Question 1

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  True

Question 2

An increase in any current asset must be accompanied by an equal increase in some current liability.

Accepted Answer

A) True 
 B)False  False

Question 3

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  True

Question 4

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 5

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 6

Roton Inc. purchases merchandise on terms of 2/15, net 40, and its gross purchases (i.e., purchases before taking off the discount) are $800,000 per year. What is the maximum dollar amount of costly trade credit the firm could get, assuming it abides by the supplier's credit terms? (Assume a 365-day year.)

Accepted Answer

A)  $53,699 
B)  $56,384 
C)  $59,203 
D)  $62,163 
E)  $65,271 
A)  $53,699 
B)  $56,384 
C)  $59,203 
D)  $62,163 
E)  $65,271

Question 7

Van Den Borsh Corp. has annual sales of $50,735,000, an average inventory level of $15,012,000, and average accounts receivable of $10,008,000. The firm's cost of goods sold is 85% of sales. The company makes all purchases on credit and has always paid on the 30th day. However, it now plans to take full advantage of trade credit and to pay its suppliers on the 40th day. The CFO also believes that sales can be maintained at the existing level but inventory can be lowered by $1,946,000 and accounts receivable by $1,946,000. What will be the net change in the cash conversion cycle, assuming a 365-day year?

Accepted Answer

A)  -26.6 days 
B)  -29.5 days 
C)  -32.8 days 
D)  -36.4 days 
E)  -40.5 days 
A)  -26.6 days 
B)  -29.5 days 
C)  -32.8 days 
D)  -36.4 days 
E)  -40.5 days

Question 8

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 $450,000 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.)

Accepted Answer

A)  $43,151 
B)  $45,308 
C)  $47,574 
D)  $49,952 
E)  $52,450 
A)  $43,151 
B)  $45,308 
C)  $47,574 
D)  $49,952 
E)  $52,450

Question 9

Net working capital is defined as current assets divided by current liabilities.

Accepted Answer

A) True 
 B)False

Question 10

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. 
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.

Question 11

The facts that (1) no explicit interest is paid on accruals and (2) the firm can vary the level of these accounts at will makes them an attractive source of funding to meet the firm's working capital needs.

Accepted Answer

A) True 
 B)False

Question 12

As a rule, managers should try to always use the free component of trade credit but should use the costly component only if the cost of this credit is lower than the cost of credit from other sources.

Accepted Answer

A) True 
 B)False

Question 13

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. 
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.

Question 14

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 15

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 16

Margetis Inc. carries an average inventory of $750,000. Its annual sales are $10 million, its cost of goods sold is 75% of annual sales, and its receivables collection period is twice as long as its inventory conversion period. The firm buys on terms of net 30 days, and it pays on time. Its new CFO wants to decrease the cash conversion cycle by 10 days, based on a 365-day year. He believes he can reduce the average inventory to $647,260 with no effect on sales. By how much must the firm also reduce its accounts receivable to meet its goal in the reduction of its cash conversion cycle?

Accepted Answer

A)  $123,630 
B)  $130,137 
C)  $136,986 
D)  $143,836 
E)  $151,027 
A)  $123,630 
B)  $130,137 
C)  $136,986 
D)  $143,836 
E)  $151,027

Question 17

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 18

If a firm's suppliers stop offering discounts, then its use of trade credit is more likely to increase than to decrease other things held constant.

Accepted Answer

A) True 
 B)False

Question 19

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. 
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.

Question 20

Inmoo Company's average age of accounts receivable is 45 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)  63 days 
B)  67 days 
C)  70 days 
D)  74 days 
E)  78 days 
A)  63 days 
B)  67 days 
C)  70 days 
D)  74 days 
E)  78 days

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.

An increase in any current asset must be accompanied by an equal increase in some current liability.

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.

Which of the following statements is CORRECT?

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.

Net working capital is defined as current assets divided by current liabilities.

Which of the following statements is CORRECT?

The facts that (1) no explicit interest is paid on accruals and (2) the firm can vary the level of these accounts at will makes them an attractive source of funding to meet the firm's working capital needs.

As a rule, managers should try to always use the free component of trade credit but should use the costly component only if the cost of this credit is lower than the cost of credit from other sources.

Which of the following statements is CORRECT?

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

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.

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?

If a firm's suppliers stop offering discounts, then its use of trade credit is more likely to increase than to decrease other things held constant.

Which of the following statements is NOT CORRECT?

Inmoo Company's average age of accounts receivable is 45 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?

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Exam 16: Working Capital

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.

An increase in any current asset must be accompanied by an equal increase in some current liability.

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.

Which of the following statements is CORRECT?

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.

Net working capital is defined as current assets divided by current liabilities.

Which of the following statements is CORRECT?

The facts that (1) no explicit interest is paid on accruals and (2) the firm can vary the level of these accounts at will makes them an attractive source of funding to meet the firm's working capital needs.

As a rule, managers should try to always use the free component of trade credit but should use the costly component only if the cost of this credit is lower than the cost of credit from other sources.

Which of the following statements is CORRECT?

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

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.

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?

If a firm's suppliers stop offering discounts, then its use of trade credit is more likely to increase than to decrease other things held constant.

Which of the following statements is NOT CORRECT?

Inmoo Company's average age of accounts receivable is 45 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?

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

Real Options

Capital Structure

Dividends

Forecasting

Derivatives

Multinational

Hybrid Financing

Mergers

Filters