exam 15: Working Capital

Other things held constant, which of the following would tend to reduce the cash conversion cycle?

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

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?

Zarruk Construction's DSO is 50 days (on a 365-day basis), accounts receivable are $100 million, and its balance sheet shows inventory of $125 million. What is the inventory turnover ratio?

A revolving credit agreement is a formal line of credit. The firm must generally pay a fee on the unused balance of the committed funds to compensate the bank for the commitment to extend those funds.

The calculated cost of trade credit for a firm that buys on terms of 2/10, net 30, is lower (other things held constant) if the firm plans to pay in 40 days than in 30 days.

Other things held constant, if a firm "stretches" (i.e., delays paying) its accounts payable, this will lengthen its cash conversion cycle (CCC).

Dewey Corporation has the following data, in thousands. Assuming a 365-day year, what is the firm's cash conversion cycle?

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.

The relative profitability of a firm that employs an aggressive working capital financing policy will improve if the yield curve changes from upward sloping to downward sloping.

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.

A firm buys on terms of 3/15, net 45. It does not take the discount, and it generally pays after 60 days. What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?

Which of the following statements is CORRECT?

Atlanta Cement, Inc. buys on terms of 2/15, net 30. It does not take discounts, and it typically pays 60 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?

The calculated cost of trade credit can be reduced by paying late.

Which of the following statements is CORRECT?

Which of the following statements is most consistent with efficient inventory management? The firm has a

Overview

Financial Markets

Financial Statements

Statement Analysis

Time Value of Money

Interest Rates

Bonds

Risk and Return

Stocks

Cost of Capital

Capital Budgeting

Cash Flow and Risk

Capital Structure

Dividends

Forecasting

Multinational

Stock Equilibrium and Project Evaluation

Filters