Question 1

An unusually high turnover of accounts receivable,which implies a very short days sales outstanding (DSO),could indicate that the firm

Accepted Answer

A)  Is very conservative (tough)in its credit policy. 
B)  Has a very efficient credit and collection department. 
C)  Offers unusually large discounts. 
D)  All of the above. 
E)  Only answers a and b above. 
A)  Is very conservative (tough)in its credit policy. 
B)  Has a very efficient credit and collection department. 
C)  Offers unusually large discounts. 
D)  All of the above. 
E)  Only answers a and b above.

Question 2

Cross Collectibles currently fills mail orders from all over the U.S.and receipts come in to headquarters in Little Rock,Arkansas.The firm's average accounts receivable (A/R)is $2.5 million and is financed by an 11 percent annual,simple interest bank loan.Cross is considering a regional lockbox system to speed up collections which it believes will reduce A/R by 20 percent.The annual cost of the system is $15,000.What is the estimated net annual savings to the firm from implementing the lockbox system?

Accepted Answer

A)  $500,000 
B)  $30,000 
C)  $60,000 
D)  $55,000 
E)  $40,000 
A)  $500,000 
B)  $30,000 
C)  $60,000 
D)  $55,000 
E)  $40,000

Question 3

A just-in-time system of inventory control requires that manufacturers coordinate production with suppliers so that raw materials or components arrive just as they are needed in the production process.The main objective of such a system is to reduce carrying costs.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following is not commonly regarded as being a credit policy variable?

Accepted Answer

A)  Credit period. 
B)  Collection policy. 
C)  Credit standards. 
D)  Cash discounts. 
E)  All of the above are credit policy variables. 
A)  Credit period. 
B)  Collection policy. 
C)  Credit standards. 
D)  Cash discounts. 
E)  All of the above are credit policy variables.

Question 5

Which of the following statements is correct?

Accepted Answer

A)  A firm that makes 90 percent of its sales on credit and 10 percent for cash is growing at a rate of 10 percent annually.If the firm maintains stable growth it will also be able to maintain its accounts receivable at its current level,since the 10 percent cash sales can be used to manage the 10 percent growth rate. 
B)  In managing a firm's accounts receivable it is possible to increase credit sales per day yet still keep accounts receivable fairly steady if the firm can shorten the length of its collection period. 
C)  If a firm has a large percentage of accounts over 30 days old,it is a sign that the firm's receivables management needs to be reviewed and improved. 
D)  Because receivables and payables both result from sales transactions,a firm with a high receivables-to-sales ratio should also have a high payables-to-sales ratio. 
A)  A firm that makes 90 percent of its sales on credit and 10 percent for cash is growing at a rate of 10 percent annually.If the firm maintains stable growth it will also be able to maintain its accounts receivable at its current level,since the 10 percent cash sales can be used to manage the 10 percent growth rate. 
B)  In managing a firm's accounts receivable it is possible to increase credit sales per day yet still keep accounts receivable fairly steady if the firm can shorten the length of its collection period. 
C)  If a firm has a large percentage of accounts over 30 days old,it is a sign that the firm's receivables management needs to be reviewed and improved. 
D)  Because receivables and payables both result from sales transactions,a firm with a high receivables-to-sales ratio should also have a high payables-to-sales ratio.

Question 6

You need to borrow $25,000 for one year.Your bank offers to make the loan,and it offers you three choices: (1)15 percent simple interest,annual compounding;(2)13 percent simple interest,daily compounding (360-day year);(3)9 percent add-on interest,12 end-of-month payments.The first two loans would require a single payment at the end of the year,the third would require 12 equal monthly payments beginning at the end of the first month.What is the difference between the highest and lowest effective annual rate?

Accepted Answer

A)  1.12% 
B)  2.48% 
C)  3.60% 
D)  4.25% 
E)  5.00% 
A)  1.12% 
B)  2.48% 
C)  3.60% 
D)  4.25% 
E)  5.00%

Question 7

Small,undercapitalized firms

Accepted Answer

A)  Are generally users of net trade credit. 
B)  Are major users of banker's acceptances. 
C)  Generally do not issue commercial paper. 
D)  Typically have a high cost of debt capital. 
E)  Are described by all of the above statements. 
A)  Are generally users of net trade credit. 
B)  Are major users of banker's acceptances. 
C)  Generally do not issue commercial paper. 
D)  Typically have a high cost of debt capital. 
E)  Are described by all of the above statements.

Question 8

Suppose the Campus Bookstore purchases 50,000 boxes of writing tablets every year.Ordering costs are $100 per order and carrying costs are $0.40 per box.Moreover,management has determined that the EOQ is 5,000 boxes.The vendor now offers a quantity discount of $0.02 per box if the company buys tablets in order sizes of 10,000 boxes.Determine the before-tax benefit or loss of accepting the quantity discount.(Assume the carrying cost remains at $0.40 per box whether or not the discount is taken. )

Accepted Answer

A)  $1,000 loss 
B)  $1,000 benefit 
C)  $500 loss 
D)  $500 benefit 
E)  $0 (The change would not affect profits. ) 
A)  $1,000 loss 
B)  $1,000 benefit 
C)  $500 loss 
D)  $500 benefit 
E)  $0 (The change would not affect profits. )

Question 9

Which of the following statements is correct?

