Question 1

The overriding goal of inventory management is to ensure that the firm never suffers a stock-out, i.e., never runs out of an inventory item.

Accepted Answer

A) True 
 B)False  False

Question 2

Accruals are "spontaneous," but unfortunately, due to law and economic forces, firms have little control over the level of these accounts.

Accepted Answer

A) True 
 B)False  True

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)  conservative firms generally use no short-term debt and thus have zero current liabilities. 
B)  a short-term loan can usually be obtained more quickly than a long-term loan, but the cost of short-term debt is normally higher than that of long-term debt. 
C)  if a firm that can borrow from its bank at a 6% interest rate buys materials on terms of 2/10 net 30, and if it must pay by day 30 or else be cut off, then we would expect to see zero accounts payable on its balance sheet. 
D)  if one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but it will not have an adverse financial impact on your firm if the customer periodically pays off its entire balance. 
E)  under normal conditions, a firm's expected roe would probably be higher if it financed with short-term rather than with long-term debt, but using short-term debt would probably increase the firm's risk. 
A)  conservative firms generally use no short-term debt and thus have zero current liabilities. 
B)  a short-term loan can usually be obtained more quickly than a long-term loan, but the cost of short-term debt is normally higher than that of long-term debt. 
C)  if a firm that can borrow from its bank at a 6% interest rate buys materials on terms of 2/10 net 30, and if it must pay by day 30 or else be cut off, then we would expect to see zero accounts payable on its balance sheet. 
D)  if one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but it will not have an adverse financial impact on your firm if the customer periodically pays off its entire balance. 
E)  under normal conditions, a firm's expected roe would probably be higher if it financed with short-term rather than with long-term debt, but using short-term debt would probably increase the firm's risk. E

Question 4

Carter & Carter is considering setting up a regional lockbox system to speed up collections. The company sells to customers all over the U.S., and all receipts come in to its headquarters in San Francisco. The firm's average accounts receivable balance is $2.5 million, and they are financed by a bank loan at an 11% annual interest rate. The firm believes this new lockbox system would reduce receivables by 20%. If the annual cost of the system is $15,000, what pre-tax net annual savings would be realized?

Accepted Answer

A)  $29,160 
B)  $32,400 
C)  $36,000 
D)  $40,000 
E)  $44,000 
A)  $29,160 
B)  $32,400 
C)  $36,000 
D)  $40,000 
E)  $44,000

Question 5

A line of credit can be either a formal or an informal agreement between a borrower and a bank regarding the maximum amount of credit the bank will extend to the borrower during some future period, assuming the borrower maintains its financial strength.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A)  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. 
B)  sound working capital policy is designed to maximize the time between cash expenditures on materials and the collection of cash on sales. 
C)  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. 
D)  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. 
E)  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. 
A)  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. 
B)  sound working capital policy is designed to maximize the time between cash expenditures on materials and the collection of cash on sales. 
C)  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. 
D)  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. 
E)  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.

Question 7

If a firm has set up a revolving credit agreement with a bank, the risk to the firm of being unable to obtain funds when needed is lower than if it had an informal line of credit.

Accepted Answer

A) True 
 B)False

Question 8

For a firm that makes heavy use of net float, being able to forecast collections and disbursement check clearings is essential.

Accepted Answer

A) True 
 B)False

Question 9

Setting up a lockbox arrangement is one way for a firm to speed up the collection of payments from its customers.

Accepted Answer

A) True 
 B)False

Question 10

Newsome Inc. buys on terms of 3/15, net 45. It does not take the discount, and it generally pays after 60 days. What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?

Accepted Answer

A)  25.09% 
B)  27.59% 
C)  30.35% 
D)  33.39% 
E)  36.73% 
A)  25.09% 
B)  27.59% 
C)  30.35% 
D)  33.39% 
E)  36.73%

Question 11

The longer its customers normally hold inventory, the longer the credit period supplier firms normally offer. Still, suppliers have some flexibility in the credit terms they offer. If a supplier lengthens the credit period offered, this will shorten the customer's cash conversion cycle but lengthen the supplier firm's own CCC.

Accepted Answer

A) True 
 B)False

Question 12

For a zero-growth firm, it is possible to increase the percentage of sales that are made on credit and still keep accounts receivable at their current level, provided the firm can shorten the length of its collection period sufficiently.

Accepted Answer

A) True 
 B)False

Question 13

If a firm has a large percentage of accounts over 30 days old, this is proof positive that its receivables manager is not doing a good job.

Accepted Answer

A) True 
 B)False

Question 14

Krackle Korn Inc. had credit sales of $3,500,000 last year and its days sales outstanding was DSO = 35 days. What was its average receivables balance, based on a 365-day year?

Accepted Answer

A)  $335,616 
B)  $352,397 
C)  $370,017 
D)  $388,518 
E)  $407,944 
A)  $335,616 
B)  $352,397 
C)  $370,017 
D)  $388,518 
E)  $407,944

Question 15

Suppose the suppliers of your firm offered you credit terms of 2/10 net 30 days. Your firm is not taking discounts, but is paying after 25 days instead of waiting until Day 30. You point out that the nominal cost of not taking the discount and paying on Day 30 is approximately 37%. But since your firm is neither taking discounts nor paying on the due date, what is the effective annual percentage cost (not the nominal cost) of its costly trade credit, using a 365-day year?

Accepted Answer

A)  60.3% 
B)  63.5% 
C)  66.7% 
D)  70.0% 
E)  73.5% 
A)  60.3% 
B)  63.5% 
C)  66.7% 
D)  70.0% 
E)  73.5%

Question 16

Which of the following statements concerning the cash budget is CORRECT?

