Question 1

Net working capital is defined as current assets minus current liabilities.This also defines the current ratio.

Accepted Answer

A) True 
 B)False

Question 2

Sound Systems Inc.wants to use the economic ordering quantity model to determine the optimal order quantity of speakers.The wholesale unit purchase price to Sound Systems is $50, and annual sales at a $100 per unit retail price total $50,000.The fixed cost of placing an order is $10, and the carrying cost is 50 percent of the purchase price.What is the EOQ, in units?

Accepted Answer

A)  10 
B)  20 
C)  30 
D)  40 
E)  50 
A)  10 
B)  20 
C)  30 
D)  40 
E)  50

Question 3

Which of the following statements is correct?

Accepted Answer

A)  Under normal conditions, a firm's expected ROE probably would be higher if it financed with short-term than with long-term debt, but the use of short-term debt would probably increase the firm's risk. 
B)  Conservative firms generally use no short-term debt and thus have zero current liabilities. 
C)  A short-term loan can usually be obtained more quickly than a long-term loan, but the cost of short-term debt is likely to be higher than that of long-term debt. 
D)  If a firm that can borrow from its bank buys 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. 
E)  If one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but does not represent a real financial cost to your firm as long as the firm periodically pays off its entire balance. 
A)  Under normal conditions, a firm's expected ROE probably would be higher if it financed with short-term than with long-term debt, but the use of short-term debt would probably increase the firm's risk. 
B)  Conservative firms generally use no short-term debt and thus have zero current liabilities. 
C)  A short-term loan can usually be obtained more quickly than a long-term loan, but the cost of short-term debt is likely to be higher than that of long-term debt. 
D)  If a firm that can borrow from its bank buys 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. 
E)  If one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but does not represent a real financial cost to your firm as long as the firm periodically pays off its entire balance.

Question 4

For the Cook County Company, the average age of accounts receivable is 60 days, the average age of accounts payable is 45 days, and the average age of inventory is 72 days.Assuming a 360-day year, what is the length of the firm's cash conversion cycle?

Accepted Answer

A)  87 days 
B)  90 days 
C)  65 days 
D)  48 days 
E)  66 days 
A)  87 days 
B)  90 days 
C)  65 days 
D)  48 days 
E)  66 days

Question 5

Firms hold cash balances in order to complete transactions that are necessary in business operations and as compensation to banks for providing loans and services.

Accepted Answer

A) True 
 B)False

Question 6

If the unit sales of a firm double, the optimal order quantity as determined by the EOQ model will also double.

Accepted Answer

A) True 
 B)False

Question 7

What is the inventory conversion period for a firm that has inventory of $1.5 million, a tax rate of 35 percent, daily cost of goods sold of $300,000, and profit margin of 12 percent?

Accepted Answer

A)  3.25 days 
B)  0.60 days 
C)  5.00 days 
D)  6.75 days 
A)  3.25 days 
B)  0.60 days 
C)  5.00 days 
D)  6.75 days

Question 8

The economic order quantity (EOQ) is that order quantity that results in the minimum ordering cost and the minimum carrying cost; that is, the EOQ minimizes both of these cost components individually.

Accepted Answer

A) True 
 B)False

Question 9

Dixie Tours Inc.buys on terms of 2/15, net 30.It does not take discounts, and it typically pays 35 days after the invoice date.Net purchases amount to $720,000 per year.What is the approximate percentage cost of its non-free trade credit?

Accepted Answer

A)  17.2% 
B)  23.6% 
C)  26.1% 
D)  36.7% 
E)  50.6% 
A)  17.2% 
B)  23.6% 
C)  26.1% 
D)  36.7% 
E)  50.6%

Question 10

The principal goal of most inventory management systems is to balance the costs of ordering, shipping, and receiving goods with the cost of carrying those goods, while simultaneously meeting the firm's policy with respect to avoiding running short of stock and disrupting production schedules.

Accepted Answer

A) True 
 B)False

Question 11

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 12

Quickbow Company currently uses maximum trade credit by not taking discounts on its purchases.Quickbow is considering borrowing from its bank, using notes payable, in order to take trade discounts.The firm wants to determine the effect of this policy change on its net income.The standard industry credit terms offered by all its suppliers are 2/10, net 30 days, and Quickbow pays in 30 days.Its net purchases are $11,760 per day, using a 360-day year.The rate on the notes payable is 10 percent and the firm's tax rate is 40 percent.If the firm implements the plan, what is the expected change in Quickbow's net income?

Accepted Answer

A)  −$23,520 
B)  −$32,160 
C)  +$23,520 
D)  +$37,728 
E)  +$62,880 
A)  −$23,520 
B)  −$32,160 
C)  +$23,520 
D)  +$37,728 
E)  +$62,880

Question 13

The three major elements in a firm's credit policy are (1) credit standards, (2) credit terms, and (3) collection policy.

Accepted Answer

A) True 
 B)False

Question 14

Cash is often referred to as a "non-earning" asset.Thus, one goal of cash management is to minimize the amount of cash necessary to conduct business.

Accepted Answer

A) True 
 B)False

Question 15

Uncertainty about the exact lives of assets prevents precise maturity matching in an ex post (i.e.after the fact) sense even though it is possible to maturity match on an expected basis.

