Question 1

What is meant by the term 1.5/14 net 30?

Accepted Answer

A)  If the invoice is paid within 14 days, a discount of 1.5 percent can be taken; otherwise the invoice is due in 30 days. 
B)  If the invoice is paid within 30 days, a discount of 14 percent can be taken; otherwise the invoice is due 14 days after that day. 
C)  If the invoice is paid within 1.5 days, a discount of 14 percent can be taken; otherwise the invoice is due in 30 days. 
D)  If the invoice is paid right away, a discount of 14 percent can be taken; otherwise a discount of 1.5 percent can be taken if paid within the next 30 days. 
A)  If the invoice is paid within 14 days, a discount of 1.5 percent can be taken; otherwise the invoice is due in 30 days. 
B)  If the invoice is paid within 30 days, a discount of 14 percent can be taken; otherwise the invoice is due 14 days after that day. 
C)  If the invoice is paid within 1.5 days, a discount of 14 percent can be taken; otherwise the invoice is due in 30 days. 
D)  If the invoice is paid right away, a discount of 14 percent can be taken; otherwise a discount of 1.5 percent can be taken if paid within the next 30 days.

Question 2

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 3

What is a firm's cash cycle?

Accepted Answer

A firm's cash cycle is the len

Question 4

Your firm purchases goods from its supplier on terms of 2/10, net 40. The effective annual cost to your firm if it chooses not to take advantage of the trade discount offered and stretches the accounts payable to 60 days is closest to ________.

Accepted Answer

A)  20.1% 
B)  15.9% 
C)  13.0% 
D)  11.1% 
A)  20.1% 
B)  15.9% 
C)  13.0% 
D)  11.1%

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

A firm offers its customers 3/5 net 25. What is the cost of trade credit to a customer who chooses to pay on day 25?

Accepted Answer

A)  32.3% 
B)  65.5% 
C)  68.4% 
D)  74.3% 
A)  32.3% 
B)  65.5% 
C)  68.4% 
D)  74.3%

Question 7

Bercraft Industries has an average accounts payable balance of $280,000. Its average annual cost of goods sold is $4,780,000. It receives terms of 1/20 net 40 from its suppliers. Is Bercraft managing its accounts payables well?

Accepted Answer

A)  Yes, since it, on average, chooses not to take the discount, but pays when payment is due. 
B)  Yes, since it, on average, takes the discount, and pays at the end of the discount period. 
C)  Yes, since it, on average, stretches payment beyond the due payment date. 
D)  No, since it, on average, does not take advantage of the discount period and pays well before payment is due. 
A)  Yes, since it, on average, chooses not to take the discount, but pays when payment is due. 
B)  Yes, since it, on average, takes the discount, and pays at the end of the discount period. 
C)  Yes, since it, on average, stretches payment beyond the due payment date. 
D)  No, since it, on average, does not take advantage of the discount period and pays well before payment is due.

Question 8

What is discount period?

Accepted Answer

The discount period

Question 9

What are the advantages of holding inventory?

Accepted Answer

A firm needs its inv

Question 10

Your firm purchases goods from its supplier on terms of 1/10 net 30. The effective annual cost to your firm if it chooses not to take advantage of the trade discount offered is closest to ________.

Accepted Answer

A)  16.8% 
B)  44.6% 
C)  20.1% 
D)  13.0% 
A)  16.8% 
B)  44.6% 
C)  20.1% 
D)  13.0%

Question 11

Which of the following statements is FALSE?

Accepted Answer

A)  The lower the discount percentage offered, the greater the cost of forgoing the discount and using trade credit. 
B)  A firm should choose to borrow using accounts payable only if trade credit is the cheapest source of funding. 
C)  A firm should always pay on the latest day allowed. 
D)  A firm should strive to keep its money working for it as long as possible without developing a bad relationship with its suppliers or engaging in unethical practices. 
A)  The lower the discount percentage offered, the greater the cost of forgoing the discount and using trade credit. 
B)  A firm should choose to borrow using accounts payable only if trade credit is the cheapest source of funding. 
C)  A firm should always pay on the latest day allowed. 
D)  A firm should strive to keep its money working for it as long as possible without developing a bad relationship with its suppliers or engaging in unethical practices.

Question 12

A firm's credit terms specify "1/10 net 30" and the accounts receivable days outstanding is 32 days. Which of the following can be concluded on the basis of this information?

Accepted Answer

A)  Most customers pay on time. 
B)  The average customer pays two days late. 
C)  All customers have paid within 32 days of purchase. 
D)  All customers pay late. 
A)  Most customers pay on time. 
B)  The average customer pays two days late. 
C)  All customers have paid within 32 days of purchase. 
D)  All customers pay late.

Question 13

Which of the following is/are direct costs associated with inventory? I. Acquisition costs

Accepted Answer

A)  I only 
B)  I and II 
C)  II and III 
D)  I, II, and III 
A)  I only 
B)  I and II 
C)  II and III 
D)  I, II, and III

Question 14

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 15

Which of the following is a component of disbursement float but not a component of collection float?

