Deck 13: Working Capital Management

Question 1

Perfect Purchase Electronics Selected Income Statement Items, 2009
Cash Sales $1,500,000
Credit Sales $7,500,000
Total Sales $9,000,000
COGS $6,000,000
Perfect Purchase Electronics
Selected Balance Sheet Accounts
12/31/2009 12/31/2008 Change
Accounts Receivable $270,000 $240,000 $30,000
Inventory $125,000 $100,000 $25,000
Accounts Payable $110,000 $90,000 $20,000
Using the information provided, what is the accounts payable cycle for the firm?

A) 4.06 days
B) 4.87 days
C) 6.08 days
D) 24.33 days

Answer 1

C

Question 2

The ________ is the period from the start of cash outflow for producing a product or service until the associated cash inflow materializes from the sale of that product or service.

A) cash conversion cycle
B) accounts receivable cycle
C) current ratio
D) business operating cycle

Answer 2

A

Question 3

The cash conversion cycle consists of three parts. List and define these three parts. How do they fit together to form the cash conversion cycle? You may answer this last question with a formula if you wish.

Answer 3

The three parts of the cash conversion cycle are the production cycle, the collection cycle, and the payment cycle. The production cycle is the period of time from when the firm first starts to make the product until the customer buys it. The collection cycle runs from the sale of the product until payment is received, and the payment cycle begins when the firm purchases necessary raw materials and ends when payment is made. The cash conversion cycle consists of the production cycle plus the collection cycle minus the payment cycle.

Question 4

The time between when a raw material is ordered and received and when it is paid for is called the cash conversion cycle.

Question 5

The cash conversion cycle is comprised of the production cycle minus the collection cycle plus the payment cycle.

Question 6

Perfect Purchase Electronics Selected Income Statement Items, 2009
Cash Sales $1,500,000
Credit Sales $7,500,000
Total Sales $9,000,000
COGS $6,000,000
Perfect Purchase Electronics
Selected Balance Sheet Accounts
12/31/2009 12/31/2008 Change
Accounts Receivable $270,000 $240,000 $30,000
Inventory $125,000 $100,000 $25,000
Accounts Payable $110,000 $90,000 $20,000
Using the information provided, what is the accounts receivable turnover for the firm?

A) 23.53 times
B) 29.41 times
C) 53.33 times
D) 60.00 times

Question 7

Perfect Purchase Electronics Selected Income Statement Items, 2009
Cash Sales $1,500,000
Credit Sales $7,500,000
Total Sales $9,000,000
COGS $6,000,000
Perfect Purchase Electronics
Selected Balance Sheet Accounts
12/31/2009 12/31/2008 Change
Accounts Receivable $270,000 $240,000 $30,000
Inventory $125,000 $100,000 $25,000
Accounts Payable $110,000 $90,000 $20,000
Using the information provided, what is the length of the production cycle for the firm?

A) 6.08 days
B) 7.60 days
C) 53.33 days
D) 6.84 days

Question 8

Managing the relationship between current assets and current liabilities of the firm in order to improve the flow of funds is called ________.

A) the business operating cycle
B) the cash conversion cycle
C) working capital management
D) the production cycle

Question 9

Perfect Purchase Electronics Selected Income Statement Items, 2009
Cash Sales $1,500,000
Credit Sales $7,500,000
Total Sales $9,000,000
COGS $6,000,000
Perfect Purchase Electronics
Selected Balance Sheet Accounts
12/31/2009 12/31/2008 Change
Accounts Receivable $270,000 $240,000 $30,000
Inventory $125,000 $100,000 $25,000
Accounts Payable $110,000 $90,000 $20,000
Using the information provided, what is the collection cycle for the firm?

A) 6.84 days
B) 7.60 days
C) 10.34 days
D) 12.41 days

Question 10

The ________ starts at the time production begins and ends with the collection of cash from the sale of the product.

A) accounts receivable cycle
B) business operating cycle
C) cash conversion cycle
D) production cycle

Question 11

The ________ begins at the time a firm first starts to make a product and lasts until the time the customer buys the product.