Accepted Answer

A) True 
 B)False

Question 16

Incremental Profits
Berkeley Prints
Berkeley Prints expects to have sales this year of $15 million under its current credit policy.The present terms are net 30; the days sales outstanding (DSO) is 60 days; and the bad debt loss percentage is 5 percent.Also, Berkeley's cost of capital is 15 percent, and its variable costs total 60 percent of sales.Because Berkeley wants to improve its profitability, a proposal has been made to offer a 2 percent discount for payment within 10 days; that is, change the credit terms to 2/10, net 30.The consultants predict that sales would increase by $500,000, and that 50 percent of all customers would take the discount.The new DSO would be 30 days, and the bad debt loss percentage on all sales would fall to 4 percent.
-Refer to Berkeley Prints.What would be the cost to Berkeley of the discounts taken?

Accepted Answer

A)  $116,750 
B)  −$108,750 
C)  $155,000 
D)  $225,000 
E)  $260,500 
A)  $116,750 
B)  −$108,750 
C)  $155,000 
D)  $225,000 
E)  $260,500

Question 17

Generally, the longer the normal inventory holding period of a customer the longer the credit period.One effect of extending the credit period to match the customer's merchandise holding period is to increase the customer's payables deferral period, which actually serves to shorten the customer's cash conversion cycle.

Accepted Answer

A) True 
 B)False

Question 18

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 19

A line of credit can be either a formal or informal agreement between borrower and bank regarding the maximum amount of credit the bank will extend to the borrower subject to certain conditions.

Accepted Answer

A) True 
 B)False

Question 20

If a firm is offered credit terms of 2/10, net 30, it is in the firm's financial interest to pay as early during the discount period as possible.

Accepted Answer

A) True 
 B)False

Net working capital is defined as current assets minus current liabilities.This also defines the current ratio.

Which of the following statements is correct?

For the Cook County Company, the average age of accounts receivable is 60 days, the average age of accounts payable is 45 days, and the average age of inventory is 72 days.Assuming a 360-day year, what is the length of the firm's cash conversion cycle?

Firms hold cash balances in order to complete transactions that are necessary in business operations and as compensation to banks for providing loans and services.

If the unit sales of a firm double, the optimal order quantity as determined by the EOQ model will also double.

What is the inventory conversion period for a firm that has inventory of $1.5 million, a tax rate of 35 percent, daily cost of goods sold of $300,000, and profit margin of 12 percent?

The economic order quantity (EOQ) is that order quantity that results in the minimum ordering cost and the minimum carrying cost; that is, the EOQ minimizes both of these cost components individually.

Dixie Tours Inc.buys on terms of 2/15, net 30.It does not take discounts, and it typically pays 35 days after the invoice date.Net purchases amount to $720,000 per year.What is the approximate percentage cost of its non-free trade credit?

The principal goal of most inventory management systems is to balance the costs of ordering, shipping, and receiving goods with the cost of carrying those goods, while simultaneously meeting the firm's policy with respect to avoiding running short of stock and disrupting production schedules.

Which of the following statements is correct?

The three major elements in a firm's credit policy are (1) credit standards, (2) credit terms, and (3) collection policy.

Cash is often referred to as a "non-earning" asset.Thus, one goal of cash management is to minimize the amount of cash necessary to conduct business.

Uncertainty about the exact lives of assets prevents precise maturity matching in an ex post (i.e.after the fact) sense even though it is possible to maturity match on an expected basis.

A line of credit can be either a formal or informal agreement between borrower and bank regarding the maximum amount of credit the bank will extend to the borrower subject to certain conditions.

If a firm is offered credit terms of 2/10, net 30, it is in the firm's financial interest to pay as early during the discount period as possible.

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 Concepts

Security Valuation and Selection

Filters

Exam 15: Working Capital Management

Net working capital is defined as current assets minus current liabilities.This also defines the current ratio.

Which of the following statements is correct?

For the Cook County Company, the average age of accounts receivable is 60 days, the average age of accounts payable is 45 days, and the average age of inventory is 72 days.Assuming a 360-day year, what is the length of the firm's cash conversion cycle?

Firms hold cash balances in order to complete transactions that are necessary in business operations and as compensation to banks for providing loans and services.

If the unit sales of a firm double, the optimal order quantity as determined by the EOQ model will also double.

What is the inventory conversion period for a firm that has inventory of $1.5 million, a tax rate of 35 percent, daily cost of goods sold of $300,000, and profit margin of 12 percent?

The economic order quantity (EOQ) is that order quantity that results in the minimum ordering cost and the minimum carrying cost; that is, the EOQ minimizes both of these cost components individually.

Dixie Tours Inc.buys on terms of 2/15, net 30.It does not take discounts, and it typically pays 35 days after the invoice date.Net purchases amount to $720,000 per year.What is the approximate percentage cost of its non-free trade credit?

The principal goal of most inventory management systems is to balance the costs of ordering, shipping, and receiving goods with the cost of carrying those goods, while simultaneously meeting the firm's policy with respect to avoiding running short of stock and disrupting production schedules.

Which of the following statements is correct?

The three major elements in a firm's credit policy are (1) credit standards, (2) credit terms, and (3) collection policy.

Cash is often referred to as a "non-earning" asset.Thus, one goal of cash management is to minimize the amount of cash necessary to conduct business.

Uncertainty about the exact lives of assets prevents precise maturity matching in an ex post (i.e.after the fact) sense even though it is possible to maturity match on an expected basis.

A line of credit can be either a formal or informal agreement between borrower and bank regarding the maximum amount of credit the bank will extend to the borrower subject to certain conditions.

If a firm is offered credit terms of 2/10, net 30, it is in the firm's financial interest to pay as early during the discount period as possible.

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 Concepts

Security Valuation and Selection

Filters