Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)   In managing a firm's accounts receivable, it is possible to increase credit sales per day yet still keep accounts receivable fairly steady, provided the firm can shorten the length of its collection period (its DSO)  sufficiently.
B)   Because of the costs of granting credit, it is not possible for credit sales to be more profitable than cash sales.
C)   Since receivables and payables both result from sales transactions, a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio.
D)   Other things held constant, if a firm can shorten its DSO, this will lead to a higher current ratio.
E)   A firm that makes 90% of its sales on credit and 10% for cash is growing at a constant rate of 10% annually. Such a firm will be able to keep its accounts receivable at the current level, since the 10% cash sales can be used to finance the 10% growth rate. A

Question 2

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  True

Question 3

maturity of most bank loans is short term Bank loans to businesses are frequently made as 90-day notes which are often rolled over, or renewed, rather than repaid when they mature However, if the borrower's financial situation deteriorates, then the bank may refuse to roll over the loan.

Accepted Answer

A) True 
 B)False  True

Question 4

Arnold Incpurchases merchandise on terms of 2/10 net 30, and it always pays on the 30th day The CFO calculates that the average amount of costly trade credit carried is $375,000 What is the firm's average accounts payable balance? Assume a 365-day year.

Accepted Answer

A)   $458,160
B)   $482,273
C)   $507,656
D)   $534,375
E)   $562,500

Question 5

the yield curve is upward sloping, then short-term debt will be cheaper than long-term debt Thus, if a firm's CFO expects the yield curve to continue to have an upward slope, this would tend to cause the current ratio to be relatively low, other things held constant.

Accepted Answer

A) True 
 B)False

Question 6

Other things held constant, which of the following would tend to reduce the cash conversion cycle?

Accepted Answer

A)   Place larger orders for raw materials to take advantage of price breaks.
B)   Take all discounts that are offered.
C)   Continue to take all discounts that are offered and pay on the net date.
D)   Offer longer payment terms to customers.
E)   Carry a constant amount of receivables as sales decline.

Question 7

the firm adopts a restricted policy, how much lower would its interest expense be than under the relaxed policy?

Accepted Answer

A)   $ 8,418
B)   $ 8,861
C)   $ 9,327
D)   $ 9,818
E)   $10,309

Question 8

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

Question 9

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 10

Mark's Manufacturing's average age of accounts receivable is 45 days, the average age of accounts payable is 40 days, and the average age of inventory is 69 days Assuming a 365-day year, what is the length of its cash conversion cycle?

Accepted Answer

A)   63 days
B)   67 days
C)   70 days
D)   74 days
E)   78 days

Question 11

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 12

Since receivables and payables both result from sales transactions, a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio.

Accepted Answer

A) True 
 B)False

Question 13

firm's collection policy, i.e., the procedures it follows to collect accounts receivable, plays an important role in keeping its average collection period short, although too strict a collection policy can reduce profits due to lost sales.

Accepted Answer

A) True 
 B)False

Question 14

Short-term financing is riskier than long-term financing since, during periods of tight credit, the firm may not be able to rollover (renew) its debt This is especially true if the funds are used to finance long-term assets rather than short-term assets.

Accepted Answer

A) True 
 B)False

Question 15

Short-term marketable securities are held for two separate and distinct purposes: (1) to provide liquidity as a substitute for cash and (2) as a non-operating investment Marketable securities held while awaiting reinvestment are not available for liquidity purposes.

Accepted Answer

A) True 
 B)False

Question 16

Freeman Builders, Incbuys on terms of 2/15, net 30 It does not take discounts, and it typically pays 60 days after the invoice date Net purchases amount to $720,000 per year What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?

Accepted Answer

A)   10.86%
B)   12.07%
C)   13.41%
D)   14.90%
E)   16.55%

Question 17

cash budget and the capital budget are handled separately, and although they are both important, they are developed completely independently of one another.

Accepted Answer

A) True 
 B)False

Question 18

Thornton Universal Sales's cost of goods sold (COGS) average $2,000,000 per month, and it keeps inventory equal to 50% of its monthly COGS on hand at all times Using a 365-day year, what is its inventory conversion period?

Accepted Answer

A)   11.7 days
B)   13.0 days
C)   14.4 days
D)   15.2 days
E)   16.7 days

Question 19

cash conversion cycle (CCC) combines three factors: The inventory conversion period, the average collection period, and the payables deferral period, and its purpose is to show how long a firm must finance its working capital Other things held constant, the shorter the CCC, the more effective the firm's working capital management.

Accepted Answer

A) True 
 B)False

Question 20

Firms generally choose to finance temporary current operating assets with short-term debt because

Accepted Answer

A)   short-term interest rates have traditionally been more stable than long-term interest rates.
B)   a firm that borrows heavily on a long-term basis is more apt to be unable to repay the debt than a firm that borrows short term.
C)   the yield curve is normally downward sloping.
D)   short-term debt has a higher cost than equity capital.
E)   matching the maturities of assets and liabilities reduces risk under some circumstances, and also because short-term debt is often less expensive than long-term capital.

Exam 21: Working Capital

Which of the following statements is CORRECT?

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

maturity of most bank loans is short term Bank loans to businesses are frequently made as 90-day notes which are often rolled over, or renewed, rather than repaid when they mature However, if the borrower's financial situation deteriorates, then the bank may refuse to roll over the loan.

Arnold Incpurchases merchandise on terms of 2/10 net 30, and it always pays on the 30th day The CFO calculates that the average amount of costly trade credit carried is $375,000 What is the firm's average accounts payable balance? Assume a 365-day year.

the yield curve is upward sloping, then short-term debt will be cheaper than long-term debt Thus, if a firm's CFO expects the yield curve to continue to have an upward slope, this would tend to cause the current ratio to be relatively low, other things held constant.

Other things held constant, which of the following would tend to reduce the cash conversion cycle?

the firm adopts a restricted policy, how much lower would its interest expense be than under the relaxed policy?

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.

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.

Mark's Manufacturing's average age of accounts receivable is 45 days, the average age of accounts payable is 40 days, and the average age of inventory is 69 days Assuming a 365-day year, what is the length of its cash conversion cycle?

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

Since receivables and payables both result from sales transactions, a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio.

firm's collection policy, i.e., the procedures it follows to collect accounts receivable, plays an important role in keeping its average collection period short, although too strict a collection policy can reduce profits due to lost sales.

Short-term financing is riskier than long-term financing since, during periods of tight credit, the firm may not be able to rollover (renew) its debt This is especially true if the funds are used to finance long-term assets rather than short-term assets.

Short-term marketable securities are held for two separate and distinct purposes: (1) to provide liquidity as a substitute for cash and (2) as a non-operating investment Marketable securities held while awaiting reinvestment are not available for liquidity purposes.

Freeman Builders, Incbuys on terms of 2/15, net 30 It does not take discounts, and it typically pays 60 days after the invoice date Net purchases amount to $720,000 per year What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?

cash budget and the capital budget are handled separately, and although they are both important, they are developed completely independently of one another.

Thornton Universal Sales's cost of goods sold (COGS) average $2,000,000 per month, and it keeps inventory equal to 50% of its monthly COGS on hand at all times Using a 365-day year, what is its inventory conversion period?

Firms generally choose to finance temporary current operating assets with short-term debt because