Deck 19: Working Capital Management

Question 1

Macrae Products,a manufacturer of building products,buys raw gypsum on credit on May 16.It processes this gypsum to make dry plaster powder on May 20 and pays cash for the raw gypsum on May 30.On June 7 it sells the dry plaster powder to a chain of hardware stores,and on June 21 receives cash payment for this sale.What is the length of the cash cycle in this case?

A) 8 days
B) 14 days
C) 22 days
D) 23 days
E) 36 days

Answer 1

22 days

Question 2

Jerome Industries has a cash conversion cycle of 73 days,accounts receivable days of 43,and accounts payable days of 25.What is its inventory days?

A) 5 days
B) 55 days
C) 30 days
D) 48 days
E) 91 days

Answer 2

55 days

Question 3

Cromwell Incorporated has the information shown above on its annual Income Statement and Balance Sheet (all numbers shown are in thousands).What is Cromwell's cash conversion cycle?

A) -41.8 days
B) -36.1 days
C) 24.3 days
D) 111.6 days
E) 131.3 days

Answer 3

-41.8 days

Question 4

Gencom International has inventory days of 12,and accounts receivable days of 33.If its cash conversion cycle is 21 days,what is Gencom's accounts payable days?

A) 0 days
B) 30 days
C) 12 days
D) 66 days
E) 24 days

Question 5

Jerome Industries has inventory days of 48,accounts receivable days of 21,and accounts payable days of 30.What is its cash conversion cycle?

A) 39 days
B) 57 days
C) 69 days
D) 72 days
E) 78 days

Question 6

Genovese Fine Foods,a manufacturer of foodstuffs,buys durum wheat flour on credit on June 1.It processes this flour to make pasta on June 6 and pays cash for the flour on June 15.On June 22 it sells the pasta to a chain of supermarkets,and on July 3 receives cash payment for this sale.What is the length of the cash cycle in this case?

A) 8 days
B) 12 days
C) 18 days
D) 28 days
E) 33 days

Question 7

Which of the following is a firm's cash cycle?

A) the average length of time between when a firm originally purchases its inventory and when it receives the cash back from selling its product
B) the average length of time between when a firm pays cash to purchase its initial inventory and when it receives cash from the sale of the product produced from that inventory
C) the average length of time between when a firm pays cash to purchase its initial inventory and when it sells that product
D) the average length of time between when a firm originally purchases its inventory and when it sells the product produced from that inventory
E) the average length of time between when a firm receives cash for its current inventory and uses that cash to purchase new inventory

Question 8

Which of the following is a firm's operating cycle?

A) the average length of time between when a firm originally purchases its inventory and when it receives the cash back from selling its product
B) the average length of time between when a firm pays cash to purchase its initial inventory and when it receives cash from the sale of the product produced from that inventory
C) the average length of time between when a firm originally purchases its inventory and when it sells the product produced from that inventory
D) the average length of time between when a firm originally purchases its inventory and when it pays cash for that inventory
E) the average length of time between when a firm receives cash for its current inventory and uses that cash to purchase new inventory

Question 9

Cooper Copper,a manufacturer of copper piping,buys copper on credit on March 10.It processes this copper to make pipes on March 25 and pays cash for the copper on April 9.On April 14 it sells the pipes to a construction company,and on May 14 receives cash payment for this sale.What is the length of the operating cycle in this case?

A) 15 days
B) 20 days
C) 65 days
D) 30 days
E) 35 days

Question 10

Working capital management involves the management of all of a firm's assets and liabilities.

Question 11

Jerome Industries has inventory days of 31,accounts payable days of 28,and a cash conversion cycle of 56 days.What is its accounts receivable days?

A) 28 days
B) 25 days
C) 56 days
D) 53 days
E) 59 days

Question 12

Working capital alters a firm's value by affecting its free cash flow.

Question 13

Firms typically would prefer a positive cash conversion cycle versus a negative cash conversion cycle.

