Question 1

A lockbox plan is most beneficial to firms that

Accepted Answer

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

Question 2

A conservative financing approach to working capital will result in permanent current assets and some seasonal current assets being financed using long-term securities.

Accepted Answer

A) True 
 B)False

Question 3

The cash conversion cycle (CCC) combines three factors: The inventory conversion period, the receivables collection period, and the payables deferral period, and its purpose is to show how long a firm must finance its working capital. Other things held constant, the shorter the CCC, the more effective the firm's working capital management.

Accepted Answer

A) True 
 B)False

Question 4

Your company has been offered credit terms of 4/30, net 90 days. What will be the nominal annual percentage cost of its non-free trade credit if it pays 120 days after the purchase? (Assume a 365-day year.)

Accepted Answer

A)   16.05%
B)   16.90%
C)   17.74%
D)   18.63%
E)   19.56%F) A) and B)
G) A) and C)

Question 5

A firm's collection policy, i.e., the procedures it follows to collect accounts receivable, plays an important role in keeping its average collection period short, although too strict a collection policy can reduce profits due to lost sales.

Accepted Answer

A) True 
 B)False

Question 6

Net operating working capital, defined as current assets minus the difference between current liabilities and notes payable, is equal to the current ratio minus the quick ratio.

Accepted Answer

A) True 
 B)False

Question 7

If one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but it does not represent a real financial cost to your firm as long as the customer periodically pays off its entire balance.

Accepted Answer

A) True 
 B)False

Question 8

Zarruk Construction's DSO is 50 days (on a 365-day basis) , accounts receivable 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)   7.07F) None of the above
G) B) and D)

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)   Depreciation is included in the estimate of free cash flows (FCF = EBIT(1 - T)  + Depreciation - [Capital expenditures + NOWC]) , hence depreciation is set forth on a separate line in the cash budget.
B)   If cash inflows from collections occur in equal daily amounts but most payments must be made on the 10th of each month, then a regular monthly cash budget will be misleading. The problem can be corrected by using a daily cash budget.
C)   Sound working capital policy is designed to maximize the time between cash expenditures on materials and the collection of cash on sales.
D)   If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10, net 30 to net 60.
E)   If a firm sells on terms of net 90, and if its sales are highly seasonal, with 80% of its sales in September, then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365)  would probably be lower in October than in August.F) All of the above
G) B) and E)

Question 10

Other things held constant, which of the following would tend to reduce the cash conversion cycle?

Accepted Answer

A)   Carry a constant amount of receivables as sales decline.
B)   Place larger orders for raw materials to take advantage of price breaks.
C)   Take all discounts that are offered.
D)   Continue to take all discounts that are offered and pay on the net date.
E)   Offer longer payment terms to customers.F) None of the above
G) C) and E)

Question 11

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 12

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.F) A) and E)
G) B) and D)

Question 13

The calculated cost of trade credit can be reduced by paying late.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following statements is CORRECT?

Accepted Answer

A)   Accruals are an expensive but commonly used way to finance working capital.
B)   A conservative financing policy is one where the firm finances part of its fixed assets with short-term capital and all of its net working capital with short-term funds.
C)   If a company receives trade credit under terms of 2/10, net 30, this implies that the company has 10 days of free trade credit.
D)   One cannot tell if a firm has a conservative, aggressive, or moderate current asset financing policy without an examination of its cash budget.
E)   If a firm has a relatively aggressive current asset financing policy vis-à-vis other firms in its industry, then its current ratio will probably be relatively high.F) A) and E)
G) D) and E)

Question 15

Your firm's cost of goods sold (COGS)  average $2,000,000 per month, and it keeps inventory equal to 50% of its monthly COGS on hand at all times. Using a 365-day year, what is its inventory conversion period?

Accepted Answer

A)   11.7 days
B)   13.0 days
C)   14.4 days
D)   15.2 days
E)   16.7 daysF) B) and C)
G) A) and E)

Question 16

If a firm sells on terms of 2/10, net 30 days, and its DSO is 28 days, then the fact that the 28-day DSO is less than the 30-day credit period tell us that the credit department is functioning efficiently and there are no past due accounts.

Accepted Answer

A) True 
 B)False

Question 17

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 18

"Stretching" accounts payable is a widely accepted, entirely ethical, and costless financing technique, which is particularly useful when suppliers' production plants are at full capacity.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following statements is CORRECT?

