Question 1

Drawing, Inc. has sales of $860,000 and cost of goods sold of $450,000. The firm had a beginning inventory of $50,000 and an ending inventory of $59,000. What is the length of the days' sales in inventory?

Accepted Answer

A) 23.13 days 
B) 44.21 days 
C) 21.22 days 
D) 47.86 days

Question 2

If a firm has a cash cycle of 75 days and an operating cycle of 120 days, what is its payables turnover?

Accepted Answer

A) 8.11 
B) 7.19 
C) 5.97 
D) 6.73

Question 3

Which of the following will increase the operating cycle?

Accepted Answer

A) The cash cycle decreases by one day but the average payment period increases by two and a half days. 
B) The days' sales in inventory decreases by one day but the average collection period increases by two days. 
C) COGS stays the same but inventory increases. 
D) All of the options will increase the operating cycle.

Question 4

Choosing the optimal level of investment in each current asset type involves a trade-off between carry costs and:

Accepted Answer

A) opportunity costs. 
B) financing costs. 
C) safety costs. 
D) shortage costs.

Question 5

Which of the following is the technique for reducing collection float by having funds sent to several geographically situated regional banks and then transferring to a main concentration account in another bank?

Accepted Answer

A) Lockbox system 
B) Concentration banking 
C) Wire transfers 
D) Collection float

Question 6

All of the following are examples of carrying costs EXCEPT:

Accepted Answer

A) rental payments on storage facilities where inventory is maintained. 
B) the lost sale if the company runs out of a particular model. 
C) the opportunity costs associated with having capital tied up in current assets instead of more productive fixed assets. 
D) All of the options are examples of carrying costs.

Question 7

All of the following are different techniques that can be used to help firms reduce collection float EXCEPT:

Accepted Answer

A) using drafts. 
B) using wire transfers. 
C) using concentration banking. 
D) using a lockbox system.

Question 8

Hollywood Shoes would like to maintain their cash account at a minimum level of $50,000, but expects the standard deviation in net daily cash flows to be $4,000; the effective annual rate on marketable securities to be 6 percent per year; and the trading cost per sale or purchase of marketable securities to be $100 per transaction. What will be their optimal upper cash limit?

Accepted Answer

A) $59,094.77 
B) $69,588.47 
C) $108,765.41 
D) $54,000.00

Question 9

PB&J Company has sales of $900,000 and cost of goods sold of $450,000. The firm had a beginning inventory of $70,000 and an ending inventory of $65,000. What is the length of the days' sales in inventory?

Accepted Answer

A) 56.78 days 
B) 54.75 days 
C) 52.72 days 
D) 26.36 days

Question 10

Everything else held constant, will an increase in the amount of inventory on hand increase or decrease the firm's profitability?

Accepted Answer

A) Decrease the profitability. 
B) Increase the profitability. 
C) It could either increase or decrease the profitability depending on net profit margins. 
D) It could either increase or decrease the profitability depending on the debt ratio.

Question 11

Suppose that Freddie's Fries has annual sales of $500,000; cost of goods sold of $375,000; average inventories of $9,000; average accounts receivable of $25,000; and an average accounts payable balance of $20,000. Assuming that all of Freddie's sales are on credit, what will be the firm's cash cycle?

Accepted Answer

A) 46.48 
B) 1.22 
C) 7.54 
D) 27.01

Question 12

Which of the following is NOT one of the Baumol Model's unrealistic assumptions?

Accepted Answer

A) The firm has a constant, perfectly predictable distribution rate for cash. 
B) No cash will come in during the period in question. 
C) No allowance for any safety stock of extra cash to buffer the firm against unexpectedly high demand for cash. 
D) No assumption to start from a replenishment level of cash then decline smoothly to a value of zero.

Question 13

Would it be worth it to incur a compensating balance of $15,000 in order to get a 2-percent-lower interest rate on a 1-year, pure discount loan of $1,000,000?

Accepted Answer

A) Yes 
B) No 
C) Not enough information is given to determine

Question 14

If a firm starts selling its accounts receivable to a factor, how will the firm's cash cycle change?

Accepted Answer

A) The firm will increase its cash cycle since it will now have to wait longer for payment. 
B) The firm will decrease its cash cycle since accounts receivable is reduced. 
C) Depending on conditions, the cash cycle could either increase or decrease. 
D) There will be no change.

Question 15

If a firm has a cash cycle of 10 days and an operating cycle of 43 days, what is its average payment period?

Accepted Answer

A) 10 
B) 33 
C) 43 
D) 53

Question 16

What effect does increasing the standard deviation in daily cash flows have on the cash return point in the Miller-Orr model?

Accepted Answer

A) It will cause the cash return point to increase. 
B) It will cause the cash return point to decrease. 
C) It has no impact on the cash return point. 
D) It will cause the cash return point to first increase, then decrease.

Question 17

The operating cycle will increase with all of the following changes EXCEPT:

Accepted Answer

A) the cost of goods sold increases. 
B) the level of accounts receivable increases. 
C) the level of inventory increases. 
D) All of the options will increase the operating cycle.

Question 18

For most businesses, particularly smaller ones, the most common way to cover a short-term financing need is to apply at a bank for which of the following?

Accepted Answer

A) Commercial loan 
B) Line of credit 
C) Asset-based loan 
D) Inventory loan

Question 19

The financing policy that will result in investing in marketable securities when asset requirements are low is referred to as:

Accepted Answer

A) compromise financing. 
B) restrictive financing. 
C) flexible financing. 
D) none of the options.

Question 20

Which of these is defined as the excess amounts of a current asset kept on hand to meet unexpected shocks in demand?

Accepted Answer

A) Liquid current assets 
B) Safety stock 
C) Overnight securities 
D) Float

Exam 14: Working Capital Management and Policies