Deck 17: Working Capital Management

Question 1

A firm grants trade credit with terms of 3/20,net 60.What effective annual rate (EAR)does a buyer pay by not taking the discount? If the buyer can borrow funds from a bank at 21% per annum,should the account be settled within 20 days?

A)22.04%;yes
B)16.83%;no
C)32.04%;yes
D)16.83%;yes
E)28.51%;yes

Answer 1

32.04%;yes

Question 2

Which of the following are considered as money market securities in Australia?
I.bank-accepted bills
II.commercial bills
III.10 year government bonds
IV.treasury notes
V.a bank term loan

A)all of them
B)I,II and IV only
C)IV and V only
D)IV,V and VI only
E)I,II and V only

Answer 2

I,II and IV only

Question 3

Which one of the following is a speculative motive for holding cash?

A)paying the annual insurance premium on the firm's assets
B)contributing $1000 to help fund medical care for an uninsured neighbour
C)needing to purchase a new delivery truck because the old one was totally destroyed in an accident
D)paying a $100 bonus to all employees at year end
E)buying extra inventory because a key supplier offered a special one-time discount

Answer 3

buying extra inventory because a key supplier offered a special one-time discount

Question 4

The economic order quantity (EOQ)is best defined as the:

A)amount of inventory that is sold during the time period it takes a vendor to restock an item
B)least amount of inventory which a firm can purchase at any one time
C)minimal amount of inventory which must be purchased in order to qualify for a cash discount
D)restocking quantity that minimises the total cost of inventory
E)amount of inventory that is required on a monthly basis

Question 5

Don,a local building contractor,keeps an extra $5000 in his chequing account simply for any emergency which might arise.This is an example of the _____ motive for holding cash.

A)precautionary
B)availability
C)transaction
D)speculative
E)daily

Question 6

An increase in a firm's average collection period generally indicates that:

A)the cash flows of the firm have increased
B)the majority of a firm's receivables are delinquent
C)an increased number of customers are taking advantage of the cash discount offered
D)at least some customers are taking longer to pay
E)customers are paying more promptly

Question 7

A disbursement account into which funds are transferred from a master account only as they are needed to cover cheques presented for payment is called a _____ account.

A)lockbox
B)cash clearing
C)ledger
D)cash concentration
E)zero-balance

Question 8

Abco International offers credit terms of 2/7,net 20.What is the effective annual rate on a $13 000 purchase if you forgo the discount?

A)31.03 per cent
B)28.88 per cent
C)36.50 per cent
D)76.34 per cent
E)21.18 per cent

Question 9

Baxter's,Inc.generally holds $125 000 in cash in case an unexpected investment opportunity arises.Which one of the following refers to holding cash for this type of purpose?

A)transaction motive
B)reserve motive
C)opportunistic motive
D)speculative motive
E)precautionary motive

Question 10

A firm has determined that 66 per cent of its accounts receivable are less than 1 month old,32 per cent are more than 1 month but less than 2 months old,and the remainder are more than 2 months old.The firm probably compiled a(n)_____ to determine this information.

A)credit scoring report
B)aging schedule
C)settlement statement
D)collateral trust schedule
E)invoice

Question 11

Which one of the following is the need to hold cash simply as a financial reserve?

A)activity motive
B)speculative motive
C)precautionary motive
D)opportunistic motive
E)transaction motive

Question 12

The transaction motive for holding cash refers to the need to have cash for which one of the following purposes?

A)financial reserve
B)investment opportunities
C)bargain opportunities
D)safety margin
E)daily operations

Question 13

Which one of the following defines the terms of sale?

A)legal documents related to the credit sale of either goods or services
B)period of time during which a discount can be taken on an invoice
C)period of time granted to a customer to pay for the goods or services received
D)conditions under which a firm sells its goods or services for either cash or credit
E)process used to determine which customers shall be granted credit and which shall not

Question 14

What is the primary purpose of a cash discount?

A)inducement to pay promptly
B)customer compensation for an out-of-stock item
C)customer compensation for faulty goods or services
D)incentive to purchase a specialty item
E)means of offsetting the interest charges on an account receivable

Question 15

Which one of the following is the bill given to a customer for goods he or she purchased?

A)shipping receipt
B)remittance advice
C)invoice
D)docket
E)account aging

Question 16

The optimal credit policy:

A)is the policy that eliminates all potential bad debts
B)is the one which offers credit to the largest number of customers
C)minimises the carrying costs associated with granting credit
D)is the policy that produces the largest amount of sales for a firm
E)minimises the total cost of granting credit

Question 17

Which one of the following best defines the term 'collection policy'?