Question 14

Brilliant Balloons,a party balloon manufacturer,buys latex on credit on September 1.It processes this latex to make balloons on September 6 and pays cash for the latex on September 14.On September 19 it sells the balloons to a party supply retailer,and on October 5 receives cash payment for this sale.What is the length of the operating cycle in this case?

A) 21 days
B) 5 days
C) 18 days
D) 34 days
E) 13 days

Question 15

Cooper Copper,a manufacturer of copper piping,buys copper on credit on March 10.It processes this copper to make pipes on March 25 and pays cash for the copper on April 9.On April 14 it sells the pipes to a construction company,and on May 14 receives cash payment for this sale.What is the length of the cash cycle in this case?

A) 15 days
B) 20 days
C) 65 days
D) 30 days
E) 35 days

Question 16

Gencom International has accounts receivable days of 34,and accounts payable days of 52.If its cash conversion cycle is -7 days,what is Gencom's inventory days?

A) 79 days
B) 93 days
C) 7 days
D) 25 days
E) 11 days

Question 17

Brilliant Balloons,a party balloon manufacturer,buys latex on credit on September 1.It processes this latex to make balloons on September 6 and pays cash for the latex on September 14.On September 19 it sells the balloons to a party supply retailer,and on October 5 receives cash payment for this sale.What is the length of the cash cycle in this case?

A) 21 days
B) 34 days
C) 5 days
D) 18 days
E) 13 days

Question 18

Jerome Industries has inventory days of 15,accounts receivable days of 33,and a cash conversion cycle of 41 days.What is its accounts payable days?

A) 23 days
B) 7 days
C) 4 days
D) 33 days
E) 59 days

Question 19

Gencom International has inventory days of 33,accounts receivable days of 24,and accounts payable days of 41.What is its cash conversion cycle?

A) 17 days
B) 118 days
C) 22 days
D) 50 days
E) 16 days

Question 20

Gencom International has inventory days of 22,and accounts payable days of 37.If its cash conversion cycle is 28 days,what is Gencom's accounts receivable days?

A) 43 days
B) 31 days
C) 13 days
D) 87 days
E) 29 days

Question 21

ALT had $25 million in sales last year.Its cost of goods sold was $15 million and its average inventory balance was $3 million.The average days of inventory in the industry is 65 days.What would ALT's average inventory need to be so that it would meet the industry average?

A) $4.45 million
B) $3.65 million
C) $3.33 million
D) $2.67 million
E) $1.54 million

Question 22

Monroe Electronics' projected net income and free cash flows are given above in thousands of dollars.Monroe expects their net income and increases in net working capital to increase by 4% per year.and has a cost of capital of 8%.Monroe wishes to achieve a 5% increase in firm value.If the rest of the business remains unchanged,what reduction in working capital increases would Monroe require in order to achieve this goal?

A) $2,000
B) $4,200
C) $5,800
D) $10,000
E) $8,000

Question 23

Use the table for the question(s) below.
Luther Industries had sales of $980 million and a cost of goods sold of $560 million in 2006.
A simplified balance sheet for the firm appears below:
Luther Industries
Balance Sheet
As of December 31, 2011
(millions of dollars)

Luther's Accounts Receivable days is closest to:

A) 42 days
B) 39 days
C) 32 days
D) 59 days
E) 47 days

Question 24

What is a firm's operating cycle?

Question 25

Which of the following would decrease a firm's cash conversion cycle?

A) increase the inventory days
B) increase the accounts receivable days
C) increase the accounts payable days
D) increase the cash days
E) decrease the average daily sales

Question 26

Which of the following firms would be expected to need the most cash to conduct its daily operations?

A) a retail grocery store that sells on a cash only basis
B) an electronics manufacturer that only assemble its goods once they have been paid for
C) an airline that has many of its fares pre-paid by cash or credit card
D) an aircraft manufacturer with large inventory and long development and sales cycles
E) a clothing retailer that accepts both cash and credit payments

Question 27

What is a firm's cash cycle?

