Question 1

Which of the following statements is CORRECT?

Accepted Answer

A) Other things held constant, the higher a firm's days sales outstanding (DSO), the better its credit department. 
B) If a firm that sells on terms of net 30 changes its policy to 2/10 net 30, and if no change in sales volume occurs, then the firm's DSO will probably increase. 
C) If a firm sells on terms of 2/10 net 30, and its DSO is 30 days, then the firm probably has some past-due accounts. 
D) If a firm sells on terms of net 60, and if its sales are highly seasonal, with a sharp peak in December, then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be lower in January than in July. 
E) If a firm changed the credit terms offered to its customers from 2/10 net 30 to 2/10 net 60, then its sales should increase, and this should lead to an increase in sales per day, and that should lead to a decrease in the DSO.

Question 2

Bumpas Enterprises purchases $4,562,500 in goods per year from its sole supplier on terms of 2/15, net 50.If the firm chooses to pay on time but does not take the discount, what is the effective annual percentage cost of its non-free trade credit? (Assume a 365-day year.)

Accepted Answer

A) 20.11% 
B) 21.17% 
C) 22.28% 
D) 23.45% 
E) 24.63%

Question 3

on Shin Inc.for 2008 are shown below, along with the inventory conversion period (ICP) of the firms against which it benchmarks.The firm's new CFO believes that the company could reduce its inventory enough to reduce its ICP to the benchmarks' average.If this were done, by how much would inventories decline? Use a 365-day year.
Cost of goods sold =$85,000
Inventory =$20,000
Inventory conversion period (ICP) =85.88
Benchmark inventory conversion period (ICP) =38.00

Accepted Answer

A) $ 7,316 
B) $ 8,129 
C) $ 9,032 
D) $10,036 
E) $11,151

Question 4

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 match maturities on an ex ante (expected) basis.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements is CORRECT?

Accepted Answer

A) Net working capital is defined as current assets minus the sum of payables and accruals, and any increase in the current ratio automatically indicates that net working capital has increased. 
B) Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks associated with using short-term financing. 
C) If a company follows a policy of "matching maturities," this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt. 
D) Net working capital is defined as current assets minus the sum of payables and accruals, and any decrease in the current ratio automatically indicates that net working capital has decreased. 
E) If a company follows a policy of "matching maturities," this means that it matches its use of short-term debt with its use of long-term debt.

Question 6

of the effects of ceasing to take trade credit discounts is that the firm's accounts payable will rise, other things held constant.

Accepted Answer

A) True 
 B)False

Question 7

Loans from commercial banks generally appear on balance sheets as notes payable.A bank's importance is actually greater than it appears from the dollar amounts shown on balance sheets because banks provide nonspontaneous funds to firms.

Accepted Answer

A) True 
 B)False

Question 8

Soenen Inc.had the following data for 2008 The new CFO believes that the company could improve its working capital management sufficiently to bring its NWC and CCC up to the benchmark companies' level without affecting either sales or the costs of goods sold.Soenen finances its net working capital with a bank loan at an 8% annual interest rate, and it uses a 365-day year.If these changes had been made, by how much would the firm's pre-tax income have increased?

Accepted Answer

A) 1,901 
B) 2,092 
C) 2,301 
D) 2,531 
E) 2,784

Question 9

aging schedule is a commonly used method for monitoring receivables.

Accepted Answer

A) True 
 B)False

Question 10

on Shick Inc.for 2008 are shown below, along with the days sales outstanding of the firms against which it benchmarks.The firm's new CFO believes that the company could reduce its receivables enough to reduce its DSO to the benchmarks' average.If this were done, by how much would receivables decline? Use a 365-day year.
$$\begin{array}{l}
\text { Project Data }\
\begin{array} { | l | r | } 
\hline \text { Sales } & \$ 110,000 \
\hline \text { Accounts receivable } & \$ 16,000 \
\hline \text { Days sales outstanding (DSO) } & 53.09 \
\hline \text { Benchmark days sales outstanding (DSO) } & 20.00 \
\hline
\end{array}
\end{array}$$

Accepted Answer

A) $8,078 
B) $8,975 
C) $9,973 
D) $10,970 
E) $12,067

Question 11

Since depreciation is a non-cash charge, it neither appears on nor has any effect on the cash budget.Thus, if the depreciation charge for the coming year doubled or halved, this would have no effect on the cash budget.

Accepted Answer

A) True 
 B)False

Question 12

working capital, defined as current assets minus the sum of payables and accruals, is equal to the current ratio minus the quick ratio.

Accepted Answer

A) True 
 B)False

Question 13

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 14

Which of the following statement completions is CORRECT? If the yield curve is upward sloping, then the marketable securities held in a firm's portfolio, assumed to be held for emergencies, should

Accepted Answer

A) consist mainly of long-term securities because they pay higher rates. 
B) consist mainly of short-term securities because they pay higher rates. 
C) consist mainly of U.S.Treasury securities to minimize interest rate risk. 
D) consist mainly of short-term securities to minimize interest rate risk. 
E) be balanced between long- and short-term securities to minimize the adverse effects of either an upward or a downward trend in interest rates.

Question 15

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 16

Which of the following is NOT commonly regarded as being a credit policy variable?

Accepted Answer

A) Credit period. 
B) Collection policy. 
C) Credit standards. 
D) Cash discounts. 
E) Payments deferral period.

Question 17

average accounts receivable balance is a function of both the volume of credit sales and the days sales outstanding.

Accepted Answer

A) True 
 B)False

Question 18

Because money has time value, a cash sale is always more profitable than a credit sale.

Accepted Answer

A) True 
 B)False

Question 19

on Wentz Inc.for 2008 are shown below, along with the payables deferral period (PDP) for the firms against which it benchmarks.The firm's new CFO believes that the company could delay payments enough to increase its PDP to the benchmarks' average.If this were done, by how much would payables increase? Use a 365-day year.
Cost of goods sold = $75,000
Payables = $5,000
Payables deferral period (PDP) = 24.33
Benchmark payables deferral period = 30.00

Accepted Answer

A) $ 764 
B) $ 849 
C) $ 943 
D) $1,048 
E) $1,164

Question 20

Pickle 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

Exam 16: Working Capital

Which of the following statements is CORRECT?

Bumpas Enterprises purchases $4,562,500 in goods per year from its sole supplier on terms of 2/15, net 50.If the firm chooses to pay on time but does not take the discount, what is the effective annual percentage cost of its non-free trade credit? (Assume a 365-day year.)

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 match maturities on an ex ante (expected) basis.

Which of the following statements is CORRECT?

of the effects of ceasing to take trade credit discounts is that the firm's accounts payable will rise, other things held constant.

Loans from commercial banks generally appear on balance sheets as notes payable.A bank's importance is actually greater than it appears from the dollar amounts shown on balance sheets because banks provide nonspontaneous funds to firms.

aging schedule is a commonly used method for monitoring receivables.

Since depreciation is a non-cash charge, it neither appears on nor has any effect on the cash budget.Thus, if the depreciation charge for the coming year doubled or halved, this would have no effect on the cash budget.

working capital, defined as current assets minus the sum of payables and accruals, is equal to the current ratio minus the quick ratio.

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.

Which of the following statement completions is CORRECT? If the yield curve is upward sloping, then the marketable securities held in a firm's portfolio, assumed to be held for emergencies, should

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.

Which of the following is NOT commonly regarded as being a credit policy variable?

average accounts receivable balance is a function of both the volume of credit sales and the days sales outstanding.

Because money has time value, a cash sale is always more profitable than a credit sale.

Pickle 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?