Question 1

What of the following best describes just-in-time inventory management?

Accepted Answer

A) Inventory is maintained as a buffer to meet uncertainties in demand, supply, and movements of goods. 
B) Production inefficiencies arising when production capacity stands idle for lack of materials are minimized by holding a small stock of essentials at all times. 
C) A firm acquires inventory precisely when needed so that its inventory balance is always at, or close to, zero. 
D) A firm minimizes the time lags present in the supply chain by maintaining a certain amount of inventory to use in these lag times. 
A) Inventory is maintained as a buffer to meet uncertainties in demand, supply, and movements of goods. 
B) Production inefficiencies arising when production capacity stands idle for lack of materials are minimized by holding a small stock of essentials at all times. 
C) A firm acquires inventory precisely when needed so that its inventory balance is always at, or close to, zero. 
D) A firm minimizes the time lags present in the supply chain by maintaining a certain amount of inventory to use in these lag times.

Question 2

Evertz Metals buys and stockpiles dolomite to use in its smelting processes. Before all this dolomite is used, however, they alter their smelting process so that calcite limestone is used instead. How is the inventory cost of the unused dolomite best categorized?

Accepted Answer

A) an acquisition cost 
B) a carrying cost 
C) an order cost 
D) a holding cost 
A) an acquisition cost 
B) a carrying cost 
C) an order cost 
D) a holding cost

Question 3

What is the meaning of the term 2/10 net 30?

Accepted Answer

A) If the invoice is paid within 10 days, a 2% discount can be taken. If the invoice is paid between 11 and 29 days, a 1% discount can be taken. After 30 days, the full invoice is due. 
B) If the invoice is paid within 2 days, a 10% discount can be taken; otherwise the full invoice is due in 30 days. 
C) If the invoice is paid within 2 days, a 10% discount can be taken; otherwise a 2% discount can be taken if the invoice is paid in 30 days. 
D) If the invoice is paid within 10 days, a 2% discount can be taken; otherwise the full invoice is due in 30 days. 
A) If the invoice is paid within 10 days, a 2% discount can be taken. If the invoice is paid between 11 and 29 days, a 1% discount can be taken. After 30 days, the full invoice is due. 
B) If the invoice is paid within 2 days, a 10% discount can be taken; otherwise the full invoice is due in 30 days. 
C) If the invoice is paid within 2 days, a 10% discount can be taken; otherwise a 2% discount can be taken if the invoice is paid in 30 days. 
D) If the invoice is paid within 10 days, a 2% discount can be taken; otherwise the full invoice is due in 30 days.

Question 4

Sales $122,800 Cost of Goods Sold 104,380
Accounts Receivable 10,900
Inventory 1,420
Accounts Payable 22,640
Cromwell Incorporated has the information shown above on its annual Income Statement and Balance Sheet (all numbers shown are in thousands). What is Cromwell's cash conversion cycle?

Accepted Answer

A) -41.8 days 
B) -36.1 days 
C) 24.3 days 
D) 111.6 days 
A) -41.8 days 
B) -36.1 days 
C) 24.3 days 
D) 111.6 days

Question 5

Use the table for the question(s)below.
Luther Industries had sales of $980 million and a cost of goods sold of $560 million in 2006.
A simplified balance sheet for the firm appears below:
Luther Industries
Balance Sheet
As of December 31, 2006
(millions of dollars)  
-Luther's cash conversion cycle is closest to ________.

Accepted Answer

A) 51 days 
B) 66 days 
C) 71 days 
D) 129 days 
A) 51 days 
B) 66 days 
C) 71 days 
D) 129 days

Question 6

Which of the following is the term used to describe debt issued by state and local government which has a maturity of one to six months?

Accepted Answer

A) certificates of deposit 
B) banker's acceptances 
C) commercial paper 
D) short-term tax exempts 
A) certificates of deposit 
B) banker's acceptances 
C) commercial paper 
D) short-term tax exempts

Question 7

What is the effective annual cost of credit terms of 2/20, net 60, if the firm stretches the accounts payable to 80 days?

Accepted Answer

A) 6.4 % 
B) 13.1% 
C) 21.1% 
D) 34.2% 
A) 6.4 % 
B) 13.1% 
C) 21.1% 
D) 34.2%

Question 8

A financial manager who wants her investment to have a higher return would choose to invest some of her firm's excess cash in commercial paper over Treasury bonds.

Accepted Answer

A) True 
 B)False

Question 9

What is discount period?

Accepted Answer

The discount period

Question 10

Working capital management involves the management of all of a firm's assets and liabilities.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following is NOT a benefit of holding inventory?

Accepted Answer

A) minimizes the risk that the firm will not be able to obtain an input it needs for production 
B) seasonality of demand, meaning that customer purchases often do not match the most efficient production cycle, leading to a buildup of inventory in off-peak periods 
C) minimizes order cost from placing multiple orders throughout the year 
D) minimizes risks involved in spoilage and obsolescence 
A) minimizes the risk that the firm will not be able to obtain an input it needs for production 
B) seasonality of demand, meaning that customer purchases often do not match the most efficient production cycle, leading to a buildup of inventory in off-peak periods 
C) minimizes order cost from placing multiple orders throughout the year 
D) minimizes risks involved in spoilage and obsolescence

Question 12

Which of the following statements is FALSE?

