Question 1

A firm tries to extend its disbursement float in order to reduce its working capital needs. Which of the following is a risk that may be associated with this strategy, if it is taken too far?

Accepted Answer

A) may attract a late fee 
B) may be required to pay before delivery for future supplies 
C) may jeopardize the entire relationship with the supplier 
D) all of the above

Question 2

A firm currently sells its product with a 2% discount to customers who pay by cash or credit card when they purchase one of the firm's products; otherwise, the full price is due within 30 days. Forty percent of customers take advantage of the discount. The firm plans to drop the discount so the new terms will simply be net 30. In doing so it expects to sell 100 fewer units per month and all customers to pay at day 30. The firm currently sells 1000 units per month at a cost per unit of $45 and a selling price per unit of $80. If the firm's required return is 2%, what is the net present value (NPV)of making this change? (Assume that all 1,000 units are sold at the beginning of the month and the cost of producing the units is paid immediately.)

Accepted Answer

A) -$169,860 
B) -$122,420 
C) $64,490 
D) $172,320

Question 3

Which of the following is NOT a motivation for holding cash?

Accepted Answer

A) to meet its day-to-day needs 
B) to compensate for the uncertainty associated with cash flows 
C) to satisfy bank requirements 
D) to place in short-term investments

Question 4

Which of the following is NOT a reason why a firm may typically choose not to stretch its accounts payable?

Accepted Answer

A) Delaying payment can increase the effective cost of credit in some circumstances. 
B) The supplier may demand COD or CBD in the future. 
C) The supplier may choose to discontinue business with delinquent customers. 
D) The firm's credit rating may be damaged.

Question 5

Genovese Fine Foods, a manufacturer of foodstuffs, buys durham wheat flour on credit on June 1. It processes this flour to make pasta on June 6 and pays cash for the flour on June 15. On June 22 it sells the pasta to a chain of supermarkets, and on July 3 receives cash payment for this sale. What is the length of the cash cycle in this case?

Accepted Answer

A) 8 days 
B) 12 days 
C) 18 days 
D) 28 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.

Question 7

Which of the following statements is FALSE?

Accepted Answer

A) A firm's cash cycle is the length of time between when the firm pays cash to purchase its initial inventory and when it receives cash from the sale of the output produced from that inventory. 
B) The longer a firm's cash cycle, the more working capital it has, and the more cash it needs to carry to conduct its daily operations. 
C) Most firms buy their inventory on credit, which increases the amount of time between the cash investment and the receipt of cash from that investment. 
D) Any reduction in working capital requirements generates a positive free cash flow that the firm can distribute immediately to shareholders.

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.

Question 9

Which of the following is/are direct costs associated with inventory?
I. Acquisition costs
II. Carrying costs
III. Order costs

Accepted Answer

A) I only 
B) I and II 
C) II and III 
D) I, II, and III

Question 10

Which of the following statements is FALSE?

Accepted Answer

A) The aging schedule is also sometimes augmented by analysis of the payments pattern, which provides information on the percentage of monthly sales that the firm collects in each month after the sale. 
B) Because accounts receivable days can be calculated from the firm's financial statement, outside investors commonly use this measure to evaluate a firm's credit management policy. 
C) If the aging schedule gets "top-heavy"-that is, if the percentages in the upper half of the schedule begin to increase, the firm will likely need to revisit its credit policy. 
D) Seasonal sales patterns may cause the number calculated for the accounts receivable days to change depending on when the calculation takes place.

Question 11

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, 2006
(millions of dollars) 
-Luther's Accounts Receivable days is closest to ________.

Accepted Answer

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

Question 12

Your firm purchases goods from its supplier on terms of 2/10, net 40. The effective annual cost to your firm if it chooses not to take advantage of the trade discount offered and stretches the accounts payable to 60 days is closest to ________.

Accepted Answer

A) 20.1% 
B) 15.9% 
C) 13.0% 
D) 11.1%

Question 13

A firm offers its customers 3/5 net 25. What is the cost of trade credit to a customer who chooses to pay on day 25?

Accepted Answer

A) 32.3% 
B) 65.5% 
C) 68.4% 
D) 74.3%

Question 14

The level of cash a firm holds is irrelevant; it can never be short of cash since a firm is able to raise new money instantly at a fair rate, while it can never have surplus cash since the firm can invest excess cash at a fair rate to earn a net present value (NPV)of zero.

Accepted Answer

A) True 
 B)False

Question 15

What is a firm's operating cycle?

Accepted Answer

The answer of What is a firm's operating cycle?...

Question 16

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%

Question 17

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) Treasury bills 
B) certificates of deposit 
C) repurchase agreements 
D) banker's acceptances

Question 18

Which of the following is a firm's operating cycle?

Accepted Answer

A) the average length of time between when a firm originally purchases its inventory and when it receives the cash back from selling its product 
B) the average length of time between when a firm pays cash to purchase its initial inventory and when it receives cash from the sale of the product produced from that inventory 
C) the average length of time between when a firm originally purchases its inventory and when it sells the product produced from that inventory 
D) the average length of time between when a firm originally purchases its inventory and when it pays cash for that inventory

Question 19

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 20

What is meant by the term 1.5/14 net 30?

Accepted Answer

A) If the invoice is paid within 14 days, a discount of 1.5 percent can be taken; otherwise the invoice is due in 30 days. 
B) If the invoice is paid within 30 days, a discount of 14 percent can be taken; otherwise the invoice is due 14 days after that day. 
C) If the invoice is paid within 1.5 days, a discount of 14 percent can be taken; otherwise the invoice is due in 30 days. 
D) If the invoice is paid right away, a discount of 14 percent can be taken; otherwise a discount of 1.5 percent can be taken if paid within the next 30 days.

Exam 19: Working Capital Management

A firm tries to extend its disbursement float in order to reduce its working capital needs. Which of the following is a risk that may be associated with this strategy, if it is taken too far?

Which of the following is NOT a motivation for holding cash?

Which of the following is NOT a reason why a firm may typically choose not to stretch its accounts payable?

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?

Which of the following statements is FALSE?

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?

Which of the following is/are direct costs associated with inventory? I. Acquisition costs II. Carrying costs III. Order costs

Which of the following statements is FALSE?

Your firm purchases goods from its supplier on terms of 2/10, net 40. The effective annual cost to your firm if it chooses not to take advantage of the trade discount offered and stretches the accounts payable to 60 days is closest to ________.

A firm offers its customers 3/5 net 25. What is the cost of trade credit to a customer who chooses to pay on day 25?

The level of cash a firm holds is irrelevant; it can never be short of cash since a firm is able to raise new money instantly at a fair rate, while it can never have surplus cash since the firm can invest excess cash at a fair rate to earn a net present value (NPV)of zero.

What is a firm's operating cycle?

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

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?

Which of the following is a firm's operating cycle?

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

What is meant by the term 1.5/14 net 30?