Question 1

Accruals represent a source of "free" financing in the sense that no explicit interest is paid on these funds.

Accepted Answer

A) True 
 B)False

Question 2

A firm constructing a new manufacturing plant and financing it with short-term loans that are scheduled to be converted to bonds when the plant is completed,would want to separate the construction loan from other current liabilities associated with working capital management.

Accepted Answer

A) True 
 B)False

Question 3

The pledging of receivables differs from factoring in that,under pledging,the lender normally has recourse against the borrower.

Accepted Answer

A) True 
 B)False

Question 4

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 5

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

Question 6

An aggressive method of financing an ongoing construction program would be for a company to sell bonds and equity before it actually needs funds,and to invest the proceeds in marketable securities until they are actually needed.

Accepted Answer

A) True 
 B)False

Question 7

One of the advantages of short-term debt financing is that firms can expand or contract their short-term credit more easily than their long-term credit.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

The cash budget focuses on the firm's ability to generate sufficient cash inflows to meet its required cash outflows.

Accepted Answer

A) True 
 B)False

Question 10

A firm is offered trade credit terms of 3/15,net 45.The firm does not take the discount,and it pays after 67 days.What is the approximate annual cost of not taking the discount?

Accepted Answer

A)  21.41% 
B)  22.07% 
C)  22.95% 
D)  23.48% 
E)  24.52%

Question 11

Which of the following would cause average inventory holdings to decrease,other things held constant?

Accepted Answer

A)  Fixed order costs double. 
B)  The purchase price of inventory items decreases by 50 percent. 
C)  The carrying cost of an item decreases (as a percent of purchase price). 
D)  The sales forecast is revised downward by 10 percent. 
E)  None of the above (all would cause average inventory to increase).

Question 12

Which of the following statements is correct?

Accepted Answer

A)  If a firm begins buying on terms of 2/20,net 60,after having bought on terms of 2/10,net 30,this will,other things held constant,probably lengthen its cash conversion cycle. 
B)  If a firm begins buying on terms of 2/20,net 60,after having bought on terms of 2/10,net 30,this will,other things held constant,increase the cost of nonfree (costly)trade credit. 
C)  Because the loan is paid off faster,the effective interest rate is lower if a firm borrows $100,000 on the basis of a 10% "add-on interest rate" loan paid off in 12 equal monthly installments than if the firm borrows the $100,000 on a loan which calls for a nominal 10% rate and for all interest and principal to be paid (repaid)at the end of one year. 
D)  "Commercial paper" is the name given to a type of short-term loan typically used by firms that are too small and financially weak to obtain credit from banks and other normal sources of credit. 
E)  Statements a,b,c,and d are all false.

Question 13

In part because money has time value,cash sales are always more profitable and more valuable than credit sales.

Accepted Answer

A) True 
 B)False

Question 14

Aberwald Corporation
Aberwald Corporation expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate. Fixed ordering costs are $200 per order; the purchase price per chip is $25; and the firm's inventory carrying cost is equal to 20 percent of the purchase price. (Assume a 360-day year.)
-Refer to Aberwald Corporation.At the EOQ,what is Aberwald's cost of ordering and carrying inventory?

Accepted Answer

A)  $23,820 
B)  $7,940 
C)  $15,940 
D)  $34,220 
E)  $47,693

Question 15

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 incremental bad debt losses if the change were made?

Accepted Answer

A)  $130,000 
B)  $250,000 
C)  −$250,000 (bad debt losses would decline) 
D)  −$130,000 (bad debt losses would decline) 
E)  $620,000

Question 16

Calculate the economic ordering quantity for Nashville Records Inc. ,given the following information:
Sales= 15,000 units per year
Sales price= $10 per unit
Purchase price= $5
Carrying cost= 0.25 times inventory value
Fixed cost per order= $1,000

Accepted Answer

A)  3,464 units 
B)  4,899 units 
C)  346 units 
D)  490 units 
E)  1,549 units

Question 17

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

Question 18

A zero balance account is used by firms as an effective tool of cash management to reduce the amount of idle cash a firm might otherwise keep.

Accepted Answer

A) True 
 B)False

Question 19

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 working capital strategy because of the inherent risks of using short-term financing.

Accepted Answer

A) True 
 B)False

Question 20

The central goal of inventory management is to provide sufficient incentives to ensure that the firm never suffers a stock-out (i.e.runs out of an inventory item).

Accepted Answer

A) True 
 B)False

Exam 15: Working Capital Management

Accruals represent a source of "free" financing in the sense that no explicit interest is paid on these funds.

A firm constructing a new manufacturing plant and financing it with short-term loans that are scheduled to be converted to bonds when the plant is completed,would want to separate the construction loan from other current liabilities associated with working capital management.

The pledging of receivables differs from factoring in that,under pledging,the lender normally has recourse against the borrower.

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.

An aggressive method of financing an ongoing construction program would be for a company to sell bonds and equity before it actually needs funds,and to invest the proceeds in marketable securities until they are actually needed.

One of the advantages of short-term debt financing is that firms can expand or contract their short-term credit more easily than their long-term credit.

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

The cash budget focuses on the firm's ability to generate sufficient cash inflows to meet its required cash outflows.

A firm is offered trade credit terms of 3/15,net 45.The firm does not take the discount,and it pays after 67 days.What is the approximate annual cost of not taking the discount?

Which of the following would cause average inventory holdings to decrease,other things held constant?

Which of the following statements is correct?

In part because money has time value,cash sales are always more profitable and more valuable than credit sales.

Calculate the economic ordering quantity for Nashville Records Inc. ,given the following information: Sales= 15,000 units per year Sales price= $10 per unit Purchase price= $5 Carrying cost= 0.25 times inventory value Fixed cost per order= $1,000

A zero balance account is used by firms as an effective tool of cash management to reduce the amount of idle cash a firm might otherwise keep.

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 working capital strategy because of the inherent risks of using short-term financing.

The central goal of inventory management is to provide sufficient incentives to ensure that the firm never suffers a stock-out (i.e.runs out of an inventory item).