Accepted Answer

A) Similar to the situation with its accounts receivable, a firm should monitor its accounts payable to ensure that it is making its payments at an optimal time. 
B) Some firms ignore the payment due period and pay later, in a practice referred to as pushing the accounts payable. 
C) Suppliers may react to a firm whose payments are always late by imposing terms of cash on delivery (CO
D) or cash before delivery (CB
D) . 
D) If the accounts payable outstanding is 40 days and the terms are 2/10 net 30, the firm can conclude that it generally pays late and may be risking supplier difficulties. 
A) Similar to the situation with its accounts receivable, a firm should monitor its accounts payable to ensure that it is making its payments at an optimal time. 
B) Some firms ignore the payment due period and pay later, in a practice referred to as pushing the accounts payable. 
C) Suppliers may react to a firm whose payments are always late by imposing terms of cash on delivery (CO
D) or cash before delivery (CB
D) . 
D) If the accounts payable outstanding is 40 days and the terms are 2/10 net 30, the firm can conclude that it generally pays late and may be risking supplier difficulties.

Question 13

The difference between a firm's operating cycle and its cash cycle is ________.

Accepted Answer

A) its account receivable days 
B) its accounts payable days 
C) its inventory days 
D) There is no difference between the cash and operating cycles. 
A) its account receivable days 
B) its accounts payable days 
C) its inventory days 
D) There is no difference between the cash and operating cycles.

Question 14

Which of the following is NOT an advantage of trade credit versus a standard loan?

Accepted Answer

A) Trade credit reduces a firm's collection float. 
B) If the buyer defaults, the supplier may be able to seize the inventory as collateral. 
C) The supplier may have more information about the credit quality of the customer than a bank. 
D) Providing financing at below-market rates is an indirect way to lower prices for only certain customers. 
A) Trade credit reduces a firm's collection float. 
B) If the buyer defaults, the supplier may be able to seize the inventory as collateral. 
C) The supplier may have more information about the credit quality of the customer than a bank. 
D) Providing financing at below-market rates is an indirect way to lower prices for only certain customers.

Question 15

A firm that chooses a low-risk, restrictive credit policy will tend to have a larger investment in receivables.

Accepted Answer

A) True 
 B)False

Question 16

What is a precautionary balance?

Accepted Answer

A) the cash a firm holds to counter the uncertainty surrounding its future cash needs 
B) the cash a firm places into short-term investments 
C) the cash a firm holds in order to pay its bills 
D) the cash a firm holds to gain tax advantages 
A) the cash a firm holds to counter the uncertainty surrounding its future cash needs 
B) the cash a firm places into short-term investments 
C) the cash a firm holds in order to pay its bills 
D) the cash a firm holds to gain tax advantages

Question 17

Use the table for the question(s)below.
Luther Industries had sales of $980 million and a cost of goods sold of $560 million in 2006.
A simplified balance sheet for the firm appears below:
Luther Industries
Balance Sheet
As of December 31, 2006
(millions of dollars)  
-Luther's Accounts Payable days is closest to ________.

Accepted Answer

A) 39 days 
B) 32 days 
C) 59 days 
D) 42 days 
A) 39 days 
B) 32 days 
C) 59 days 
D) 42 days

Question 18

Firms typically would prefer a positive cash conversion cycle versus a negative cash conversion cycle.

Accepted Answer

A) True 
 B)False

Question 19

Trade credit should always be used when it is offered.

Accepted Answer

A) True 
 B)False

Question 20

What is trade credit?

Accepted Answer

A) the credit that a firm extends to its customers 
B) the amount a firm is owed by its customers who have received goods and services but have not yet paid for them 
C) the percentage discount offered to a customer who opts to pay their account early 
D) the amount that a firm owes its suppliers for goods which it has received but for which it has not yet paid. 
A) the credit that a firm extends to its customers 
B) the amount a firm is owed by its customers who have received goods and services but have not yet paid for them 
C) the percentage discount offered to a customer who opts to pay their account early 
D) the amount that a firm owes its suppliers for goods which it has received but for which it has not yet paid.

Exam 19: Working Capital Management

What of the following best describes just-in-time inventory management?

Evertz Metals buys and stockpiles dolomite to use in its smelting processes. Before all this dolomite is used, however, they alter their smelting process so that calcite limestone is used instead. How is the inventory cost of the unused dolomite best categorized?

What is the meaning of the term 2/10 net 30?

Sales $122,800 Cost of Goods Sold 104,380 Accounts Receivable 10,900 Inventory 1,420 Accounts Payable 22,640 Cromwell Incorporated has the information shown above on its annual Income Statement and Balance Sheet (all numbers shown are in thousands). What is Cromwell's cash conversion cycle?

Which of the following is the term used to describe debt issued by state and local government which has a maturity of one to six months?

What is the effective annual cost of credit terms of 2/20, net 60, if the firm stretches the accounts payable to 80 days?

A financial manager who wants her investment to have a higher return would choose to invest some of her firm's excess cash in commercial paper over Treasury bonds.

What is discount period?

Working capital management involves the management of all of a firm's assets and liabilities.

Which of the following is NOT a benefit of holding inventory?

Which of the following statements is FALSE?

The difference between a firm's operating cycle and its cash cycle is ________.

Which of the following is NOT an advantage of trade credit versus a standard loan?

A firm that chooses a low-risk, restrictive credit policy will tend to have a larger investment in receivables.

What is a precautionary balance?

Firms typically would prefer a positive cash conversion cycle versus a negative cash conversion cycle.

Trade credit should always be used when it is offered.

What is trade credit?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Fundamentals of Capital Budgeting

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

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