Question 28

Can a firm's cash cycle be longer than a firm's operating cycle?

Question 29

Franklin Industries has a current net working capital of $1 million.It expects that this will grow at a rate of 3% annually forever.What growth rate in working capital would the firm require in order to achieve a $2 million increase in firm value,given that it has a cost of capital of 7%?

A) 2%
B) 2.7%
C) 3.3%
D) 1.4%
E) 4%

Question 30

The cash conversion cycle (CCC)is defined as

A) Inventory Days + Accounts Receivable Days - Accounts Payable Days.
B) Inventory Days - Accounts Receivable Days - Accounts Payable Days.
C) Inventory Days + Accounts Receivable Days + Accounts Payable Days.
D) Inventory Days + Accounts Payable Days - Accounts Receivable Days.
E) Inventory Days - Accounts Receivable Days + Accounts Payable Days.

Question 31

Vega Music's projected net income and free cash flows are given above in thousands of dollars.Vega expects their net income and increases in net working capital to increase by 5% per year.If Vega were able to reduce its annual increase in working capital by 10% without affecting any other part of the business adversely,what would be the effect of this reduction on Vega's value,given a cost of capital of 13%?

A) an increase of $500,000
B) an increase of $1,370,000
C) an increase of $2,500,000
D) an increase of $3,800,000
E) an increase of $350,000

Question 32

Use the table for the question(s) below.
Luther Industries had sales of $980 million and a cost of goods sold of $560 million in 2006.
A simplified balance sheet for the firm appears below:
Luther Industries
Balance Sheet
As of December 31, 2011
(millions of dollars)

Luther's Accounts Payable days is closest to:

A) 39 days
B) 32 days
C) 59 days
D) 42 days
E) 47 days

Question 33

Franklin Industries has a current net working capital of $2.5 million.It expects that this will grow at a rate of 3.5% annually forever.If it could slow that growth to 3% per year,how would that affect the value of the firm,given that it has a cost of capital of 11%?

A) a decrease of $2.22 million
B) an increase of $12,500
C) an increase of $0.78 million
D) an increase of $2.08 million
E) an increase of $3.14 million

Question 34

Which of the following would increase a firm's cash conversion cycle?

A) increase inventory days
B) decrease accounts receivable days
C) decrease accounts payable days
D) increase cash days
E) increase average daily sales

Question 35

The difference between a firm's operating cycle and its cash cycle is

A) its account receivable days.
B) its accounts payable days.
C) its inventory days.
D) how inventory is calculated.
E) how sales are calculated.

Question 36

ALT had $25 million in sales last year.Its cost of goods sold was $15 million and its average inventory balance was $3 million.What was its average days of inventory?

A) 43.8 days
B) 36.5 days
C) 73.0 days
D) 9.1 days
E) 23.7 days

Question 37

Monroe Electronics' projected net income and free cash flows are given above in thousands of dollars.Monroe expects their net income and increases in net working capital to increase by 6% per year.If Monroe were able to reduce its annual increase in working capital by 15% without affecting any other part of the business adversely,what would be the effect of this reduction on Monroe's value,given a cost of capital of 11%?

A) an increase of $3000
B) an increase of $8000
C) an increase of $12,000
D) an increase of $24,000
E) an increase of $258,000

Question 38

Use the table for the question(s) below.
Luther Industries had sales of $980 million and a cost of goods sold of $560 million in 2006.
A simplified balance sheet for the firm appears below:
Luther Industries
Balance Sheet
As of December 31, 2011
(millions of dollars)

Luther's Inventory days is closest to:

A) 32 days
B) 59 days
C) 39 days
D) 42 days
E) 47 days

Question 39

Use the table for the question(s) below.
Luther Industries had sales of $980 million and a cost of goods sold of $560 million in 2006.
A simplified balance sheet for the firm appears below:
Luther Industries
Balance Sheet
As of December 31, 2011
(millions of dollars)

Luther's cash conversion cycle is closest to:

A) 51 days
B) 66 days
C) 71 days
D) 129 days
E) 89 days

Question 40

Lionheart Inc.has the information shown above on its annual Income Statement and Balance Sheet (all numbers shown are in thousands).What is Lionheart's cash conversion cycle?