A) business operating cycle
B) accounts receivable cycle
C) cash conversion cycle
D) production cycle

Question 12

Managing these assets and liabilities in such a way as to improve the company's flow of funds is what capital budgeting is all about.

Question 13

Using the information provided, what is the inventory turnover for the firm? Perfect Purchase Electronics
Selected Income Statement Items, 2009
Cash Sales $1,500,000
Credit Sales $7,500,000
Total Sales $9,000,000
COGS $6,000,000
Perfect Purchase Electronics
Selected Balance Sheet Accounts
12/31/2009 12/31/2008 Change
Accounts Receivable $270,000 $240,000 $30,000
Inventory $125,000 $100,000 $25,000
Accounts Payable $110,000 $90,000 $20,000

A) 23.53 times
B) 53.33 times
C) 48.00 times
D) 60.00 times

Question 14

Jolly Roger Kite Company has a payment cycle of 17 days, a collection cycle of 31 days, and a production cycle of 12 days. What is the average cash conversion cycle for the Jolly Roger Company?

A) 2 days
B) 36 days
C) 26 days
D) 60 days

Question 15

Which of the following is NOT true of the cash conversion cycle?

A) It is the net period from the start of cash outflow for producing a product or service until the associated cash inflow materializes from the sale of that product or service.
B) Cash Conversion Cycle = Production Cycle + Collection Cycle - Payment Cycle
C) Cash Conversion Cycle = Production Cycle + Collection Cycle + Payment Cycle
D) The cash conversion cycle essentially measures how quickly a company can convert its products or services into cash.

Question 16

The cash conversion cycle is the net period from the start of cash outflow for producing a product or service until the associated cash inflow materializes from the sale of that product or service.

Question 17

The business operating cycle has two components: the production cycle and the collection cycle.

Question 18

To determine the average cash conversion cycle, we must first compute the average production cycle, the average collection cycle, and the average payment cycle.

Question 19

The production cycle ________.

A) is the period from the start of cash outflow for producing a product or service until the associated cash inflow materializes from the sale of that product or service
B) begins at the time a firm first starts to make a product and lasts until the time the customer buys the product
C) starts when production begins and ends with the collection of cash from the sale of the product
D) starts when the customer takes delivery of the product and ends when the firm receives payment for the product

Question 20

Perfect Purchase Electronics Selected Income Statement Items, 2009
Cash Sales $1,500,000
Credit Sales $7,500,000
Total Sales $9,000,000
COGS $6,000,000
Perfect Purchase Electronics
Selected Balance Sheet Accounts
12/31/2009 12/31/2008 Change
Accounts Receivable $270,000 $240,000 $30,000
Inventory $125,000 $100,000 $25,000
Accounts Payable $110,000 $90,000 $20,000
Using the information provided, what is the accounts payable turnover for the firm?

A) 15 times
B) 60 times
C) 75 times
D) 90 times

Question 21

Travel and Tow Trailers Inc. makes small trailers for light-duty towing behind SUVs and small pickup trucks. Its trailers typically sell for $2,500. Many of its customers have asked for credit terms to aid in purchasing the trailers. The firm's finance department has estimated the following profile for it light-duty trailers and customer base: Annual sales: 10,000 trailers
Annual production costs per trailer: $1,500
Lost sales if credit is not provided for customers: 2,000 trailers
Default rate if all customers purchase on credit: 3.00%
What is the profit margin if the firm has a cash-only policy?

A) $9,250,000
B) $25,000,000
C) $8,000,000
D) $15,000,000

Question 22

Eagle Paints
Selected Income Statement Items, 2008
Cash Sales $2,500,000
Credit Sales $9,500,000
Total Sales $12,000,000
COGS $7,000,000
Eagle Paints
Selected Balance Sheet Accounts
12/31/2008 12/31/07 Change
Accounts Receivable $550,000 $400,000 $150,000
Inventory $275,000 $250,000 $25,000
Accounts Payable $150,000 $110,000 $40,000
Using the information provided, what is the inventory turnover for Eagle Paints? What is the average production cycle for the firm? What is the average collection cycle? What could Eagle Paints do to reduce the average collection cycle?

