Question 1

Data on Nathan Enterprises for the most recent year are shown below,along with the days sales outstanding of the firms against which it benchmarks.The firm's new CFO believes that the company could reduce its receivables enough to reduce its DSO to the benchmarks' average.If this were done,by how much would receivables decline? Use a 365-day year.
Sales
$110,000
Accounts receivable
$16,000
Days sales outstanding (DSO)
53)09
Benchmark days sales outstanding (DSO)
20)00

Accepted Answer

A)  $8,078 
B)  $8,975 
C)  $9,973 
D)  $10,970 
E)  $12,067

Question 2

Uncertainty about the exact lives of assets prevents precise maturity matching in an ex post (i.e. ,after the fact)sense even though it is possible to match maturities on an ex ante (expected)basis.

Accepted Answer

A) True 
 B)False

Question 3

Determining a firm's optimal investment in working capital and deciding how that investment should be financed are critical to working capital management.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)  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. 
B)  Since depreciation is a non-cash charge,it neither appears on nor has any effect on the cash budget. 
C)  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. 
D)  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. 
E)  Shorter-term cash budgets,in general,are used primarily for planning purposes,while longer-term budgets are used for actual cash control.

Question 5

If a firm switched from taking trade credit discounts to paying on the net due date,this might cost the firm some money,but such a policy would probably have only a negligible effect on the income statement and no effect whatever on the balance sheet.

Accepted Answer

A) True 
 B)False

Question 6

The concept of permanent current operating assets reflects the fact that some components of current assets do not shrink to zero even when a business is at its seasonal or cyclical low.Thus,permanent current operating assets represent a minimum level of current assets that must be financed.

Accepted Answer

A) True 
 B)False

Question 7

On average,a firm collects checks totaling $250,000 per day.It takes the firm approximately 4 days from the day the checks were mailed until they result in usable cash for the firm.Assume that (1)a lockbox system could be employed which would reduce the cash conversion procedure to 2 1/2 days and (2)the firm could invest any additional cash generated at 6% after taxes.The lockbox system would be a good buy if it costs $25,000 annually.

Accepted Answer

A) True 
 B)False

Question 8

For 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 9

A lockbox plan is most beneficial to firms that

Accepted Answer

A)  have widely dispersed manufacturing facilities. 
B)  have a large marketable securities portfolio and cash to protect. 
C)  receive payments in the form of currency,such as fast food restaurants,rather than in the form of checks. 
D)  have customers who operate in many different parts of the country. 
E)  have suppliers who operate in many different parts of the country.

Question 10

Net working capital is defined as current assets divided by current liabilities.

Accepted Answer

A) True 
 B)False

Question 11

The twin goals of inventory management are (1)to ensure that the inventories needed to sustain operations are available,but (2)to hold the costs of ordering and carrying inventories to the lowest possible level.

Accepted Answer

A) True 
 B)False

Question 12

If a firm takes actions that reduce its days sales outstanding (DSO),then,other things held constant,this will lengthen its cash conversion cycle (CCC).

Accepted Answer

A) True 
 B)False

Question 13

Net operating working capital is defined as operating current assets minus operating current liabilities..

Accepted Answer

A) True 
 B)False

Question 14

Famous Farm's payables deferral period (PDP)is 50 days (on a 365-day basis),accounts payable are $100 million,and its balance sheet shows inventory of $125 million.What is the inventory turnover ratio?

Accepted Answer

A)  4.73 
B)  5.26 
C)  5.84 
D)  6.42 
E)  7.07

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

Synchronization of cash flows is an important cash management technique,as proper synchronization can reduce the required cash balance and increase a firm's profitability.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?

Accepted Answer

A)  Depreciation. 
B)  Cumulative cash. 
C)  Repurchases of common stock. 
D)  Payment for plant construction. 
E)  Payments lags.

Question 18

Carter & Carter is considering setting up a regional lockbox system to speed up collections.The company sells to customers all over the U.S. ,and all receipts come in to its headquarters in San Francisco.The firm's average accounts receivable balance is $2.5 million,and they are financed by a bank loan at an 11% annual interest rate.The firm believes this new lockbox system would reduce receivables by 20%.If the annual cost of the system is $15,000,what pre-tax net annual savings would be realized?

Accepted Answer

A)  $29,160 
B)  $32,400 
C)  $36,000 
D)  $40,000 
E)  $44,000

Question 19

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 20

Trade credit can be separated into two components: free trade credit,which is credit received after the discount period ends,and costly trade credit,which is the cost of discounts not taken.

Accepted Answer

A) True 
 B)False

Exam 16: Supply Chains and Working Capital Management

Uncertainty about the exact lives of assets prevents precise maturity matching in an ex post (i.e. ,after the fact)sense even though it is possible to match maturities on an ex ante (expected)basis.

Determining a firm's optimal investment in working capital and deciding how that investment should be financed are critical to working capital management.

Which of the following statements is CORRECT?

If a firm switched from taking trade credit discounts to paying on the net due date,this might cost the firm some money,but such a policy would probably have only a negligible effect on the income statement and no effect whatever on the balance sheet.

The concept of permanent current operating assets reflects the fact that some components of current assets do not shrink to zero even when a business is at its seasonal or cyclical low.Thus,permanent current operating assets represent a minimum level of current assets that must be financed.

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

A lockbox plan is most beneficial to firms that

Net working capital is defined as current assets divided by current liabilities.

The twin goals of inventory management are (1)to ensure that the inventories needed to sustain operations are available,but (2)to hold the costs of ordering and carrying inventories to the lowest possible level.

If a firm takes actions that reduce its days sales outstanding (DSO),then,other things held constant,this will lengthen its cash conversion cycle (CCC).

Net operating working capital is defined as operating current assets minus operating current liabilities..

Famous Farm's payables deferral period (PDP) is 50 days (on a 365-day basis) ,accounts payable are $100 million,and its balance sheet shows inventory of $125 million.What is the inventory turnover ratio?

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

Synchronization of cash flows is an important cash management technique,as proper synchronization can reduce the required cash balance and increase a firm's profitability.

Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?

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.

Trade credit can be separated into two components: free trade credit,which is credit received after the discount period ends,and costly trade credit,which is the cost of discounts not taken.