Accepted Answer

A)  cash budgets do not include financial items such as interest and dividend payments. 
B)  cash budgets do not include cash inflows from long-term sources such as the issuance of bonds. 
C)  changes that affect the dso do not affect the cash budget. 
D)  capital budgeting decisions have no effect on the cash budget until projects go into operation and start producing revenues. 
E)  depreciation expense is not explicitly included, but depreciation's effects are reflected in the estimated tax payments. 
A)  cash budgets do not include financial items such as interest and dividend payments. 
B)  cash budgets do not include cash inflows from long-term sources such as the issuance of bonds. 
C)  changes that affect the dso do not affect the cash budget. 
D)  capital budgeting decisions have no effect on the cash budget until projects go into operation and start producing revenues. 
E)  depreciation expense is not explicitly included, but depreciation's effects are reflected in the estimated tax payments.

Question 17

Which of the following statements is NOT CORRECT?

Accepted Answer

A)  accruals are "free" in the sense that no explicit interest is paid on these funds. 
B)  a conservative approach to working capital management will result in most, if not all, permanent current operating assets being financed with long-term capital. 
C)  the risk to a firm that borrows with short-term credit is usually greater than if it borrowed using long-term debt. this added risk stems from the greater variability of interest costs on short-term debt and possible difficulties with rolling over short-term debt. 
D)  bank loans generally carry a higher interest rate than commercial paper. 
E)  commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate. 
A)  accruals are "free" in the sense that no explicit interest is paid on these funds. 
B)  a conservative approach to working capital management will result in most, if not all, permanent current operating assets being financed with long-term capital. 
C)  the risk to a firm that borrows with short-term credit is usually greater than if it borrowed using long-term debt. this added risk stems from the greater variability of interest costs on short-term debt and possible difficulties with rolling over short-term debt. 
D)  bank loans generally carry a higher interest rate than commercial paper. 
E)  commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate.

Question 18

Not taking cash discounts is costly, and as a result, firms that do not take them are usually those that are performing poorly and have inadequate cash balances.

Accepted Answer

A) True 
 B)False

Question 19

As a rule, managers should try to always use the free component of trade credit but should use the costly component only if the cost of this credit is lower than the cost of credit from other sources.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following will cause an increase in net working capital, other things held constant?

Accepted Answer

A)  a cash dividend is declared and paid. 
B)  merchandise is sold at a profit, but the sale is on credit. 
C)  long-term bonds are retired with the proceeds of a preferred stock issue. 
D)  missing inventory is written off against retained earnings. 
E)  cash is used to buy marketable securities. 
A)  a cash dividend is declared and paid. 
B)  merchandise is sold at a profit, but the sale is on credit. 
C)  long-term bonds are retired with the proceeds of a preferred stock issue. 
D)  missing inventory is written off against retained earnings. 
E)  cash is used to buy marketable securities.

Exam 21: Supply Chains and Working Capital Management

The overriding goal of inventory management is to ensure that the firm never suffers a stock-out, i.e., never runs out of an inventory item.

Accruals are "spontaneous," but unfortunately, due to law and economic forces, firms have little control over the level of these accounts.

Which of the following statements is CORRECT?

A line of credit can be either a formal or an informal agreement between a borrower and a bank regarding the maximum amount of credit the bank will extend to the borrower during some future period, assuming the borrower maintains its financial strength.

Which of the following statements is CORRECT?

If a firm has set up a revolving credit agreement with a bank, the risk to the firm of being unable to obtain funds when needed is lower than if it had an informal line of credit.

For a firm that makes heavy use of net float, being able to forecast collections and disbursement check clearings is essential.

Setting up a lockbox arrangement is one way for a firm to speed up the collection of payments from its customers.

Newsome Inc. buys on terms of 3/15, net 45. It does not take the discount, and it generally pays after 60 days. What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?

For a zero-growth firm, it is possible to increase the percentage of sales that are made on credit and still keep accounts receivable at their current level, provided the firm can shorten the length of its collection period sufficiently.

If a firm has a large percentage of accounts over 30 days old, this is proof positive that its receivables manager is not doing a good job.

Krackle Korn Inc. had credit sales of $3,500,000 last year and its days sales outstanding was DSO = 35 days. What was its average receivables balance, based on a 365-day year?

Which of the following statements concerning the cash budget is CORRECT?

Which of the following statements is NOT CORRECT?

Not taking cash discounts is costly, and as a result, firms that do not take them are usually those that are performing poorly and have inadequate cash balances.

As a rule, managers should try to always use the free component of trade credit but should use the costly component only if the cost of this credit is lower than the cost of credit from other sources.

Which of the following will cause an increase in net working capital, other things held constant?

An Overview of Financial Management and the Financial Environment

Risk and Return-Part I

Risk and Return-Part II

Bond Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Basic Stock Valuation

Corporate Valuation and Financial Planning

Corporate Governance

Determining the Cost of Capital

Capital Budgeting: Decision Criteria

Capital Budgeting-Estimating Cash Flows and Analyzing Risk

Real Options

Distributions to Shareholders-Dividends and Repurchases

Capital Structure Decisions

Dynamic Capital Structures and Corporate Valuation

Initial Public Offerings-Investment Banking: and Financial Restructuring

Lease Financing

Hybrid Financing Preferred Stock-Warrants and Convertibles

Providing and Obtaining Credit

Other Topics in Working Capital Management

Enterprise Risk Management

Bankruptcy-Reorganization and Liquidation

Mergers and Corporate Control

Multinational Financial Management

Time Value of Money

Basic Financial Tools: A review

Pension Plan Management

Financial Management in Not for Profit Businesses

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