Question 23

Travel and Tow Trailers Inc. makes small trailers for light-duty towing behind SUVs and small pickup trucks. Its trailers typically sell for $2,500. Many of its customers have asked for credit terms to aid in purchasing the trailers. The firm's finance department has estimated the following profile for its light-duty trailers and customer base: Annual sales: 10,000 trailers
Annual production costs per trailer: $1,500
Lost sales if credit is not provided for customers: 2,000 trailers
Default rate if all customers purchase on credit: 3.00%
What is the dollar value of bad debts the firm expects to accumulate over a year? Given this amount, what is the maximum average amount per customer that the firm should spend on credit screening?

A) $450,000; $45.00
B) $450,000; $56.25
C) $4,500,000; $450.00
D) $4,500,000; $$562.50

Question 24

Hansen Photography has the following outstanding account receivables at the end the month. Calculate the number of days late for each outstanding invoice.

A) 71 days, 61 days, and 16 days
B) 76 days, 66 days, and 48 days
C) 75 days, 65 days, and 48 days
D) 77 days, 67 days, and 49 days

Question 25

BarnBurner Music, a music publishing firm located in Tennessee, bills its clients on the first of the month. For example, any sale made in the month of July is billed August 1 and is due September 1. Clients traditionally pay as follows: 50% at the end of the first month, 40% at the end of the second month, 8% at the end of the third month, and 2% default on their bills. What is the dollar value of January billings collected in April?

A) $7,040
B) $29,600
C) $5,920
D) $0.00

Question 26

Travel and Tow Trailers Inc. makes small trailers for light-duty towing behind SUVs and small pickup trucks. Its trailers typically sell for $2,500. Many of its customers have asked for credit terms to aid in purchasing the trailers. The firm's finance department has estimated the following profile for its light-duty trailers and customer base: Annual sales: 10,000 trailers
Annual production costs per trailer: $1,500
Lost sales if credit is not provided for customers: 2,000 trailers
Default rate if all customers purchase on credit: 3.00%
What is the dollar value of bad debts the firm expects to accumulate over a year?

A) $9,250,000
B) $4,500,000
C) $8,000,000
D) $450,000

Question 27

Estimating ________ is one part of managing short-term cash needs. The second part is estimating ________.

A) cash inflow, accounts payable
B) cash inflow, cash outflow
C) accounts receivable, cash outflow
D) accounts receivable, cash inflow

Question 28

Oregon Saw Mills Inc. has credit terms of 2/10 net 60. Customers should take the discount and pay in 10 days if they CANNOT earn more than ________ (APR) or ________ (EAR) on their investments.

A) 14.90% APR or 15.89% EAR
B) 15.89% APR or 14.90% EAR
C) 12.42% APR or 13.08% EAR
D) 13.08% APR or 12.42% EAR

Question 29

TexasLight Fruit Company has credit terms of 2/15 net 45. Customers should take the discount and pay in 15 days if they CANNOT earn more than ________ (EAR) on their investments.

A) 17.81%
B) 27.86%
C) 24.83%
D) 16.55%

Question 30

BarnBurner Music, a music publishing firm located in Tennessee, bills its clients on the first of the month. For example, any sale made in the month of July is billed August 1 and is due September 1. Clients traditionally pay as follows: 50% at the end of the first month, 40% at the end of the second month, 8% at the end of the third month, and 2% default on their bills. If accounts receivable are collected as anticipated, what is the last month in which January billings will be collected?

A) March
B) April
C) May
D) June

Question 31

________ is the collective term used to describe a firm's decisions as to how customers will qualify for credit, what payment plan is allowed to creditors, and how overdue bills will be collected.

A) Credit history
B) Credit policy
C) Collection policy
D) Payment policy

Question 32

Travel and Tow Trailers Inc. makes small trailers for light-duty towing behind SUVs and small pickup trucks. Its trailers typically sell for $2,500. Many of its customers have asked for credit terms to aid in purchasing the trailers. The firm's finance department has estimated the following profile for its light-duty trailers and customer base: Annual sales: 10,000 trailers
Annual production costs per trailer: $1,500
Lost sales if credit is not provided for customers: 2,000 trailers
Default rate if all customers purchase on credit: 3.00%
What is the profit if the firm has a credit policy?