A) 8.3 days
B) 24.4 days
C) -28.0 days
D) -7.7 days
E) 20.1 days

Question 41

Collection float is the amount of time it takes for a firm to be able to use funds after a customer has paid for its goods.

Question 42

A firm offers its customers 2/14 net 28.What is the cost of trade credit to a customer who chooses to pay on day 28?

A) 32.8%
B) 67.3%
C) 69.3%
D) 72.4%
E) 76.1%

Question 43

Your firm purchases goods from its supplier with a discount of 1%,and a discount period of 15 days.If the effective annual cost of forgoing the discount is 15.8%,what is the length of the credit period?

A) 10 days
B) 20 days
C) 30 days
D) 40 days
E) 50 days

Question 44

Your firm purchases goods from its supplier with a discount of 2%,and a credit period of 30 days.If the effective annual cost of forgoing the discount is 63.49%,what is the length of the discount period?

A) 15 days
B) 25 days
C) 35 days
D) 40 days
E) 50 days

Question 45

A firm offers its customers 1/10 net 40.What is the cost of trade credit to a customer who chooses to pay on day 40?

A) 12.8%
B) 13.0%
C) 65.5%
D) 96.0%
E) 83.1%

Question 46

Which of the following best describes the collection float?

A) how long it takes the firm to receive the cheque after the customer has mailed it
B) how long it takes the firm to process the cheque and deposit it in the bank
C) how long it takes before the bank gives the firm credit for the funds
D) how long it takes for a firm to be able to use funds after a customer has paid for its goods
E) how long it takes before payments to suppliers actually result in cash outflow for the firm

Question 47

Your firm purchases $100,000 worth of goods from its supplier on terms of 2/20 net 60.How much more does your firm pay if it chooses not to take advantage of the trade discount?

A) $100,000
B) $10,000
C) $2,000
D) $40,000
E) $20,000

Question 48

Which of the following best describes the availability float?

A) how long it takes the firm to process the cheque and deposit it in the bank
B) how long it takes before the bank gives the firm credit for the funds
C) how long it takes before payments to suppliers actually result in a cash outflow for the firm
D) how long it takes for a firm to be able to use funds after a customer has paid for its goods
E) how long it takes before payments to suppliers actually result in cash outflow for the firm

Question 49

Your firm purchases goods from its supplier with a discount period of 10 days,and a credit period of 30 days.If the effective annual cost of forgoing the discount is 44.59%,what is the amount of the discount?

A) 1%
B) 2%
C) 1.5%
D) 2.5%
E) 3%

Question 50

Trade credit should always be used when it is offered.

Question 51

Your firm purchases goods from its supplier on terms of 1/10 net 30.The effective annual cost to your firm if it chooses not to take advantage of the trade discount offered is closest to:

A) 16.8%
B) 44.6%
C) 20.1%
D) 13.0%
E) 11.4%

Question 52

What is the meaning of the term 2/10 net 30?

A) If the invoice is paid within 10 days a 2% discount can be taken. If the invoice is paid between 11 and 29 days a 1% discount can be taken. After 30 days the full invoice is due.
B) If the invoice is paid within 2 days a 10% discount can be taken, otherwise the full invoice is due in 30 days.
C) If the invoice is paid within 2 days a 10% discount can be taken, otherwise a 2% discount can be taken if the invoice is paid in 30 days.
D) If the invoice is paid within 10 days a 2% discount can be taken, otherwise the full invoice is due in 30 days.
E) If the invoice is paid within 2 days a 30% discount can be taken, otherwise the full invoice is due in 10 days.