A)process of determining which customers will be granted credit
B)daily process of handling cash inflows and outflows of cash
C)set of guidelines used by a firm to determine the cost of offering credit to its customers
D)process of determining the probability customers will not pay
E)set of procedures a firm follows in collecting accounts receivable

Question 18

An increase in which of the following will tend to increase the length of the credit period?
I.product cost
II.consumer demand
III.product perishability
IV.credit risk

A)I only
B)I and II only
C)II and III only
D)I and IV only
E)II only

Question 19

A firm grants trade credit with terms of 3/20,n/60 .It signifies,that if payment has not been made within ____ days,then the full invoice price is payable within _____ days.

A)20;60
B)3;20
C)3;60
D)20;23
E)20;40

Question 20

Which one of the following is the process of determining the creditworthiness of customers?

A)customer invoicing
B)account aging
C)credit analysis
D)collection policy
E)credit terms

Question 21

Laurie's Ice Rink keeps an extra $1500 in its cheque account simply in case an emergency arises.Which type of motive for holding cash does this represent?

A)availability
B)speculative
C)float requirement
D)transaction
E)precautionary

Question 22

Which one of the following best defines the term 'credit scoring'?

A)categorising customers into groups depending upon the length of time it takes each customer to pay for purchases
B)process of quantifying the probability of default when granting credit to customers
C)compiling a list of accounts receivables segregated by the length of time each receivable has been outstanding
D)evaluating the opportunity costs of a credit policy
E)tracking of both the number and the size of customer orders over a period of time

Question 23

Stan Lee's sells 4300 carpets a year at an average price per carpet of $1490.The carrying cost per unit is $21.63.The company orders 500 carpets at a time and has a fixed order cost of $69 per order.The carpets are sold out before they are restocked.What is the economic order quantity?

A)315 carpets
B)348 carpets
C)166 carpets
D)184 carpets
E)147 carpets

Question 24

Which one of the following terms refers to the basic factors that are reviewed when evaluating the creditworthiness of a potential customer?

A)terms of sale
B)collection policy
C)credit score
D)five Cs of credit
E)cash concentration

Question 25

Which one of the following is the graphical representation of the sum of the carrying costs and the opportunity costs of a credit policy?

A)economic credit function
B)credit analysis
C)credit cost curve
D)accounts receivables aging
E)optimal credit curve

Question 26

Which one of the following is a shortage cost associated with a firm's inventory?

A)inventory theft
B)restocking cost
C)opportunity cost of capital
D)insurance cost
E)inventory obsolescence

Question 27

Which one of the following is evidence of indebtedness?

A)concentration policy
B)credit policy
C)credit instrument
D)credit cost curve
E)terms of sale

Question 28

The Flowering Vine buys hanging plants for $2 each and resells them for $8.95 each.The firm sells 3500 plants per year.Generally,the firm orders 400 plants at a time and has a fixed cost per order of $28.The carrying cost per unit is $1.16.To avoid newer plants mixing with older plants,the inventory is totally sold out before it is restocked.The total annual carrying cost is ____ and the total annual restocking cost is _____.

A)$211;$269
B)$232;$269
C)$211;$245
D)$232;$256
E)$232;$245

Question 29

The economic order quantity approach states that inventory order sizes should be determined in which of the following manners?

A)computing the amount of the derived demand
B)dividing annual item sales by the carrying cost per item and multiplying by 2
C)dividing the inventory into various groups based on the value per item
D)computing the average number of items sold each month
E)equating restocking costs with carrying costs

Question 30

Which one of the following is a system for managing demand-dependent inventories that minimises the amount of inventory on hand?

A)kanban
B)keiretsu
C)just-in-time inventory system
D)material requirement planning
E)inventory flow log

Question 31

Kate's Korner Market monitors 3 per cent of its inventory on a daily basis,another 20 per cent on a weekly basis,and the remaining inventory on a quarterly basis.What inventory management approach is being used?

A)ABC
B)MRP
C)JIT
D)Q*
E)EOQ

Question 32

Which one of the following best states the primary goal of inventory management?

A)Minimise total inventory costs
B)Minimise the number of orders per year
C)Minimise the level of inventory for the most expensive items
D)Minimise the average inventory level
E)Minimise opportunity costs

Question 33

A firm uses the extended economic order quantity approach to inventory management.Which one of the following inventory levels is considered to be the minimum inventory level given this approach?