A) $25,000,000
B) $9,250,000
C) $450,000
D) $8,000,000

Question 33

Hansen Photography has the following outstanding account receivables at the end of the month. The monthly late fee is 1.50% of the outstanding balance at the end of the billing month following the sale (February sales receive a late fee in April if not paid by March 31). Determine the total late fees due for the following.

A) $19.85
B) $31.08
C) $48.17
D) $0.00

Question 34

BarnBurner Music, a music publishing firm located in Tennessee, bills its clients on the first of the month. For example, any sale made in the month of July is billed August 1 and is due September 1. Clients traditionally pay as follows: 50% at the end of the first month, 40% at the end of the second month, 8% at the end of the third month, and 2% default on their bills. The firm's CEO wants to know the anticipated cash flow for April. Use the following information to estimate April cash flows.

A) $96,000
B) $77,600
C) $84,640
D) $99,000

Question 35

When a company deals only in cash, the cash conversion cycle becomes ________.

A) the collection cycle
B) the payable cycle
C) the production cycle
D) the collection cycle - the payable cycle

Question 36

Travel and Tow Trailers Inc. makes small trailers for light-duty towing behind SUVs and small pickup trucks. Its trailers typically sell for $2,500. Many of its customers have asked for credit terms to aid in purchasing the trailers. The firm's finance department has estimated the following profile for its light-duty trailers and customer base: Annual sales: 10,000 trailers
Annual production costs per trailer: $1,500
Lost sales if credit is not provided for customers: 2,000 trailers
Default rate if all customers purchase on credit: 3.00%
What is the change in the profit margin if the firm moves from a cash-only policy to a credit policy?

A) $1,250,000
B) $8,000,000
C) $9,250,000
D) $15,000,000

Question 37

Extending credit to a customer has three major components:

A) a policy on how customers will qualify for credit, a policy on the payment plan allowed creditors, and a policy for collecting overdue bills.
B) a policy on how customers will qualify for credit, a policy on paying commissions on sales, and a policy for collecting overdue bills.
C) a policy on how customers will qualify for credit, a policy on the payment plan allowed creditors, and a policy on accounting for depreciation.
D) a policy on how customers will qualify for credit, a policy on accounting for depreciation, and a policy on paying commissions on sales.

Question 38

BarnBurner Music, a music publishing firm located in Tennessee, bills its clients on the first of the month. For example, any sale made in the month of July is billed August 1 and is due September 1. Clients traditionally pay as follows: 50% at the end of the first month, 40% at the end of the second month, 8% at the end of the third month, and 2% default on their bills. What is the total dollar value of first-quarter actual billings that will NOT be collected?

A) $12,900
B) $1,760
C) $5,160
D) $3,460

Question 39

Peach Sign Company of Atlanta, Georgia, has credit terms of 1/10 net 30. Customers should take the discount and pay in 10 days if they CANNOT earn more than ________ (APR) on their investments.

A) 13.01%
B) 20.13%
C) 18.43%
D) 12.29%

Question 40

Which of the following is a consideration when a company decides which customers should receive credit?

A) The amount of potential business from the customer
B) The credit policies of competing firms
C) The results of credit screening
D) All are considerations that the company takes into account.

Question 41

To shorten the financing period of the collection cycle a firm can speed up receivables and speed up payments.

Question 42

In order to shorten the financing period of the cash conversion cycle, a manager can speed up the collection period or slow down the payable cycle.

Question 43

When a company deals only in cash transactions (from its customers and to its creditors), the cash conversion cycle is only the production cycle.

Question 44

Which of the following does NOT reduce the length of time of collection float for a firm?

A) Electronic fund transfers (ETF)
B) Lockboxes
C) Direct payment via on line checking
D) All of the above reduce the length of time of collection float for a firm.

Question 45

The company offering a discount on accounts payable is trying to ________ and the firm that pays on time rather than take a discount is attempting to ________.

