Question 1

If a firm increases its accounts payable period, other things equal, it increases the cash conversion cycle.

Accepted Answer

A) True 
 B)False

Question 2

What happens to a firm whose uses of cash exceed its sources of cash during an accounting period?

Accepted Answer

A)  It has a loss of net working capital. 
B)  It declares a net loss on the income statement. 
C)  It experiences a decrease in sales. 
D) It experiences a decrease in its cash balance. 
A)  It has a loss of net working capital. 
B)  It declares a net loss on the income statement. 
C)  It experiences a decrease in sales. 
D) It experiences a decrease in its cash balance.

Question 3

A company that borrows $1 million short term and invests the proceeds in inventory will see its cash position unchanged.

Accepted Answer

A) True 
 B)False

Question 4

A company that borrows $1 million long term and invests the proceeds in inventory will see a $1 million increase in its net working capital.

Accepted Answer

A) True 
 B)False

Question 5

A company that pays $5,000 previously owed to one of its suppliers will see no change in its net working capital.

Accepted Answer

A) True 
 B)False

Question 6

When a loan is secured by receivables, the firm assigns the receivables to the bank. If the firm fails to repay the loan, the bank can collect the receivables from the firm's customers and use the cash to pay off the debt.

Accepted Answer

A) True 
 B)False

Question 7

Some companies solve their financing problem by borrowing on the strength of their current assets; others solve it by selling their current assets.

Accepted Answer

A) True 
 B)False

Question 8

The factoring firm bears responsibility for default on accounts receivable purchased from a firm.

Accepted Answer

A) True 
 B)False

Question 9

A firm faces a liquidity crunch and must decide between borrowing from a bank at 12% interest or stretching its payables for one quarter. If it stretches the payables it will forgo a 2% discount for timely payment. Based solely on cash flows, which would you suggest?

Accepted Answer

A)  Stretching saves the firm approximately 8% per year. 
B)  Use the bank loan; forgoing a cash discount is costly. 
C)  Stretch the payables and finance at a savings of approximately 3.75% annually. 
D) Use the bank loan because it represents simple interest. 
A)  Stretching saves the firm approximately 8% per year. 
B)  Use the bank loan; forgoing a cash discount is costly. 
C)  Stretch the payables and finance at a savings of approximately 3.75% annually. 
D) Use the bank loan because it represents simple interest.

Question 10

What is the inventory period for a firm with an annual cost of goods sold of $8 million, $1.5 million in inventory, and a cash conversion cycle of 75 days?

Accepted Answer

A)  76.56 days 
B)  18.75 days 
C)  53.33 days 
D) 68.44 days 
A)  76.56 days 
B)  18.75 days 
C)  53.33 days 
D) 68.44 days

Question 11

Investments in marketable securities are generally a positive NPV investment for tax-paying firms.

Accepted Answer

A) True 
 B)False

Question 12

What is the annual cost of goods sold for a firm with an accounts payable period of 35 days and an average accounts payable of $600,000?

Accepted Answer

A)  $5,753,425 
B)  $6,171,429 
C)  $6,257,143 
D) $17,142,857 
A)  $5,753,425 
B)  $6,171,429 
C)  $6,257,143 
D) $17,142,857

Question 13

What is the cash conversion cycle for a firm with $3 million average inventories, $1.5 million average accounts payable, a receivables period of 40 days, and an annual cost of goods sold of $18 million?

Accepted Answer

A)  14.59 days 
B)  46.25 days 
C)  70.42 days 
D) 136.25 days 
A)  14.59 days 
B)  46.25 days 
C)  70.42 days 
D) 136.25 days

Question 14

Field warehousing can be an important source of:

Accepted Answer

A)  additional storage space for cash-strapped firms. 
B)  investing for those who follow the relaxed cash strategy. 
C)  trade credit on a long-term basis. 
D) short-term financing with low risk to the lender. 
A)  additional storage space for cash-strapped firms. 
B)  investing for those who follow the relaxed cash strategy. 
C)  trade credit on a long-term basis. 
D) short-term financing with low risk to the lender.

