Question 1

A lockbox plan is

Accepted Answer

A)  used to protect cash, i.e., to keep it from being stolen. 
B)  used to identify inventory safety stocks. 
C)  used to slow down the collection of checks our firm writes. 
D)  used to speed up the collection of checks received. 
E)  used primarily by firms where currency is used frequently in transactions, such as fast food restaurants, and less frequently by firms that receive payments as checks. 
A)  used to protect cash, i.e., to keep it from being stolen. 
B)  used to identify inventory safety stocks. 
C)  used to slow down the collection of checks our firm writes. 
D)  used to speed up the collection of checks received. 
E)  used primarily by firms where currency is used frequently in transactions, such as fast food restaurants, and less frequently by firms that receive payments as checks.

Question 2

A firm buys on terms of 2/8, net 45 days, it does not take discounts, and it actually pays after 58 days. What is the effective annual percentage cost of its non-free trade credit? (Use a 365-day year.)

Accepted Answer

A)  14.34% 
B)  15.10% 
C)  15.89% 
D)  16.69% 
E)  17.52% 
A)  14.34% 
B)  15.10% 
C)  15.89% 
D)  16.69% 
E)  17.52%

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)  Depreciation is included in the estimate of cash flows (Cash flow = Net income + Depreciation), hence depreciation is set forth on a separate line in the cash budget. 
B)  If cash inflows from collections occur in equal daily amounts but most payments must be made on the 10th of each month, then a regular monthly cash budget will be misleading. The problem can be corrected by using a daily cash budget. 
C)  Sound working capital policy is designed to maximize the time between cash expenditures on materials and the collection of cash on sales. 
D)  If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10, net 30 to net 60. 
E)  If a firm sells on terms of net 90, and if its sales are highly seasonal, with 80% of its sales in September, then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be lower in October than in August. 
A)  Depreciation is included in the estimate of cash flows (Cash flow = Net income + Depreciation), hence depreciation is set forth on a separate line in the cash budget. 
B)  If cash inflows from collections occur in equal daily amounts but most payments must be made on the 10th of each month, then a regular monthly cash budget will be misleading. The problem can be corrected by using a daily cash budget. 
C)  Sound working capital policy is designed to maximize the time between cash expenditures on materials and the collection of cash on sales. 
D)  If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10, net 30 to net 60. 
E)  If a firm sells on terms of net 90, and if its sales are highly seasonal, with 80% of its sales in September, then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be lower in October than in August.

Question 4

Synchronization of cash flows is an important cash management technique, as proper synchronization can reduce the required cash balance and increase a firm's profitability.

Accepted Answer

A) True 
 B)False

Question 5

The maturity of most bank loans is short term. Bank loans to businesses are frequently made as 90-day notes which are often rolled over, or renewed, rather than repaid when they mature. However, if the borrower's financial situation deteriorates, then the bank may refuse to roll over the loan.

Accepted Answer

A) True 
 B)False

Question 6

Accruals are "free" capital in the sense that no explicit interest must normally be paid on accrued liabilities.

Accepted Answer

A) True 
 B)False

Question 7

Trade credit can be separated into two components: free trade credit, which is credit received after the discount period ends, and costly trade credit, which is the cost of discounts not taken.

Accepted Answer

A) True 
 B)False

Question 8

The cash conversion cycle (CCC) combines three factors: The inventory conversion period, the receivables collection period, and the payables deferral period, and its purpose is to show how long a firm must finance its working capital. Other things held constant, the shorter the CCC, the more effective the firm's working capital management.

Accepted Answer

A) True 
 B)False

Question 9

Atlanta Cement, Inc. buys on terms of 2/15, net 30. It does not take discounts, and it typically pays 60 days after the invoice date. Net purchases amount to $720,000 per year. What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?

Accepted Answer

A)  10.86% 
B)  12.07% 
C)  13.41% 
D)  14.90% 
E)  16.55% 
A)  10.86% 
B)  12.07% 
C)  13.41% 
D)  14.90% 
E)  16.55%

Question 10

Which of the following statements is most consistent with efficient inventory management? The firm has a

Accepted Answer

A)  below average inventory turnover ratio. 
B)  low incidence of production schedule disruptions. 
C)  below average total assets turnover ratio. 
D)  relatively high current ratio. 
E)  relatively low DSO. 
A)  below average inventory turnover ratio. 
B)  low incidence of production schedule disruptions. 
C)  below average total assets turnover ratio. 
D)  relatively high current ratio. 
E)  relatively low DSO.

Question 11

If a profitable firm finds that it simply must "stretch" its accounts payable, then this suggests that it is undercapitalized, i.e., that it needs more working capital to support its operations.