A) Speed up cash outflow; slow down cash inflow
B) Speed up cash inflow; slow down cash inflow
C) Speed up cash inflow; slow down cash outflow
D) Speed up cash outflow; slow down cash outflow

Question 46

Which of the following does NOT reduce the length of time of collection float for a firm?

A) Direct payment via on line checking
B) The firm paying suppliers with a credit card
C) Lockboxes
D) Electronic fund transfers (ETF)

Question 47

Swale Circuit Boards, located in Montana, has credit terms of 1/15 net 45. What is the implied APR and EAR of the firm's credit policy? What if the firm extends the discount to 30 days and the full payment to 60 days?

Question 48

A company's future cash inflow from the sale of its products or services are called accounts payable.

Question 49

When collecting bad debts, a likely order of effort to collect would be to write a letter, followed by court action, followed by a collection agency.

Question 50

In terms of the float, the buyer of a product wants to ________ and the seller wants to ________.

A) increase the collection float; decrease the disbursement float
B) decrease the disbursement float; decrease the collection float
C) decrease the collection float; decrease the disbursement float
D) increase the disbursement float; decrease the collection float

Question 51

For positive interest rates, the EAR is greater than the APR when there are multiple compounding periods within the year.

Question 52

When managing accounts receivable, a management goal is to slow down the receipt of future cash flows.

Question 53

From the view point of the payee, the delay between when a check is written and when the money actually leaves the account is called collection float.

Question 54

Labowski's Long Boards Inc. makes high-quality skateboards for recreational use. It wholesales its boards in groups of 10 for a package price of $1,500. Many of its customers have asked for credit terms to aid in purchasing the boards. The firm's finance department has estimated the following profile for its long boards and customer base:
Annual sales: 10,000 long board packages
Annual production costs per board package: $1,000
Lost sales if credit is not provided for customers: 1,200 long board packages
Default rate if all customers purchase on credit: 4.00%
What is the profit margin if the firm has a credit policy? What is the change in the profit margin if the firm moves from a cash-only policy to a credit policy? What is the dollar value of bad debts the firm expects to accumulate over a year? Given the bad-debt dollar amount, what is the maximum average amount per customer that the firm should spend on credit screening?

Question 55

Float, from the buyer's perspective, is called ________ float and from the seller's perspective, is called ________ float.

A) financing; crediting
B) disbursement; collection
C) crediting; financing
D) collection; disbursement

Question 56

When a business customer buys on credit from another business, the seller of the product will often offer an extended payment period for the product or service, but with an incentive to delay payment of the bill in an effort to earn a finance charge.

Question 57

Which of the following choices lists the least to most aggressive actions in the pursuit of overdue debt?

A) 1) a collection agency, 2) court action, 3) a letter requesting overdue payment
B) 1) court action, 2) a collection agency, 3) a letter requesting overdue payment
C) 1) a letter requesting overdue payment, 2) court action, 3) a collection agency
D) 1) a letter requesting overdue payment, 2) a collection agency, 3) court action

Question 58

The time delay between when a check is written and when funds are available to the payee is called the float.

Question 59

An important objective of cash management is to ________ the disbursement float and ________ the collection float.

A) lengthen; reduce
B) lengthen; lengthen
C) reduce; reduce
D) reduce; lengthen

Question 60

We call the process to identify good customers from bad customers credit screening.

Question 61

The optimal order quantity as determined by the EOQ occurs when ________.

A) ordering costs equal carrying costs
B) ordering costs are exactly 1/2 of carrying costs
C) ordering costs are exactly twice as much as carrying costs
D) None of the answers provided are accurate

Question 62

What is a lockbox system for collecting accounts receivable, and how can it reduce a firm's collection float?

Question 63

A ________ inventory item is an item that is not used in current operations but is serving a back-up role in case the current item fails during operation.

A) type C
B) redundant
C) reticent
D) beta generation

Question 64

EOQ equals ________.

Question 65

An important objective of cash management is to lengthen the collection float and reduce the disbursement float.

Question 66

Ready Tees, an on line retailer of t-shirts, orders 100,000 t-shirts per year from its manufacturer. Ready plans on ordering t-shirts 12 times over the next year. Ready receives the same number of t-shirts each time it orders. The carrying cost is $0.10 per shirt per year. What is the annual carrying cost of the t-shirt inventory (rounded to the nearest dollar)?

