Question 1

Use the table for the question(s) below.
Luther Industries had sales of $980 million and a cost of goods sold of $560 million in 2006.
A simplified balance sheet for the firm appears below:
Luther Industries
Balance Sheet
As of December 31, 2011
(millions of dollars)
 
-Luther's Accounts Payable days is closest to:

Accepted Answer

A)  39 days 
B)  32 days 
C)  59 days 
D)  42 days 
E)  47 days

Question 2

Evertz Metals buys and stockpiles $4,000,000 worth of dolomite to use in its smelting processes.How is this inventory cost best categorized?

Accepted Answer

A)  an acquisition cost 
B)  a carrying cost 
C)  an order cost 
D)  a holding cost 
E)  a hidden cost

Question 3

Use the table for the question(s) below.
Luther Industries had sales of $980 million and a cost of goods sold of $560 million in 2006.
A simplified balance sheet for the firm appears below:
Luther Industries
Balance Sheet
As of December 31, 2011
(millions of dollars)
 
-Luther's Inventory days is closest to:

Accepted Answer

A)  32 days 
B)  59 days 
C)  39 days 
D)  42 days 
E)  47 days

Question 4

Can a firm's cash cycle be longer than a firm's operating cycle?

Accepted Answer

The answer of Can a firm's cash cycle be longer...

Question 5

Cooper Copper,a manufacturer of copper piping,buys copper on credit on March 10.It processes this copper to make pipes on March 25 and pays cash for the copper on April 9.On April 14 it sells the pipes to a construction company,and on May 14 receives cash payment for this sale.What is the length of the cash cycle in this case?

Accepted Answer

A)  15 days 
B)  20 days 
C)  65 days 
D)  30 days 
E)  35 days

Question 6

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. 
E)  No, since it, on average, does not make payment before it is due.

Question 7

What is the effective cost of credit terms of 3/5 net 45 if the firm stretches the accounts payable to 60 days?

Accepted Answer

A)  12.9% 
B)  35.6% 
C)  39.9% 
D)  22.4% 
E)  42.7%

Question 8

Ally Manufacturing has an average accounts payable balance of $420,000.Its average annual cost of goods sold is $10,220,000.It receives terms of 2/15 net 30 from its suppliers.Is Ally 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. 
E)  No, since it, on average, does not make payment before it is due.

Question 9

What is the effective annual cost of credit terms of 3/15 net 30,if the firm stretches the accounts payable to 60 days?

Accepted Answer

A)  1.7% 
B)  3.35% 
C)  12.65% 
D)  28.03% 
E)  17.42%

Question 10

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 
E)  a hidden cost

Question 11

A firm offers its customers 1/10 net 40.What is the cost of trade credit to a customer who chooses to pay on day 40?

Accepted Answer

A)  12.8% 
B)  13.0% 
C)  65.5% 
D)  96.0% 
E)  83.1%

Question 12

If a firm decreases the level of inventory it carries,the order costs will ________ and the carrying costs will ________.

Accepted Answer

A)  decrease, decrease 
B)  increase, increase 
C)  decrease, increase 
D)  increase, decrease 
E)  remain unchanged, decrease

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

Trade credit should always be used when it is offered.

Accepted Answer

A) True 
 B)False

Question 15

Lionheart Inc.has the information shown above on its annual Income Statement and Balance Sheet (all numbers shown are in thousands).What is Lionheart's cash conversion cycle?

Accepted Answer

A)  8.3 days 
B)  24.4 days 
C)  -28.0 days 
D)  -7.7 days 
E)  20.1 days

Question 16

If a firm wishes to invest cash that might be needed at short notice in the very near future,they would be most likely to invest in which of the following securities?

Accepted Answer

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

Question 17

Brilliant Balloons,a party balloon manufacturer,buys latex on credit on September 1.It processes this latex to make balloons on September 6 and pays cash for the latex on September 14.On September 19 it sells the balloons to a party supply retailer,and on October 5 receives cash payment for this sale.What is the length of the cash cycle in this case?

Accepted Answer

A)  21 days 
B)  34 days 
C)  5 days 
D)  18 days 
E)  13 days

Question 18

Your firm purchases goods from its supplier with a discount of 1%,and a credit period of 20 days.If the effective annual cost of forgoing the discount is 27.71%,what is the length of the discount period?

Accepted Answer

A)  25 days 
B)  20 days 
C)  15 days 
D)  10 days 
E)  5 days

Question 19

Your firm purchases goods from its supplier with a discount period of 10 days,and a credit period of 40 days.If the effective annual cost of forgoing the discount is 13%,what is the amount of the discount?

Accepted Answer

A)  1% 
B)  2% 
C)  1.5% 
D)  2.5% 
E)  3%

Question 20

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% 
E)  54%

Exam 19: Working Capital Management