Question 53

A firm offers its customers 1/7 net 21.What is the cost of trade credit to a customer who chooses to pay on day 21?

A) 7%
B) 19%
C) 21%
D) 30%
E) 69%

Question 54

Your firm purchases goods from its supplier with a discount period of 10 days,and a credit period of 40 days.If the effective annual cost of forgoing the discount is 13%,what is the amount of the discount?

A) 1%
B) 2%
C) 1.5%
D) 2.5%
E) 3%

Question 55

Your firm purchases goods from its supplier with a discount of 1%,and a credit period of 20 days.If the effective annual cost of forgoing the discount is 27.71%,what is the length of the discount period?

A) 25 days
B) 20 days
C) 15 days
D) 10 days
E) 5 days

Question 56

A firm offers its customers 3/5 net 25.What is the cost of trade credit to a customer who chooses to pay on day 25?

A) 32.3%
B) 65.5%
C) 68.4%
D) 74.3%
E) 59.4%

Question 57

What is meant by the term 1.5/14 net 30?

A) If the invoice is paid within 14 days a discount of 1.5 percent can be taken, otherwise the invoice is due in 30 days.
B) If the invoice is paid within 30 days a discount of 14 percent can be taken, otherwise the invoice is due 14 days after that days.
C) If the invoice is paid within 1.5 days a discount of 14 percent can be taken, otherwise the invoice is due in 30 days.
D) If the invoice is paid right away, a discount of 14 percent can be taken, otherwise a discount of 1.5 percent can be taken if paid within the next 30 days.
E) If the invoice is paid 1.5 days a discount of 30 percent can be taken, otherwise the invoice is due in 14 days.

Question 58

Your firm purchases goods from its supplier with a discount of 2%,and a discount period of 10 days.If the effective annual cost of forgoing the discount is 44.59%,what is the length of the credit period?

A) 10 days
B) 20 days
C) 30 days
D) 40 days
E) 50 days

Question 59

Your firm purchases goods from its supplier on terms of 2/20 net 60.The effective annual cost to your firm if it chooses not to take advantage of the trade discount offered is closest to:

A) 33.17%
B) 27.65%
C) 13.08%
D) 44.58%
E) 20.24%

Question 60

What is trade credit?

A) the credit that a firm is extends to its customers
B) the amount a firm is owed by its customers who have received goods and services but have not yet paid for them
C) the percentage discount offered to a customer who opts to pay their account early
D) the amount that a firm owes its suppliers for goods which it has received but for which it has not yet paid
E) an arrangement where two companies make payments on each other's loans

Question 61

A firm's credit terms specify "1/10 net 30" and the accounts receivable days outstanding is 32 days.Which of the following can be concluded on the basis of this information?

A) Most customers pay on time.
B) The average customer pays two days late.
C) All customers have paid within 32 days of purchase.
D) All customers pay late.
E) No customers have paid within 32 days of purchase.

Question 62

What should a firm do after establishing a credit policy?

A) Decide what should be done for those customers who do not pay their accounts on time.
B) Monitor its accounts receivable to analyze whether its credit policy is effective.
C) Decide on the length of the period before payment must be made.
D) Determine what percent of monthly sales are collected in the month after that sale.
E) Encourage as many customers as possible to use credit.

Question 63

A firm has the accounts on its books shown above.What percentage of debt has been outstanding for over 60 days?

A) 28%
B) 30%
C) 34%
D) 42%
E) 54%

Question 64

A firm had sales of $8 million,and,on average,takes 33 days to collect on its sales.What is the average daily amount of the firm's accounts receivable?

A) $1.1 million
B) $0.2 million
C) $1.4 million
D) $0.7 million
E) $0.4 million

Question 65

A firm that chooses a low-risk,restrictive credit policy will tend to have a larger investment in receivables.