A) $417
B) $834
C) $5,000
D) $10,000

Question 67

EOQ focuses on the tradeoff between ________.

A) carrying costs and delivery costs
B) seasonality and steady production
C) carrying costs and ordering costs
D) fixed and variable costs

Question 68

Alex's Sporting Goods is the only official supplier of soccer balls for games and practices at all levels of play in the Northwest region. It expects to sell 150,000 soccer balls this year. If carrying costs are $1.50 per soccer ball per year and ordering costs are $93 per order, what is the firm's EOQ for this product? (Round to the nearest whole ball.)

A) 70 balls
B) 4,313 balls
C) 18,600 balls
D) There is not enough information to answer this question

Question 69

When using the ABC Inventory Management System, Type A items are ________.

A) small-dollar items
B) nonessential inventory items
C) large-dollar or critical inventory items
D) moderate-dollar items

Question 70

Ready Tees, an on line retailer of t-shirts, orders 100,000 t-shirts per year from its manufacturer. Ready plans on ordering t-shirts 12 times over the next year. Ready receives the same number of t-shirts each time it orders. The carrying cost is $0.10 per shirt per year. The order cost is $500 per order. What is the annual ordering cost of the t-shirt inventory (rounded to the nearest dollar)?

A) $5,000
B) $6,000
C) $10,000
D) $12,000

Question 71

Many companies use lockboxes to speed up the delivery of the check at their bank.

Question 72

Ready Tees, an on line retailer of t-shirts, orders 100,000 t-shirts per year from its manufacturer. The carrying cost is $0.10 per shirt per year. The order cost is $500 per order. What is the optimal order quantity for the t-shirt inventory (rounded to the nearest dollar)?

A) 1,581
B) 8,333
C) 15,841
D) 31,623

Question 73

Ready Tees, an on line retailer of t-shirts, orders 100,000 t-shirts per year from its manufacturer. The cost of ordering and delivery is $100 per order. If Ready Tees orders 6,667 t-shirts in each order, what are the firm's total annual ordering costs (rounded to the nearest dollar)?

A) $2,000
B) $1,500
C) $1,000
D) $667

Question 74

Total carrying cost equals ________.

A) The average carry cost per item times the maximum level of inventory
B) The average carry cost per item times the minimum level of inventory
C) The average carry cost per item times the average level of inventory divided by 2
D) The average carry cost per item times the average level of inventory

Question 75

Of the following, which is NOT an accurate statement about the EOQ model?

A) The actual cost of the inventory item is ignored.
B) Costs are divided into two categories: the cost of ordering and the cost of storage.
C) EOQ is an attempt to determine the appropriate level of inventory.
D) The EOQ assumes the sales rate fluctuates with seasonal changes.

Question 76

Electronic funds transfer (EFT) substantially reduces the collection float for businesses and the disbursement float for customers.

Question 77

________ is the order quantity that minimizes total cost, and it is the result of trading off carrying costs and ordering costs.

A) Q/2
B) ABC
C) EOQ
D) None of the above

Question 78

Warehouse Sports, a large box store retailer of athletic shoes, orders 200,000 shoes per year from its manufacturer. If Warehouse Sports orders 10,000 shoes in each order, and spends $10,000 in total annual ordering costs, what is the cost of ordering and delivery per order?

A) $2,000
B) $500
C) $50
D) There is not enough information to answer this question.

Question 79

Which of the following is NOT an inventory management technique?

A) ABC
B) 6 SIGMA
C) JIT
D) EOQ

Question 80

Lipscomb is set to establish a reorder policy for his remote snack bar located on Vacation Island. He sells 10 cases of soda per day and has a lead-time for delivery of one week. Occasionally, bad weather or mechanical difficulty can delay his delivery by up to three days. At what point should Lipscomb reorder (how many cases on hand) if he wants to also compensate for unexpected order delays?

A) 30 cases
B) 70 cases
C) 100 cases
D) There is not enough information to answer this question