Accepted Answer

A)   Trade credit is provided only to relatively large, strong firms.
B)   Commercial paper is a form of short-term financing that is primarily used by large, strong, financially stable companies.
C)   Short-term debt is favored by firms because, while it is generally more expensive than long-term debt, it exposes the borrowing firm to less risk than long-term debt.
D)   Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate.
E)   Commercial paper is typically offered at a long-term maturity of at least five years.F) A) and D)
G) A) and C)

Question 20

A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption that both cash receipts and cash payments occur uniformly over the month but in reality receipts are concentrated at the beginning of each month.

Accepted Answer

A) True 
 B)False

Exam 17: Working Capital

"Stretching" accounts payable is a widely accepted, entirely ethical, and costless financing technique, which is particularly useful when suppliers' production plants are at full capacity.

Correct Answer
verified

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.

Correct Answer
verified

If a firm sells on terms of 2/10, net 30 days, and its DSO is 28 days, then the fact that the 28-day DSO is less than the 30-day credit period tell us that the credit department is functioning efficiently and there are no past due accounts.

Correct Answer
verified

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

Correct Answer
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The calculated cost of trade credit can be reduced by paying late.

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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Your company has been offered credit terms of 4/30, net 90 days. What will be the nominal annual percentage cost of its non-free trade credit if it pays 120 days after the purchase? (Assume a 365-day year.)

Correct Answer
verified

Correct Answer
verified

A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption that both cash receipts and cash payments occur uniformly over the month but in reality receipts are concentrated at the beginning of each month.

Correct Answer
verified

Zarruk Construction's DSO is 50 days (on a 365-day basis) , accounts receivable are $100 million, and its balance sheet shows inventory of $125 million. What is the inventory turnover ratio?

Correct Answer
verified

Other things held constant, which of the following would tend to reduce the cash conversion cycle?

Correct Answer
verified

Your firm's cost of goods sold (COGS) average $2,000,000 per month, and it keeps inventory equal to 50% of its monthly COGS on hand at all times. Using a 365-day year, what is its inventory conversion period?

Correct Answer
verified

Net operating working capital, defined as current assets minus the difference between current liabilities and notes payable, is equal to the current ratio minus the quick ratio.

Correct Answer
verified

A lockbox plan is most beneficial to firms that

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

A firm's collection policy, i.e., the procedures it follows to collect accounts receivable, plays an important role in keeping its average collection period short, although too strict a collection policy can reduce profits due to lost sales.

Correct Answer
verified

A conservative financing approach to working capital will result in permanent current assets and some seasonal current assets being financed using long-term securities.

Correct Answer
verified

If one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but it does not represent a real financial cost to your firm as long as the customer periodically pays off its entire balance.

Correct Answer
verified

Exam 17: Working Capital

"Stretching" accounts payable is a widely accepted, entirely ethical, and costless financing technique, which is particularly useful when suppliers' production plants are at full capacity.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

If a firm sells on terms of 2/10, net 30 days, and its DSO is 28 days, then the fact that the 28-day DSO is less than the 30-day credit period tell us that the credit department is functioning efficiently and there are no past due accounts.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The calculated cost of trade credit can be reduced by paying late.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Your company has been offered credit terms of 4/30, net 90 days. What will be the nominal annual percentage cost of its non-free trade credit if it pays 120 days after the purchase? (Assume a 365-day year.)

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption that both cash receipts and cash payments occur uniformly over the month but in reality receipts are concentrated at the beginning of each month.

Correct AnswerverifiedShow Answer

Zarruk Construction's DSO is 50 days (on a 365-day basis) , accounts receivable are $100 million, and its balance sheet shows inventory of $125 million. What is the inventory turnover ratio?

Correct AnswerverifiedShow Answer

Other things held constant, which of the following would tend to reduce the cash conversion cycle?

Correct AnswerverifiedShow Answer

Your firm's cost of goods sold (COGS) average $2,000,000 per month, and it keeps inventory equal to 50% of its monthly COGS on hand at all times. Using a 365-day year, what is its inventory conversion period?

Correct AnswerverifiedShow Answer

Net operating working capital, defined as current assets minus the difference between current liabilities and notes payable, is equal to the current ratio minus the quick ratio.

Correct AnswerverifiedShow Answer

A lockbox plan is most beneficial to firms that

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

A firm's collection policy, i.e., the procedures it follows to collect accounts receivable, plays an important role in keeping its average collection period short, although too strict a collection policy can reduce profits due to lost sales.

Correct AnswerverifiedShow Answer

A conservative financing approach to working capital will result in permanent current assets and some seasonal current assets being financed using long-term securities.

Correct AnswerverifiedShow Answer

If one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but it does not represent a real financial cost to your firm as long as the customer periodically pays off its entire balance.

Correct AnswerverifiedShow Answer

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