Question 1

Which items comprise inventory?

Accepted Answer

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

Question 2

The most important reason for holding cash is:

Accepted Answer

A)  to obtain tax benefits.
B)  for liquidity.
C)  to avoid changes in interest rates.
D)  to earn interest. B

Question 3

Which of these is not considered a cost of holding inventory?

Accepted Answer

A)  Opportunity cost of having funds tied up in inventory.
B)  Risk of bad debts.
C)  Cost of storage and handling.
D)  Risk of obsolescence. B

Question 4

Working capital is a measure of a firm's:

Accepted Answer

A)  equity.
B)  liquidity.
C)  gearing.
D)  profitability.

Question 5

Use the information below to answer the following questions
Aqua Ltd has forecast the yearly demand for its product as 5,000 units. 100 units of material must be used to produce the product. The cost of placing a single order for raw materials is $20, and the cost of holding one unit of material is $0.40 a year.
-Chocolate Ltd uses 18,000 litres of chocolate syrup each year. The cost of holding its chocolate syrup inventory is $0.50 per litre per year. The cost of ordering the syrup is $150 per delivery. The firm uses chocolate syrup at a constant rate throughout the year. The economic order quantity for chocolate syrup is:

Accepted Answer

A)  9,487 litres.
B)  3,286 litres.
C)  5,723 litres.
D)  2,900 litres.

Question 6

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

Accepted Answer

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

Question 7

Because of uncertainty of demand, a firm may choose to hold an additional amount of inventory called:

Accepted Answer

A)  reorder stock.
B)  economic order quantity stock.
C)  safety stock.
D)  transit stock.

Question 8

Credit policy is composed of:

Accepted Answer

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

Question 9

The motive behind the holding of cash balances to protect the firm from unforeseen cash requirements is known as:

Accepted Answer

A)  the transaction motive.
B)  the precautionary motive.
C)  the legal motive.
D)  the speculative motive.

Question 10

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

Accepted Answer

A)  The lower the level of inventory held, the greater the number of orders required.
B)  A decrease in the number of orders increases the overall cost of ordering inventory.
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 11

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

Question 12

A decline in the level of working capital will:

Accepted Answer

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

Question 13

A firm has annual credit sales of $2m, an average debtor's balance of $400,000 and works 365 days a year. The average settlement period for accounts receivable is:

Accepted Answer

A)  73 days.
B)  15 days.
C)  150 days.
D)  54.7 days.

Question 14

Orange Company expects demand for a product to be 12,005 units annually. It costs $5 per unit to hold inventory for one year. Order costs are $50 per order. The economic order quantity is:

Accepted Answer

A)  600 units.
B)  1,200 units.
C)  240 units.
D)  490 units.

Question 15

If accounts payable are paid 10 times a year, what, on average, is the accounts payable turnover period in days?

Accepted Answer

A)  20 days.
B)  12 days.
C)  36.5 days.
D)  None of the above.

Question 16

Which of the following is not a useful measure of the quality of accounts receivable?

Accepted Answer

A)  Bad debts as a percentage of sales.
B)  The amount owed by the debtor.
C)  Average collection period.
D)  Aging of debtors' accounts.

Question 17

Which statement concerning working capital is not true?

Accepted Answer

A)  It is possible to have too much working capital.
B)  It is possible to have too little working capital.
C)  The greater the working capital the better.
D)  There is an 'ideal' level of working capital.

Question 18

Credit should be granted to customers in which circumstance?

Accepted Answer

A)  If bad debts can be minimised.
B)  If the benefits exceed the costs.
C)  If sales can be increased.
D)  If others in the industry grant credit.

Question 19

If the planned level of sales is $146,000 and the planned average collection period is 40 days, the planned average level of accounts receivable will be:

Accepted Answer

A)  $3,650.
B)  $14,600.
C)  $16,000.
D)  $18,500.

Question 20

Which of the following will affect the length of the period of credit granted to customers?

Accepted Answer

A)  the degree of competition within the industry.
B)  the bargaining power of particular customers.
C)  typical credit terms operating within the industry.
D)  all of the above.

Exam 13: The Management of Working Capital