Question 1

All of these are assumptions of the economic order quantity model, except:

Accepted Answer

A)   demand does not fluctuate seasonally.
B)   no buffer inventory is required.
C)   the amount of inventory held is constant over the period.
D)   there are no discounts for bulk purchases. C

Question 2

Sales forecasts to help determine the amount of inventory to be held can be based on all of the following except:

Accepted Answer

A)   the judgement of sales staff.
B)   the use of statistical techniques.
C)   the rate of inflation.
D)   None of the above, i.e. all can be used to determine sales forecasts. C

Question 3

Improving cash flow in relation to debtors and creditors, respectively, requires:

Accepted Answer

A)   slowing collections and speeding up payments.
B)   speeding up collections and slowing payments.
C)   slowing collections and slowing payments.
D)   speeding up collections and speeding up payments. B

Question 4

Which of the following is not necessarily true? Increasing the cash discount which a firm offers to its debtors for prompt payment will:

Accepted Answer

A)   increase the net profit of the firm.
B)   reduce the average collection period.
C)   reduce average debtors.
D)   All of the statements are true.

Question 5

Credit policy is composed of:

Accepted Answer

A)   collection policies.
B)   vetting of customers before offering credit.
C)   credit terms.
D)   all of the above.

Question 6

The business which is likely to have the heaviest investment in working capital is a:

Accepted Answer

A)   wholesaler.
B)   service business.
C)   manufacturer.
D)   retailer.

Question 7

Procedures and techniques for managing inventory are all of the following except:

Accepted Answer

A)   financial ratios.
B)   economic order quantity model.
C)   payback method.
D)   the ABC system of control.

Question 8

In relation to the economic order quantity model:

Accepted Answer

A)   the higher the price paid for inventory, the less frequently it should be ordered.
B)   the higher the price paid for inventory, the more frequently it should be ordered.
C)   the price paid for inventory does not directly affect the frequency of inventory ordering.
D)   none of the above is true.

Question 9

Items which comprise inventory are:

Accepted Answer

A)   finished goods.
B)   raw materials.
C)   work-in-process.
D)   all of the above.

Question 10

Which of these is not a way in which the length of the operating cycle can be reduced?

Accepted Answer

A)   Reduce the time taken to pay creditors.
B)   Impose tighter controls on debtors to encourage prompt payment.
C)   Cut back on the average time inventory is held.
D)   None of the above, i.e. all are ways in which the length of the operating cycle can be reduced.

Question 11

A decline in the level of working capital will:

Accepted Answer

A)   working capital is not related to risk.
B)   reduce risk.
C)   increase risk.
D)   leave risk unchanged.

Question 12

An increase in the effort put into collection of accounts receivable will result in in the investment in accounts receivable, in bad debts expense, and in collections expenditure.

Accepted Answer

A)   a decrease; an increase; a decrease
B)   a decrease; an increase; an increase
C)   an increase; a decrease; an increase
D)   a decrease; a decrease; an increase

Question 13

Which statement concerning the economic order quantity (EOQ) model is not correct?

Accepted Answer

A)   A decrease in the number of orders increases the overall cost of ordering inventory.
B)   The lower the level of inventory held, the greater the number of orders required.
C)   The more inventory that is held, the higher the cost of holding inventory.
D)   None of the above, i.e. all are correct statements.

Question 14

If inventory is turned over 7 times a year, the inventory turnover period in days is:

Accepted Answer

A)   52 days.
B)   7 days.
C)   70 days.
D)   19 days.

Question 15

A firm has annual credit sales of $2 million, an average debtor's balance of $300,000 and works 365 days a year. The average settlement period for debtors is:

Accepted Answer

A)   150 days.
B)   15 days.
C)   66.7 days.
D)   54.7 days.

Question 16

An advantage of holding inventory is:

Accepted Answer

A)   sales are not lost because things are out of stock.
B)   ability to buy before prices rise.
C)   no interruptions to production.
D)   all of the above.

Question 17

The ABC system of managing inventory:

Accepted Answer

A)   is the activity-based costing system.
B)   is a simple system of managing inventory based on three codes.
C)   is a method of applying different levels of inventory control based on the value of each category of inventory.
D)   none of the above

Question 18

The item that is not part of working capital is:

Accepted Answer

A)   inventory.
B)   cash.
C)   debtors.
D)   plant.

Question 19

Calculate the operating cash cycle if the inventory turnover period is 21 days, the debtor's turnover period is 32 days and the creditor turnover period is 40 days.

Accepted Answer

A)   13 days
B)   53 days
C)   -13 days
D)   93 days

Question 20

Which statement is not true?

Accepted Answer

A)   A firm should always have a surplus holding of cash.
B)   If a firm has a cash surplus, it should make the best use of the surplus.
C)   If a firm has a cash deficit, it may need to reschedule its cash payments.
D)   If a firm has a cash deficit, it may need to arrange to borrow money.

Exam 12: The Management of Working Capital