Accepted Answer

A) True 
 B)False

Question 12

A conservative financing approach to working capital will result in permanent current assets and some seasonal current assets being financed using long-term securities.

Accepted Answer

A) True 
 B)False

Question 13

Ingram Office Supplies, Inc., buys on terms of 2/15, net 50 days. It does not take discounts, and it typically pays on time, 50 days after the invoice date. Net purchases amount to $450,000 per year. On average, what is the dollar amount of costly trade credit (total credit - free credit) the firm receives during the year? (Assume a 365-day year, and note that purchases are net of discounts.)

Accepted Answer

A)  $43,151 
B)  $45,308 
C)  $47,574 
D)  $49,952 
E)  $52,450 
A)  $43,151 
B)  $45,308 
C)  $47,574 
D)  $49,952 
E)  $52,450

Question 14

Your consulting firm was recently hired to improve the performance of Shin-Soenen Inc, which is highly profitable but has been experiencing cash shortages due to its high growth rate. As one part of your analysis, you want to determine the firm's cash conversion cycle. Using the following information and a 365-day year, what is the firm's present cash conversion cycle? Average inventory = $75,000
Annual sales = $600,000
Annual cost of goods sold = $360,000
Average accounts receivable = $160,000
Average accounts payable = $25,000

Accepted Answer

A)  120.6 days 
B)  126.9 days 
C)  133.6 days 
D)  140.6 days 
E)  148.0 days 
A)  120.6 days 
B)  126.9 days 
C)  133.6 days 
D)  140.6 days 
E)  148.0 days

Question 15

Data on Shick Inc. for 2008 are shown below, along with the days sales outstanding of the firms against which it benchmarks. The firm's new CFO believes that the company could reduce its receivables enough to reduce its DSO to the benchmarks' average. If this were done, by how much would receivables decline? Use a 365-day year. Sales $110,000
Accounts receivable $16,000
Days sales outstanding (DSO)Benchmarks' days sales outstanding (DSO) 20.00

Accepted Answer

A)  $8,078 
B)  $8,975 
C)  $9,973 
D)  $10,970 
E)  $12,067 
A)  $8,078 
B)  $8,975 
C)  $9,973 
D)  $10,970 
E)  $12,067

Question 16

Inventory management is largely self-contained in the sense that little coordination among the sales, purchasing, and production personnel is required for successful inventory management.

Accepted Answer

A) True 
 B)False

Question 17

Whittington Inc. has the following data. What is the firm's cash conversion cycle? Inventory conversion period = 41 days
Receivables collection period = 31 days
Payables deferral period = 38 days

Accepted Answer

A)  31 days 
B)  34 days 
C)  37 days 
D)  41 days 
E)  45 days 
A)  31 days 
B)  34 days 
C)  37 days 
D)  41 days 
E)  45 days

Question 18

Net working capital, defined as current assets minus the sum of payables and accruals, is equal to the current ratio minus the quick ratio.

Accepted Answer

A) True 
 B)False

Question 19

Dewey Corporation has the following data, in thousands. Assuming a 365-day year, what is the firm's cash conversion cycle? Annual sales = $45,000
Annual cost of goods sold = $31,500
Inventory = $4,000
Accounts receivable = $2,000
Accounts payable = $2,400

Accepted Answer

A)  25 days 
B)  28 days 
C)  31 days 
D)  35 days 
E)  38 days 
A)  25 days 
B)  28 days 
C)  31 days 
D)  35 days 
E)  38 days

Question 20

Which of the following statements is CORRECT?

Accepted Answer

A)  Trade credit is provided only to relatively large, strong firms. 
B)  Commercial paper is a form of short-term financing that is primarily used by large, strong, financially stable companies. 
C)  Short-term debt is favored by firms because, while it is generally more expensive than long-term debt, it exposes the borrowing firm to less risk than long-term debt. 
D)  Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate. 
E)  Commercial paper is typically offered at a long-term maturity of at least five years. 
A)  Trade credit is provided only to relatively large, strong firms. 
B)  Commercial paper is a form of short-term financing that is primarily used by large, strong, financially stable companies. 
C)  Short-term debt is favored by firms because, while it is generally more expensive than long-term debt, it exposes the borrowing firm to less risk than long-term debt. 
D)  Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate. 
E)  Commercial paper is typically offered at a long-term maturity of at least five years.

A lockbox plan is

A firm buys on terms of 2/8, net 45 days, it does not take discounts, and it actually pays after 58 days. What is the effective annual percentage cost of its non-free trade credit? (Use a 365-day year.)