Accepted Answer

A)  If a firm's volume of credit sales declines,then its DSO will also decline. 
B)  If a firm changes its credit terms from 1/20,net 40 days,to 2/10,net 45 days,the impact on sales can't be determined because the increase in the discount is offset by the longer net terms which tends to reduce sales. 
C)  The DSO of a firm with seasonal sales can vary because while the sales per day figure is usually based on the total annual sales,the accounts receivable balance will be high or low depending on the season. 
D)  An aging schedule is used to determine what portion of customers pay cash and what portion buy on credit. 
E)  Aging schedules can be constructed from the summary data provided in the firm's financial statements. 
A)  If a firm's volume of credit sales declines,then its DSO will also decline. 
B)  If a firm changes its credit terms from 1/20,net 40 days,to 2/10,net 45 days,the impact on sales can't be determined because the increase in the discount is offset by the longer net terms which tends to reduce sales. 
C)  The DSO of a firm with seasonal sales can vary because while the sales per day figure is usually based on the total annual sales,the accounts receivable balance will be high or low depending on the season. 
D)  An aging schedule is used to determine what portion of customers pay cash and what portion buy on credit. 
E)  Aging schedules can be constructed from the summary data provided in the firm's financial statements.

Question 10

Which of the following statements is correct?

Accepted Answer

A)  Poor synchronization of cash flows that results in high cash management costs can be partially offset by increasing disbursement float and decreasing collections float. 
B)  The size of a firm's net float is primarily a function of its natural cash flow synchronization and how it clears its checks. 
C)  Lockbox systems are used mainly for security purposes as well as to decrease the firm's net float. 
D)  If a firm can speed up its collections and slow down its disbursements,it will be able to reduce its net float. 
E)  A firm practicing good cash management and making use of positive net float will bring its check book balance as close to zero as possible,but must never generate a negative book balance. 
A)  Poor synchronization of cash flows that results in high cash management costs can be partially offset by increasing disbursement float and decreasing collections float. 
B)  The size of a firm's net float is primarily a function of its natural cash flow synchronization and how it clears its checks. 
C)  Lockbox systems are used mainly for security purposes as well as to decrease the firm's net float. 
D)  If a firm can speed up its collections and slow down its disbursements,it will be able to reduce its net float. 
E)  A firm practicing good cash management and making use of positive net float will bring its check book balance as close to zero as possible,but must never generate a negative book balance.

Question 11

Which of the following statements is most correct?

Accepted Answer

A)  Net working capital may be defined as current assets minus current liabilities.Any increase in the current ratio will automatically lead to an increase in net working capital. 
B)  Although short-term interest rates have historically averaged less than long-term rates,the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks of using short-term financing. 
C)  If a company follows a policy of "matching maturities," this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt. 
D)  Each of the above statements is true. 
E)  Each of the above statements is false. 
A)  Net working capital may be defined as current assets minus current liabilities.Any increase in the current ratio will automatically lead to an increase in net working capital. 
B)  Although short-term interest rates have historically averaged less than long-term rates,the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks of using short-term financing. 
C)  If a company follows a policy of "matching maturities," this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt. 
D)  Each of the above statements is true. 
E)  Each of the above statements is false.

Question 12

Your company has been offered credit terms on its purchases of 4/30,net 90.What will be the approximate cost of trade credit if your company pays on the 35th day after receiving the invoice?

Accepted Answer

A)  30% 
B)  300% 
C)  3% 
D)  87% 
E)  156% 
A)  30% 
B)  300% 
C)  3% 
D)  87% 
E)  156%

Question 13

Picard Orchards requires a $100,000 annual loan in order to pay laborers to tend and harvest its fruit crop.Picard borrows on a discount interest basis at a simple annual rate of 11 percent.If Picard must actually receive $100,000 net proceeds to finance its crop,then what must be the face value of the note?

Accepted Answer

A)  $111,000 
B)  $100,000 
C)  $112,360 
D)  $89,000 
E)  $108,840 
A)  $111,000 
B)  $100,000 
C)  $112,360 
D)  $89,000 
E)  $108,840

Question 14

Permanent current assets reflect the fact that current assets do not shrink to zero even when business is at a seasonal or cyclical low.Thus,permanent current assets represent a minimum level of current assets the firm must finance.

Accepted Answer

A) True 
 B)False

Question 15

Long-term loan agreements always contain provisions,or covenants,which constrain the firm's future actions.Short-term credit agreements are just as restrictive in order to protect the interests of the lender.

Accepted Answer

A) True 
 B)False

Question 16

Porta Stadium,Inc.has annual sales of $50,000,000.Its cost of goods sold equals 80 percent of sales,and the company keeps $10,000,000 of inventory on hand.On average,the firm has accounts receivable of $7,500,000.The firm buys all raw materials on credit,its trade credit terms are net 30 days,and it pays on time.The firm's managers are searching for ways to shorten the cash conversion cycle.If sales can be maintained at existing levels,but inventory can be lowered by $2,000,000 and accounts receivable lowered by $833,333,what will be the net change in the cash conversion cycle? Use a 360-day year.