Question 15

What is the best level of long-term financing relative to the total capital requirement?

Accepted Answer

It is hard to say. However, we can make

Question 16

For most corporations, net working capital is:

Accepted Answer

A)  negative during the inventory period of the cash conversion cycle. 
B)  equal to the amount of current assets. 
C)  positive to provide liquidity during the cash conversion cycle. 
D) present only during slack periods of the year. 
A)  negative during the inventory period of the cash conversion cycle. 
B)  equal to the amount of current assets. 
C)  positive to provide liquidity during the cash conversion cycle. 
D) present only during slack periods of the year.

Question 17

Which one of the following would not be considered a use of cash?

Accepted Answer

A)  Dividends 
B)  Decreased accounts payable 
C)  Depreciation 
D) Increased accounts receivable 
A)  Dividends 
B)  Decreased accounts payable 
C)  Depreciation 
D) Increased accounts receivable

Question 18

What is the length of the cash conversion cycle for a firm with $50,000 in inventory, $60,000 in average receivables, $30,000 in average payables, annual sales of $700,000, and a cost of goods sold of 75%?

Accepted Answer

Cash cycle = $50,000/[(0.75 ×

Question 19

A firm's inventory period can be estimated by the ratio of inventory to daily output.

Accepted Answer

A) True 
 B)False

Question 20

If a firm decided to reduce the receivables period by speeding up its collections from its customers while keeping the inventory period and payables period the same, then the:

Accepted Answer

A)  cash conversion cycle will increase. 
B)  cash conversion cycle will decrease. 
C)  firm's investment in working capital will be minimized. 
D) cash conversion cycle will increase while net working capital decreases. 
A)  cash conversion cycle will increase. 
B)  cash conversion cycle will decrease. 
C)  firm's investment in working capital will be minimized. 
D) cash conversion cycle will increase while net working capital decreases.

Exam 19: Short-Term Financial Planning

If a firm increases its accounts payable period, other things equal, it increases the cash conversion cycle.

What happens to a firm whose uses of cash exceed its sources of cash during an accounting period?

A company that borrows $1 million short term and invests the proceeds in inventory will see its cash position unchanged.

A company that borrows $1 million long term and invests the proceeds in inventory will see a $1 million increase in its net working capital.

A company that pays $5,000 previously owed to one of its suppliers will see no change in its net working capital.

When a loan is secured by receivables, the firm assigns the receivables to the bank. If the firm fails to repay the loan, the bank can collect the receivables from the firm's customers and use the cash to pay off the debt.

Some companies solve their financing problem by borrowing on the strength of their current assets; others solve it by selling their current assets.

The factoring firm bears responsibility for default on accounts receivable purchased from a firm.

A firm faces a liquidity crunch and must decide between borrowing from a bank at 12% interest or stretching its payables for one quarter. If it stretches the payables it will forgo a 2% discount for timely payment. Based solely on cash flows, which would you suggest?

What is the inventory period for a firm with an annual cost of goods sold of $8 million, $1.5 million in inventory, and a cash conversion cycle of 75 days?

Investments in marketable securities are generally a positive NPV investment for tax-paying firms.

What is the annual cost of goods sold for a firm with an accounts payable period of 35 days and an average accounts payable of $600,000?

What is the cash conversion cycle for a firm with $3 million average inventories, $1.5 million average accounts payable, a receivables period of 40 days, and an annual cost of goods sold of $18 million?

Field warehousing can be an important source of:

What is the best level of long-term financing relative to the total capital requirement?

For most corporations, net working capital is:

Which one of the following would not be considered a use of cash?

What is the length of the cash conversion cycle for a firm with $50,000 in inventory, $60,000 in average receivables, $30,000 in average payables, annual sales of $700,000, and a cost of goods sold of 75%?

A firm's inventory period can be estimated by the ratio of inventory to daily output.

If a firm decided to reduce the receivables period by speeding up its collections from its customers while keeping the inventory period and payables period the same, then the:

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