Question 1

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 2

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 3

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 4

A firm tries to extend its disbursement float in order to reduce its working capital needs. Which of the following is a risk that may be associated with this strategy, if it is taken too far?

Accepted Answer

A)  may attract a late fee 
B)  may be required to pay before delivery for future supplies 
C)  may jeopardize the entire relationship with the supplier 
D)  all of the above 
A)  may attract a late fee 
B)  may be required to pay before delivery for future supplies 
C)  may jeopardize the entire relationship with the supplier 
D)  all of the above

Question 5

Which of the following is NOT a motivation for holding cash?

Accepted Answer

A)  to meet its day-to-day needs 
B)  to compensate for the uncertainty associated with cash flows 
C)  to satisfy bank requirements 
D)  to place in short-term investments 
A)  to meet its day-to-day needs 
B)  to compensate for the uncertainty associated with cash flows 
C)  to satisfy bank requirements 
D)  to place in short-term investments

Question 6

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 7

A firm offers its customers 2/14 net 28. What is the cost of trade credit to a customer who chooses to pay on day 28?

Accepted Answer

A)  32.8% 
B)  67.3% 
C)  69.3% 
D)  72.4% 
A)  32.8% 
B)  67.3% 
C)  69.3% 
D)  72.4%

Question 8

Jerome Industries has inventory days of 48, accounts receivable days of 21, and accounts payable days of 30. What is its cash conversion cycle?

Accepted Answer

A)  39 days 
B)  57 days 
C)  69 days 
D)  72 days 
A)  39 days 
B)  57 days 
C)  69 days 
D)  72 days

Question 9

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 10

What is discount period?

Accepted Answer

The discount period

Question 11

What is the effective cost of credit terms of 2/10, net 30 if the firm stretches the accounts payable to 45 days?

Accepted Answer

A)  49.76% 
B)  36.12% 
C)  23.45% 
D)  44.59% 
A)  49.76% 
B)  36.12% 
C)  23.45% 
D)  44.59%

Question 12

A firm has the accounts on its books shown above. What percentage of debt has been outstanding for over 60 days?

Accepted Answer

A)  28% 
B)  30% 
C)  34% 
D)  42% 
A)  28% 
B)  30% 
C)  34% 
D)  42%

Question 13

The Holiday Corporation had sales of $450 million this year. Its accounts receivable balance averaged $30 million. How long, on average, does it take the firm to collect on its sales?

Accepted Answer

A)  15.0 days 
B)  24.3 days 
C)  12.2 days 
D)  16.7 days 
A)  15.0 days 
B)  24.3 days 
C)  12.2 days 
D)  16.7 days

Question 14

The three steps in establishing a credit policy are establishing credit standards, establishing credit terms, and establishing a collection policy.

Accepted Answer

A) True 
 B)False

Question 15

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 16

Which of the following money market investments is a short-term debt obligations of the U.S. government?

Accepted Answer

A)  Treasury bills 
B)  repurchase agreement 
C)  commercial paper 
D)  certificates of deposit 
E)  banker's acceptance 
A)  Treasury bills 
B)  repurchase agreement 
C)  commercial paper 
D)  certificates of deposit 
E)  banker's acceptance

Question 17

What is a firm's cash cycle?

Accepted Answer

A firm's cash cycle is the len

Question 18

SwenCorp had sales of $154 million this year and an average accounts receivable of $18 million per day. Its credit terms specify "2/14 net 40." On average, how long does it take to collect on its sales?

Accepted Answer

A)  8.5 days 
B)  13 days 
C)  28 days 
D)  43 days 
A)  8.5 days 
B)  13 days 
C)  28 days 
D)  43 days

Question 19

Which of the following money market investments is short-term debt issued by a bank with a minimum denomination of $100,000?

Accepted Answer

A)  Treasury bills 
B)  banker's acceptance 
C)  repurchase agreement 
D)  commercial paper 
E)  certificates of deposit 
A)  Treasury bills 
B)  banker's acceptance 
C)  repurchase agreement 
D)  commercial paper 
E)  certificates of deposit

Question 20

Commercial Supply Corp. bills its accounts on terms of 2/10 net 30. The firm's accounts receivable include $200,000 that has been outstanding for ten or fewer days, $126,000 outstanding for 11 to 30 days, $98,000 outstanding for 31 to 40 days, $12,000 outstanding for 41 to 50 days, $20,000 outstanding for 51 to 60 days, and $7,000 outstanding for more than 60 days. Is the aging schedule for Commercial Supply Corp. bottom heavy?

Accepted Answer

A)  No, since 70% of the outstanding sales are on time and the percentage of long term outstanding payments is low. 
B)  Yes, since the percentage of payments that are late are greater than the percentage of payments that are on time. 
C)  No, since since the percentage of payments that are late are greater than the percentage of payments that are on time. 
D)  Given information is not sufficient to reach any conclusion. 
A)  No, since 70% of the outstanding sales are on time and the percentage of long term outstanding payments is low. 
B)  Yes, since the percentage of payments that are late are greater than the percentage of payments that are on time. 
C)  No, since since the percentage of payments that are late are greater than the percentage of payments that are on time. 
D)  Given information is not sufficient to reach any conclusion.

Exam 19: Working Capital Management

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

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

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?

A firm tries to extend its disbursement float in order to reduce its working capital needs. Which of the following is a risk that may be associated with this strategy, if it is taken too far?

Which of the following is NOT a motivation for holding cash?

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?

A firm offers its customers 2/14 net 28. What is the cost of trade credit to a customer who chooses to pay on day 28?

Jerome Industries has inventory days of 48, accounts receivable days of 21, and accounts payable days of 30. What is its cash conversion cycle?

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

What is discount period?

What is the effective cost of credit terms of 2/10, net 30 if the firm stretches the accounts payable to 45 days?

A firm has the accounts on its books shown above. What percentage of debt has been outstanding for over 60 days?

The Holiday Corporation had sales of $450 million this year. Its accounts receivable balance averaged $30 million. How long, on average, does it take the firm to collect on its sales?

The three steps in establishing a credit policy are establishing credit standards, establishing credit terms, and establishing a collection policy.

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 money market investments is a short-term debt obligations of the U.S. government?

What is a firm's cash cycle?

SwenCorp had sales of $154 million this year and an average accounts receivable of $18 million per day. Its credit terms specify "2/14 net 40." On average, how long does it take to collect on its sales?

Which of the following money market investments is short-term debt issued by a bank with a minimum denomination of $100,000?

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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