Question 1

The cash conversion cycle (CCC) is defined as ________.

Accepted Answer

A)  Inventory Days + Accounts Receivable Days - Accounts Payable Days 
B)  Inventory Days - Accounts Receivable Days - Accounts Payable Days 
C)  Inventory Days + Accounts Receivable Days + Accounts Payable Days 
D)  Inventory Days + Accounts Payable Days - Accounts Receivable Days

Question 2

Which of the following is the term used to describe debt issued by state and local government which has a maturity of one to six months?

Accepted Answer

A)  certificates of deposit 
B)  banker's acceptances 
C)  commercial paper 
D)  short-term tax exempts

Question 3

ALT had $25 million in sales last year. Its cost of goods sold was $15 million and its average inventory balance was $3 million. The average days of inventory in the industry is 65 days. What would ALT's average inventory need to be so that it would meet the industry average?

Accepted Answer

A)  $4.45 million 
B)  $3.65 million 
C)  $3.33 million 
D)  $2.67 million

Question 4

Macrae Products, a manufacturer of building products, buys raw gypsum on credit on May 16. It processes this gypsum to make dry plaster powder on May 20 and pays cash for the raw gypsum on May 30. On June 7 it sells the dry plaster powder to a chain of hardware stores, and on June 21 receives cash payment for this sale. What is the length of the cash cycle in this case?

Accepted Answer

A)  8 days 
B)  14 days 
C)  22 days 
D)  23 days

Question 5

What is credit period?

Accepted Answer

The answer of What is credit period?...

Question 6

Evertz Metals buys and stockpiles $4,000,000 worth of dolomite to use in its smelting processes. How is this inventory cost best categorized?

Accepted Answer

A)  an acquisition cost 
B)  a carrying cost 
C)  an order cost 
D)  a holding cost

Question 7

Which of the following money market investments is a draft written by the borrower and guaranteed by the bank on which the draft is drawn? It is typically used in international trade transactions. The borrower is an importer who writes the draft in payment for goods.

Accepted Answer

A)  Treasury bills 
B)  repurchase agreement 
C)  certificates of deposit 
D)  banker's acceptance 
E)  commercial paper

Question 8

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 9

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 10

Franklin Industries has a current net working capital of $2.5 million. It expects that this will grow at a rate of 3.5% annually forever. If it could slow that growth to 3% per year, how would that affect the value of the firm, given that it has a cost of capital of 11%?

Accepted Answer

A)  a decrease of $2.22 million 
B)  an increase of $12,500 
C)  an increase of $0.78 million 
D)  an increase of $2.08 million

Question 11

What is a compensating balance?

Accepted Answer

A)  the cash a firm places into short-term investments 
B)  the cash a firm holds in order to pay its bills 
C)  the cash a firm holds to gain tax advantages 
D)  the cash a firm holds in an account at the bank in order for the bank to perform services for that firm

Question 12

Working capital management involves the management of all of a firm's assets and liabilities.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements is FALSE?

Accepted Answer

A)  Similar to the situation with its accounts receivable, a firm should monitor its accounts payable to ensure that it is making its payments at an optimal time. 
B)  Some firms ignore the payment due period and pay later, in a practice referred to as pushing the accounts payable. 
C)  Suppliers may react to a firm whose payments are always late by imposing terms of cash on delivery (CO
D)  or cash before delivery (CB
D) . 
D)  If the accounts payable outstanding is 40 days and the terms are 2/10 net 30, the firm can conclude that it generally pays late and may be risking supplier difficulties.

Question 14

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 15

A firm offers its customers 2/14 net 28. What is the cost of trade credit to a customer who chooses to pay on day 28?

Accepted Answer

A)  32.8% 
B)  67.3% 
C)  69.3% 
D)  72.4%

Question 16

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

Accepted Answer

The answer of A firm currently sells its product with...

Question 17

What is a precautionary balance?

Accepted Answer

A)  the cash a firm holds to counter the uncertainty surrounding its future cash needs 
B)  the cash a firm places into short-term investments 
C)  the cash a firm holds in order to pay its bills 
D)  the cash a firm holds to gain tax advantages

Question 18

Collection float is made up of all of the following EXCEPT ________.

Accepted Answer

A)  disbursement float 
B)  processing float 
C)  mail float 
D)  availability float

Question 19

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's Accounts Payable days is closest to ________.

Accepted Answer

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

Question 20

Which of the following is the term used to describe short-term, unsecured debt issued by large corporations, usually in denominations greater than $100,000 or more?

Accepted Answer

A)  certificates of deposit 
B)  repurchase agreements 
C)  banker's acceptances 
D)  commercial paper

Exam 19: Working Capital Management

The cash conversion cycle (CCC) is defined as ________.

Which of the following is the term used to describe debt issued by state and local government which has a maturity of one to six months?

ALT had $25 million in sales last year. Its cost of goods sold was $15 million and its average inventory balance was $3 million. The average days of inventory in the industry is 65 days. What would ALT's average inventory need to be so that it would meet the industry average?

What is credit period?

Evertz Metals buys and stockpiles $4,000,000 worth of dolomite to use in its smelting processes. How is this inventory cost best categorized?

Which of the following money market investments is a draft written by the borrower and guaranteed by the bank on which the draft is drawn? It is typically used in international trade transactions. The borrower is an importer who writes the draft in payment for goods.

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 statements is FALSE?

Franklin Industries has a current net working capital of $2.5 million. It expects that this will grow at a rate of 3.5% annually forever. If it could slow that growth to 3% per year, how would that affect the value of the firm, given that it has a cost of capital of 11%?

What is a compensating balance?

Working capital management involves the management of all of a firm's assets and liabilities.

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?

A firm offers its customers 2/14 net 28. What is the cost of trade credit to a customer who chooses to pay on day 28?

What is a precautionary balance?

Collection float is made up of all of the following EXCEPT ________.

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's Accounts Payable days is closest to ________.

Which of the following is the term used to describe short-term, unsecured debt issued by large corporations, usually in denominations greater than $100,000 or more?