Question 1

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 2

Other things held constant,if a firm "stretches" (i.e.,delays paying)its accounts payable,this will lengthen its cash conversion cycle (CCC).

Accepted Answer

A) True 
 B)False

Question 3

The facts that (1)no explicit interest is paid on accruals and (2)the firm can vary the level of these accounts at will makes them an attractive source of funding to meet the firm's working capital needs.

Accepted Answer

A) True 
 B)False

Question 4

Accruals are "spontaneous" funds arising automatically from a firm's operations,but unfortunately,due to law and economic forces,firms have little control over the level of these accounts.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable securities?

Accepted Answer

A) The firm must make a known future payment, such as paying for a new plant that is under construction. 
B) The firm is going from its peak sales season to its slack season, so its receivables and inventories will experience a seasonal decline. 
C) The firm is going from its slack season to its peak sales season, so its receivables and inventories will experience seasonal increases. 
D) The firm has just sold long-term securities and has not yet invested the proceeds in operating assets. 
E) The firm just won a product liability suit one of its customers had brought against it.

Question 6

Which of the following actions would be likely to shorten the cash conversion cycle?

Accepted Answer

A) Adopt a new manufacturing process that speeds up the conversion of raw materials to finished goods from 20 days to 10 days. 
B) Change the credit terms offered to customers from 3/10, net 30 to 1/10, net 50. 
C) Begin to take discounts on inventory purchases; we buy on terms of 2/10, net 30. 
D) Adopt a new manufacturing process that saves some labor costs but slows down the conversion of raw materials to finished goods from 10 days to 20 days. 
E) Change the credit terms offered to customers from 2/10, net 30 to 1/10, net 60.

Question 7

Dewey Corporation has the following data,in thousands.Assuming a 365-day year,what is the firm's cash conversion cycle?

Accepted Answer

A) 25 days 
B) 28 days 
C) 31 days 
D) 35 days 
E) 38 days

Question 8

If a firm has set up a revolving credit agreement with a bank,the risk to the firm of being unable to obtain funds when needed is lower than if it had an informal line of credit.

Accepted Answer

A) True 
 B)False

Question 9

As a rule,managers should try to always use the free component of trade credit but should use the costly component only if the cost of this credit is lower than the cost of credit from other sources.

Accepted Answer

A) True 
 B)False

Question 10

Weiss Inc.arranged a $9,000,000 revolving credit agreement with a group of banks.The firm paid an annual commitment fee of 0.5% of the unused balance of the loan commitment.On the used portion of the revolver,it paid 1.5% above prime for the funds actually borrowed on a simple interest basis.The prime rate was 9% during the year.If the firm borrowed $6,000,000 immediately after the agreement was signed and repaid the loan at the end of one year,what was the total dollar annual cost of the revolver?

Accepted Answer

A) $612,750 
B) $645,000 
C) $677,250 
D) $711,113 
E) $746,668

Question 11

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 12

Which of the following statements is CORRECT?

Accepted Answer

A) Shorter-term cash budgets, in general, are used primarily for planning purposes, while longer-term budgets are used for actual cash control. 
B) The cash budget and the capital budget are developed separately, and although they are both important to the firm, one does not affect the other. 
C) Since depreciation is a non-cash charge, it neither appears on nor has any effect on the cash budget. 
D) The target cash balance should be set such that it need not be adjusted for seasonal patterns and unanticipated fluctuations in receipts, although it should be changed to reflect long-term changes in the firm's operations. 
E) The typical cash budget reflects interest paid on loans as well as income from the investment of surplus cash. These numbers, as well as other items on the cash budget, are expected values; hence, actual results might vary from the budgeted amounts.

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A) Under normal conditions, a firm's expected ROE would probably be higher if it financed with short-term rather than with long-term debt, but using short-term debt would probably increase the firm's risk. 
B) Conservative firms generally use no short-term debt and thus have zero current liabilities. 
C) A short-term loan can usually be obtained more quickly than a long-term loan, but the cost of short-term debt is normally higher than that of long-term debt. 
D) If a firm that can borrow from its bank at a 6% interest rate buys materials on terms of 2/10, net 30, and if it must pay by Day 30 or else be cut off, then we would expect to see zero accounts payable on its balance sheet. 
E) If one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but it will not have an adverse financial impact on your firm if the customer periodically pays off its entire balance.

Question 14

The risk to the firm of borrowing using short-term credit is usually greater than if it used long-term debt.Added risk stems from (1)the greater variability of interest costs on short-term than long-term debt and (2)the fact that even if its long-term prospects are good,the firm's lenders may not be willing to renew short-term loans if the firm is temporarily unable to repay those loans.

Accepted Answer

A) True 
 B)False

Question 15

Inmoo Company'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 16

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

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

The prime rate charged by big money center banks at any one time is likely to vary greatly (for example,as much as 2 to 4 percentage points)across banks due to banks' ability to differentiate themselves and because different banks operate in different parts of the country.

Accepted Answer

A) True 
 B)False

Question 19

Nogueiras Corp's budgeted monthly sales are $5,000,and they are constant from month to month.40% of its customers pay in the first month and take the 2% discount,while the remaining 60% pay in the month following the sale and do not receive a discount.The firm has no bad debts.Purchases for next month's sales are constant at 50% of projected sales for the next month."Other payments," which include wages,rent,and taxes,are 25% of sales for the current month.Construct a cash budget for a typical month and calculate the average cash gain or loss during the month.

Accepted Answer

A) $1,092 
B) $1,150 
C) $1,210 
D) $1,271 
E) $1,334

Question 20

Setting up a lockbox arrangement is one way for a firm to speed up the collection of payments from its customers.

Accepted Answer

A) True 
 B)False

Exam 16: Working Capital Management

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.

Other things held constant,if a firm "stretches" (i.e.,delays paying)its accounts payable,this will lengthen its cash conversion cycle (CCC).

The facts that (1)no explicit interest is paid on accruals and (2)the firm can vary the level of these accounts at will makes them an attractive source of funding to meet the firm's working capital needs.

Accruals are "spontaneous" funds arising automatically from a firm's operations,but unfortunately,due to law and economic forces,firms have little control over the level of these accounts.

Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable securities?

Which of the following actions would be likely to shorten the cash conversion cycle?

Dewey Corporation has the following data,in thousands.Assuming a 365-day year,what is the firm's cash conversion cycle?

If a firm has set up a revolving credit agreement with a bank,the risk to the firm of being unable to obtain funds when needed is lower than if it had an informal line of credit.

As a rule,managers should try to always use the free component of trade credit but should use the costly component only if the cost of this credit is lower than the cost of credit from other sources.

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.)

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Inmoo Company'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?

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

The prime rate charged by big money center banks at any one time is likely to vary greatly (for example,as much as 2 to 4 percentage points)across banks due to banks' ability to differentiate themselves and because different banks operate in different parts of the country.

Setting up a lockbox arrangement is one way for a firm to speed up the collection of payments from its customers.