Which of the following statements is CORRECT?

Synchronization of cash flows is an important cash management technique, as proper synchronization can reduce the required cash balance and increase a firm's profitability.

The maturity of most bank loans is short term. Bank loans to businesses are frequently made as 90-day notes which are often rolled over, or renewed, rather than repaid when they mature. However, if the borrower's financial situation deteriorates, then the bank may refuse to roll over the loan.

Accruals are "free" capital in the sense that no explicit interest must normally be paid on accrued liabilities.

Trade credit can be separated into two components: free trade credit, which is credit received after the discount period ends, and costly trade credit, which is the cost of discounts not taken.

Atlanta Cement, Inc. buys on terms of 2/15, net 30. It does not take discounts, and it typically pays 60 days after the invoice date. Net purchases amount to $720,000 per year. What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?

Which of the following statements is most consistent with efficient inventory management? The firm has a

If a profitable firm finds that it simply must "stretch" its accounts payable, then this suggests that it is undercapitalized, i.e., that it needs more working capital to support its operations.

A conservative financing approach to working capital will result in permanent current assets and some seasonal current assets being financed using long-term securities.

Inventory management is largely self-contained in the sense that little coordination among the sales, purchasing, and production personnel is required for successful inventory management.

Whittington Inc. has the following data. What is the firm's cash conversion cycle? Inventory conversion period = 41 days Receivables collection period = 31 days Payables deferral period = 38 days

Net working capital, defined as current assets minus the sum of payables and accruals, is equal to the current ratio minus the quick ratio.

Dewey Corporation has the following data, in thousands. Assuming a 365-day year, what is the firm's cash conversion cycle? Annual sales = $45,000 Annual cost of goods sold = $31,500 Inventory = $4,000 Accounts receivable = $2,000 Accounts payable = $2,400

Which of the following statements is CORRECT?

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Analysis of Financial Statements

Time Value of Money

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Bonds and Their Valuation

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Cash Flow Estimation and Risk Analysis

Real Options and Other Topics in Capital Budgeting

Capital Structure and Leverage

Distributions to Shareholders: Dividends and

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Exam 16: Working Capital Management

A lockbox plan is

A firm buys on terms of 2/8, net 45 days, it does not take discounts, and it actually pays after 58 days. What is the effective annual percentage cost of its non-free trade credit? (Use a 365-day year.)

Which of the following statements is CORRECT?

Synchronization of cash flows is an important cash management technique, as proper synchronization can reduce the required cash balance and increase a firm's profitability.

The maturity of most bank loans is short term. Bank loans to businesses are frequently made as 90-day notes which are often rolled over, or renewed, rather than repaid when they mature. However, if the borrower's financial situation deteriorates, then the bank may refuse to roll over the loan.

Accruals are "free" capital in the sense that no explicit interest must normally be paid on accrued liabilities.

Trade credit can be separated into two components: free trade credit, which is credit received after the discount period ends, and costly trade credit, which is the cost of discounts not taken.

Atlanta Cement, Inc. buys on terms of 2/15, net 30. It does not take discounts, and it typically pays 60 days after the invoice date. Net purchases amount to $720,000 per year. What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?

Which of the following statements is most consistent with efficient inventory management? The firm has a

If a profitable firm finds that it simply must "stretch" its accounts payable, then this suggests that it is undercapitalized, i.e., that it needs more working capital to support its operations.

A conservative financing approach to working capital will result in permanent current assets and some seasonal current assets being financed using long-term securities.

Inventory management is largely self-contained in the sense that little coordination among the sales, purchasing, and production personnel is required for successful inventory management.

Whittington Inc. has the following data. What is the firm's cash conversion cycle? Inventory conversion period = 41 days Receivables collection period = 31 days Payables deferral period = 38 days

Net working capital, defined as current assets minus the sum of payables and accruals, is equal to the current ratio minus the quick ratio.

Dewey Corporation has the following data, in thousands. Assuming a 365-day year, what is the firm's cash conversion cycle? Annual sales = $45,000 Annual cost of goods sold = $31,500 Inventory = $4,000 Accounts receivable = $2,000 Accounts payable = $2,400

Which of the following statements is CORRECT?

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds and Their Valuation

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Real Options and Other Topics in Capital Budgeting

Capital Structure and Leverage

Distributions to Shareholders: Dividends and

Financial Planning and Forecasting

Derivatives and Risk Management

Multinational Financial Management

Hybrid Financing: Preferred Stock, Leasing, Warrants, and Convertibles

Mergers and Acquisitions

Financial Management and Stock Equilibrium

Filters