A)safety stock plus the reorder quantity
B)50 per cent of the reorder quantity
C)zero inventory
D)safety stock level
E)reorder point level

Question 34

Which one of the following inventory management approaches determines the finished goods inventory level and then works backwards until the raw material needs are determined?

A)ABC approach
B)materials requirement planning
C)economic order quantity
D)just-in-time
E)extended EOQ

Question 35

When are funds generally transferred into zero-balance accounts?

A)as needed
B)never
C)daily
D)monthly
E)weekly

Question 36

Fischer's Furniture sells 2400 sofas a year at an average price per sofa of $1250.The carrying cost per unit is $11.60.The company orders 80 sofas at a time and has a fixed order cost of $52 per order.The sofas are sold out before they are restocked.What is the economic order quantity?

A)147 sofas
B)171 sofas
C)211 sofas
D)162 sofas
E)188 sofas

Question 37

Which one of the following is the set of procedures used to determine the inventory levels for demand-dependent inventory?

A)keiretsu
B)kanban
C)inventory flow log
D)material requirement planning
E)just-in-time inventory system

Question 38

Which one of the following best represents the transaction motive for holding cash?

A)unexpectedly purchasing a competitor's firm
B)paying weekly wages and salaries
C)buying extra inventory in response to an unexpected sale offered by a supplier
D)increasing the minimum cash balance for the firm's main bank account
E)holding cash in anticipation that the firm may need to close for a few days if floodwaters keep rising

Question 39

A firm grants credit with terms of 2/5,net 20.The firm's customers have ___ days to pay in order to receive a _____ per cent discount.

A)5;2
B)30;5
C)20;2
D)15;2
E)2;5

Question 40

Which one of the following best defines the economic order quantity (EOQ)?

A)minimum size of an order needed to qualify for free shipping
B)restocking quantity that minimises the total cost of inventory
C)number of items that are sold on average each month
D)minimal amount of inventory that must be purchased to receive a cash discount
E)minimum amount that must be ordered to obtain the quantity discount

Question 41

Sydney Hi-Fi offers credit terms of 1/5,net 20.What is the effective annual rate on a $12 000 purchase if you forgo the discount?

A)32.58 per cent
B)8.59 per cent
C)27.71 per cent
D)0 per cent
E)14.99 per cent

Question 42

On June 22,Bondi Beachwear purchased $3300 worth of goods.The terms of the sale were 1/7,net 21.What is the effective annual rate of interest for the credit period for this sale?

A)34.42 per cent
B)38.63 per cent
C)31.38 per cent
D)29.96 per cent
E)37.73 per cent

Question 43

On May 11,you purchased $3700 of merchandise from a supplier.The terms of the sale were 1/5,net 15.The discounted amount due is _____ which is payable no later than _____.

A)$2960;May 16
B)$3663;May 26
C)$3515;May 16
D)$3663;May 16
E)$3515;May 26

Question 44

Sydney Surfboards sells 12 000 surfboards a year at an average price per carpet of $499.The carrying cost per unit is $25 and the fixed order costs are $75.What is the economic order quantity assuming there is no safety stock.

A)268
B)28
C)848
D)211
E)8

Question 45

The optimal credit policy will do which one of the following?

A)maximise sales
B)minimise the total costs of granting credit
C)minimise carrying costs
D)minimise bad debts
E)maximise units sold

Question 46

Which one of the following reports will tell me the percentage of accounts receivables that are delinquent by 90 days or more?

A)credit analysis
B)5Cs of credit
C)cash budget
D)aging schedule
E)credit scoring report

Question 47

Which one of the following 5Cs refers to the general economic climate in a customer's line of business?

A)capital
B)collateral
C)character
D)capacity
E)conditions

Question 48

Australian Coastal Gifts has an average collection period of 18 days and annual sales of $694 000.What is the average investment in accounts receivables as shown on the balance sheet?

A)$20 375
B)$18 850
C)$21 506
D)$28 700
E)$34 225

Question 49

You purchased an item costing $5700 on July 13.The terms of sale were 1/5,net 20.What is the last day you can pay the discounted price?

A)July 18
B)August 2
C)August 5
D)July 20
E)July 28

Question 50

Which one of the following best illustrates the concept of derived demand?

A)Retail stores have higher sales around the holiday season than in other seasons of the year.
B)Restaurant sales are rising because unemployment is falling.
C)A windscreen company has to step up production because motor vehicle sales are increasing.
D)A grocery store is selling more fresh fruits and vegetables because people are improving their diets.
E)A minimum wage worker tends to buy more home-brand products than do more highly-paid professionals.