Question 66

What is the cash discount?

Question 67

The three steps in establishing a credit policy are establishing credit standards,establishing credit terms,and establishing a collection policy.

Question 68

The categorization of a firm's accounts by the number of days they have been on the firm's books is called a(n)

A) payments pattern.
B) accounts receivable days calendar.
C) aging schedule.
D) payments record.
E) order book.

Question 69

A firm has average accounts receivable of $2 million,and,on average,takes 39 days to collect on its sales.What is the total amount of the firm's sales?

A) $2 million
B) $4.7 million
C) $18.7 million
D) $78 million
E) $19.5 million

Question 70

A firm has average accounts receivable of $85,000,and,on average,takes 50 days to collect on its sales.What is the total amount of the firm's sales?

A) $98,500
B) $620,500
C) $26.8 million
D) $78 million
E) $31 million

Question 71

What is the credit period?

Question 72

A firm had sales of $32 million,and,on average,takes 41 days to collect on its sales.What is the average daily amount of the firm's accounts receivable?

A) $3.6 million
B) $0.8 million
C) $2.4 million
D) $16 million
E) $1.6 million

Question 73

ABX corporation had sales of $47.6 million this year and an average accounts receivable of $6.3 million per day.Its credit terms specify "1/10 net 30." On average,how long does it take to collect on its sales?

A) 7.56 days
B) 12.17 days
C) 18.25 days
D) 21.49 days
E) 48.31 days

Question 74

Jen Industries had sales of $32 million this year and an average accounts receivable of $0.8 million per day.On average,how long does it take to collect on its sales?

A) 9 days
B) 11 days
C) 12 days
D) 19 days
E) 40 days

Question 75

What is the discount period?

Question 76

A firm currently sells its product with a 2% discount to customers who pay by cash or credit card when they purchase one of the firm's products; otherwise,the full price is due within 30 days.Forty percent of customers take advantage of the discount.The firm plans to drop the discount so the new terms will simply be net 30.In doing so it expects to sell 100 fewer units per month and all customers to pay at day 30.The firm currently sells 1000 units per month at a cost per unit of $45 and a selling price per unit of $80.If the firm's required return is 2%,what is the net present value (NPV)of making this change?

A) -$169,860
B) -$122,420
C) $64,490
D) $172,320
E) $184,730

Question 77

Which of the following are the "5 Cs of Credit"?

A) Character, Capacity, Compensation, Collateral, Conditions
B) Character, Cash, Credit, Collateral, Collectability
C) Character, Capacity, Capital, Collateral, Conditions
D) Cash, Capacity, Capital, Compensation, Collectability
E) Cash, Capacity, Capital, Collateral, Collectability

Question 78

SwenCorp had sales of $154 million this year and an average accounts receivable of $18 million per day.Its credit terms specify "2/14 net 40." On average,how long does it take to collect on its sales?

A) 8.5 days
B) 13 days
C) 28 days
D) 43 days
E) 40 days

Question 79

Commercial Supply Corp.bills its accounts on terms of 2/10 net 30.The firm's accounts receivable include $200,000 that has been outstanding for ten or fewer days,$126,000 outstanding for 11 to 30 days,$98,000 outstanding for 31 to 40 days,$12,000 outstanding for 41 to 50 days,$20,000 outstanding for 51 to 60 days,and $7000 outstanding for more than 60 days.Is the aging schedule for Commercial Supply Corp.bottom heavy?

A) No, since 70% of the outstanding sales are on time and the percentage of long-term outstanding payments are low.
B) Yes, since the percentage of payments that are late is greater than the percentage of payments that are on time.
C) No, since since the percentage of payments that are late are greater than the percentage of payments that are on time.
D) Yes, since the percentage of payments that are on time are greater than the percentage of payments that are late.
E) No, since the percentage of payments that are on time is equal to the percentage of payments that are late.

Question 80

What is the collection float?