Accepted Answer

A)  +114 days 
B)  −114 days 
C)  +24 days 
D)  −24 days 
E)  −90 days 
A)  +114 days 
B)  −114 days 
C)  +24 days 
D)  −24 days 
E)  −90 days

Question 17

Your firm buys on credit terms of 2/10,net 45,and it always pays on day 45.If you calculate that this policy effectively costs your firm $157,500 each year,what is the firm's average accounts payable balance?

Accepted Answer

A)  $1,234,000 
B)  $75,000 
C)  $157,500 
D)  $625,000 
E)  $750,000 
A)  $1,234,000 
B)  $75,000 
C)  $157,500 
D)  $625,000 
E)  $750,000

Question 18

When a firm pledges its accounts receivable,if a customer that purchased goods from the firm does not pay,the selling firm must take the loss.

Accepted Answer

A) True 
 B)False

Question 19

The primary motivation behind out-sourcing is to provide the firm with an alternative source of supply in the event that its primary supplier is unable to meet the firm's raw material or component needs.

Accepted Answer

A) True 
 B)False

Question 20

Many start-up firms never make it past the first few months of business,primarily because they lack formal working capital policies.

Accepted Answer

A) True 
 B)False

An unusually high turnover of accounts receivable,which implies a very short days sales outstanding (DSO),could indicate that the firm

A just-in-time system of inventory control requires that manufacturers coordinate production with suppliers so that raw materials or components arrive just as they are needed in the production process.The main objective of such a system is to reduce carrying costs.

Which of the following is not commonly regarded as being a credit policy variable?

Which of the following statements is correct?

Small,undercapitalized firms

Which of the following statements is correct?

Which of the following statements is correct?

Which of the following statements is most correct?

Your company has been offered credit terms on its purchases of 4/30,net 90.What will be the approximate cost of trade credit if your company pays on the 35th day after receiving the invoice?

Permanent current assets reflect the fact that current assets do not shrink to zero even when business is at a seasonal or cyclical low.Thus,permanent current assets represent a minimum level of current assets the firm must finance.

Long-term loan agreements always contain provisions,or covenants,which constrain the firm's future actions.Short-term credit agreements are just as restrictive in order to protect the interests of the lender.

Your firm buys on credit terms of 2/10,net 45,and it always pays on day 45.If you calculate that this policy effectively costs your firm $157,500 each year,what is the firm's average accounts payable balance?

When a firm pledges its accounts receivable,if a customer that purchased goods from the firm does not pay,the selling firm must take the loss.

The primary motivation behind out-sourcing is to provide the firm with an alternative source of supply in the event that its primary supplier is unable to meet the firm's raw material or component needs.

Many start-up firms never make it past the first few months of business,primarily because they lack formal working capital policies.

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Business Organizations and the Tax Environment

Analysis of Financial Statements

Financial Planning and Control

Time Value of Money

Valuation Concepts

Risk and Rates of Return

The Cost of Capital

Capital Budgeting

Capital Structure and Dividend Policy Decisions

Investment and Securities

Investment Analysis and Valuation Techniques

Filters

Exam 15: Working Capital Management

An unusually high turnover of accounts receivable,which implies a very short days sales outstanding (DSO),could indicate that the firm

A just-in-time system of inventory control requires that manufacturers coordinate production with suppliers so that raw materials or components arrive just as they are needed in the production process.The main objective of such a system is to reduce carrying costs.

Which of the following is not commonly regarded as being a credit policy variable?

Which of the following statements is correct?

Small,undercapitalized firms

Which of the following statements is correct?

Which of the following statements is correct?

Which of the following statements is most correct?

Your company has been offered credit terms on its purchases of 4/30,net 90.What will be the approximate cost of trade credit if your company pays on the 35th day after receiving the invoice?

Permanent current assets reflect the fact that current assets do not shrink to zero even when business is at a seasonal or cyclical low.Thus,permanent current assets represent a minimum level of current assets the firm must finance.

Long-term loan agreements always contain provisions,or covenants,which constrain the firm's future actions.Short-term credit agreements are just as restrictive in order to protect the interests of the lender.

Your firm buys on credit terms of 2/10,net 45,and it always pays on day 45.If you calculate that this policy effectively costs your firm $157,500 each year,what is the firm's average accounts payable balance?

When a firm pledges its accounts receivable,if a customer that purchased goods from the firm does not pay,the selling firm must take the loss.

The primary motivation behind out-sourcing is to provide the firm with an alternative source of supply in the event that its primary supplier is unable to meet the firm's raw material or component needs.

Many start-up firms never make it past the first few months of business,primarily because they lack formal working capital policies.

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Business Organizations and the Tax Environment

Analysis of Financial Statements

Financial Planning and Control

Time Value of Money

Valuation Concepts

Risk and Rates of Return

The Cost of Capital

Capital Budgeting

Capital Structure and Dividend Policy Decisions

Investment and Securities

Investment Analysis and Valuation Techniques

Filters