Accepted Answer

A)  availability float 
B)  mail float 
C)  processing float 
D)  check-clearing float 
A)  availability float 
B)  mail float 
C)  processing float 
D)  check-clearing float

Question 16

Which of the following is a firm's cash cycle?

Accepted Answer

A)  the average length of time between when a firm arranges funds to purchase its inventory and when it receives the cash back from selling its product 
B)  the average length of time between when a firm pays cash to purchase its initial inventory and when it receives cash from the sale of the output produced from that inventory 
C)  the average length of time between when a firm pays cash to purchase its initial inventory and when it sells output from that product 
D)  the average length of time between when a firm arranges funds to purchase its inventory and when it sells the output produced from that inventory 
A)  the average length of time between when a firm arranges funds to purchase its inventory and when it receives the cash back from selling its product 
B)  the average length of time between when a firm pays cash to purchase its initial inventory and when it receives cash from the sale of the output produced from that inventory 
C)  the average length of time between when a firm pays cash to purchase its initial inventory and when it sells output from that product 
D)  the average length of time between when a firm arranges funds to purchase its inventory and when it sells the output produced from that inventory

Question 17

Which one of the following is NOT one of the three steps involved in establishing a credit policy?

Accepted Answer

A)  establishing credit payment patterns 
B)  establishing credit standards 
C)  establishing a collection policy 
D)  establishing credit terms 
A)  establishing credit payment patterns 
B)  establishing credit standards 
C)  establishing a collection policy 
D)  establishing credit terms

Question 18

Which of the following is the major benefit to a firm of using just-in-time inventory management?

Accepted Answer

A)  minimizes the risk of stock-outs 
B)  minimizes the total number of orders that the firm places 
C)  reduces acquisition costs for placing goods in inventory 
D)  largely eliminates the carrying costs of maintaining a large inventory 
A)  minimizes the risk of stock-outs 
B)  minimizes the total number of orders that the firm places 
C)  reduces acquisition costs for placing goods in inventory 
D)  largely eliminates the carrying costs of maintaining a large inventory

Question 19

Which of the following best describes short-term debt issued by banks with a minimum denomination of $100,000?

Accepted Answer

A)  certificates of deposit 
B)  repurchase agreements 
C)  banker's acceptances 
D)  commercial paper 
A)  certificates of deposit 
B)  repurchase agreements 
C)  banker's acceptances 
D)  commercial paper

Question 20

Which of the following statements is FALSE?

Accepted Answer

A)  Firms may hold inventory because factors such as seasonality in demand mean that customer purchases do not perfectly match the most efficient production cycle. 
B)  Inventory helps minimize the risk that the firm will not be able to obtain an input it needs for production. 
C)  If a firm holds too much inventory, stock-outs, the situation when a firm runs out of product, may occur, leading to lost sales. 
D)  Because excessive inventory uses cash, efficient management of inventory increases firm value. 
A)  Firms may hold inventory because factors such as seasonality in demand mean that customer purchases do not perfectly match the most efficient production cycle. 
B)  Inventory helps minimize the risk that the firm will not be able to obtain an input it needs for production. 
C)  If a firm holds too much inventory, stock-outs, the situation when a firm runs out of product, may occur, leading to lost sales. 
D)  Because excessive inventory uses cash, efficient management of inventory increases firm value.

Exam 19: Working Capital Management

What is meant by the term 1.5/14 net 30?

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

What is a firm's cash cycle?

Your firm purchases goods from its supplier on terms of 2/10, net 40. The effective annual cost to your firm if it chooses not to take advantage of the trade discount offered and stretches the accounts payable to 60 days is closest to ________.

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

A firm offers its customers 3/5 net 25. What is the cost of trade credit to a customer who chooses to pay on day 25?

Bercraft Industries has an average accounts payable balance of $280,000. Its average annual cost of goods sold is $4,780,000. It receives terms of 1/20 net 40 from its suppliers. Is Bercraft managing its accounts payables well?

What is discount period?

What are the advantages of holding inventory?

Your firm purchases goods from its supplier on terms of 1/10 net 30. The effective annual cost to your firm if it chooses not to take advantage of the trade discount offered is closest to ________.

Which of the following statements is FALSE?

A firm's credit terms specify "1/10 net 30" and the accounts receivable days outstanding is 32 days. Which of the following can be concluded on the basis of this information?

Which of the following is/are direct costs associated with inventory? I. Acquisition costs

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

Which of the following is a component of disbursement float but not a component of collection float?

Which of the following is a firm's cash cycle?

Which one of the following is NOT one of the three steps involved in establishing a credit policy?

Which of the following is the major benefit to a firm of using just-in-time inventory management?

Which of the following best describes short-term debt issued by banks with a minimum denomination of $100,000?

Which of the following statements is FALSE?

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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