Question 1

The average accounts receivable balance is a function of both the volume of credit sales and the days sales outstanding.

Accepted Answer

A) True 
 B)False

Question 2

Taylor Textbooks Inc.buys on terms of 2/15,net 50 days.It does not take discounts,and it typically pays on time,50 days after the invoice date.Net purchases amount to $450,000 per year.On average,what is the dollar amount of costly trade credit (total credit -free credit) the firm receives during the year? (Assume a 365-day year,and note that purchases are net of discounts.)

Accepted Answer

A)   $43,151
B)   $45,308
C)   $47,574
D)   $49,952
E)   $52,450F) B) and C)
G) C) and D)

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)   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.
B)   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.
C)   One cannot tell if a firm has a conservative, aggressive, or moderate current asset financing policy without an examination of its cash budget.
D)   If a firm has a relatively aggressive current asset financing policy vis-á-vis other firms in its industry, then its current ratio will probably be relatively high.
E)   Accruals are an expensive but commonly used way to finance working capital.F) B) and E)
G) B) and D)

Question 4

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

Question 5

Which of the following actions should Reece Windows take if it wants to reduce its cash conversion cycle?

Accepted Answer

A)   Take steps to reduce the DSO.
B)   Start paying its bills sooner, which would reduce the average accounts payable but not affect sales.
C)   Sell common stock to retire long-term bonds.
D)   Sell an issue of long-term bonds and use the proceeds to buy back some of its common stock.
E)   Increase average inventory without increasing sales.F) C) and E)
G) A) and D)

Question 6

Pascarella Inc.is revising its payables policy.It has annual sales of $50,735,000,an average inventory level of $15,012,000,and average accounts receivable of $10,008,000.The firm's cost of goods sold is 85% of sales.The company makes all purchases on credit and has always paid on the 30th day.However,it now plans to take full advantage of trade credit and to pay its suppliers on the 40th day.The CFO also believes that sales can be maintained at the existing level but inventory can be lowered by $1,946,000 and accounts receivable by $1,946,000.What will be the net change in the cash conversion cycle,assuming a 365-day year?

Accepted Answer

A)   -26.6 days
B)  -29.5 days
C)   -32.8 days
D)   -36.4 days
E)   -40.5 daysF) All of the above
G) A) and C)

Question 7

A promissory note is the document signed when a bank loan is executed,and it specifies financial aspects of the loan.

Accepted Answer

A) True 
 B)False

Question 8

Short-term financing is riskier than long-term financing since,during periods of tight credit,the firm may not be able to rollover (renew)its debt.This is especially true if the funds are used to finance long-term assets rather than short-term assets.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following statements concerning the cash budget is CORRECT?

Accepted Answer

A)   Cash budgets do not include financial items such as interest and dividend payments.
B)   Cash budgets do not include cash inflows from long-term sources such as the issuance of bonds.
C)   Changes that affect the DSO do not affect the cash budget.
D)   Capital budgeting decisions have no effect on the cash budget until projects go into operation and start producing revenues.
E)   Depreciation expense is not explicitly included, but depreciation's effects are reflected in the estimated tax payments.F) C) and E)
G) B) and E)

Question 10

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 11

Net working capital,defined as current assets minus the sum of payables and accruals,is equal to the current ratio minus the quick ratio.

Accepted Answer

A) True 
 B)False

Question 12

Short-term marketable securities are held for two separate and distinct purposes: (1)to provide liquidity as a substitute for cash and (2)as a non-operating investment.Marketable securities held while awaiting reinvestment are not available for liquidity purposes.

Accepted Answer

A) True 
 B)False

Question 13

Dimon Products' sales are expected to be $5 million this year,with 90% on credit and 10% for cash.Sales are expected to grow at a stable,steady rate of 10% annually in the future.Dimon's accounts receivable balance will remain constant at the current level,because the 10% cash sales can be used to support the 10% growth rate,other things held constant.

Accepted Answer

A) True 
 B)False

Question 14

The maturity of most bank loans is short term.Bank loans to businesses are frequently made as 90-day notes which are often rolled over,or renewed,rather than repaid when they mature.However,if the borrower's financial situation deteriorates,then the bank may refuse to roll over the loan.

Accepted Answer

A) True 
 B)False

Question 15

A line of credit can be either a formal or an informal agreement between a borrower and a bank regarding the maximum amount of credit the bank will extend to the borrower during some future period,assuming the borrower maintains its financial strength.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following statements is CORRECT?

Accepted Answer

A)   Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks associated with using short-term financing.
B)   If a company follows a policy of "matching maturities," this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt.
C)   Net working capital is defined as current assets minus the sum of payables and accruals, and any decrease in the current ratio automatically indicates that net working capital has decreased.
D)   If a company follows a policy of "matching maturities," this means that it matches its use of short-term debt with its use of long-term debt.
E)   Net working capital is defined as current assets minus the sum of payables and accruals, and any increase in the current ratio automatically indicates that net working capital has increased.F) A) and B)
G) A) and E)

Question 17

Suppose the suppliers of your firm offered you credit terms of 2/10 net 30 days.Your firm is not taking discounts,but is paying after 25 days instead of waiting until Day 30.You point out that the nominal cost of not taking the discount and paying on Day 30 is approximately 37%.But since your firm is neither taking discounts nor paying on the due date,what is the effective annual percentage cost (not the nominal cost) of its costly trade credit,using a 365-day year?

Accepted Answer

A)   60.3%
B)   63.5%
C)   66.7%
D)   70.0%
E)   73.5%F) A) and B)
G) B) and C)

Question 18

Whitson Co.is looking for ways to shorten its cash conversion cycle.It has annual sales of $36,500,000,or $100,000 a day on a 365-day basis.The firm's cost of goods sold is 75% of sales.On average,the company has $9,000,000 in inventory and $8,000,000 in accounts receivable.Its CFO has proposed new policies that would result in a 20% reduction in both average inventories and accounts receivable.She also anticipates that these policies would reduce sales by 10%,while the payables deferral period would remain unchanged at 35 days.What effect would these policies have on the company's cash conversion cycle? Round to the nearest whole day.

Accepted Answer

A)   -26 days
B)   -22days
C)   -18 days
D)   -14 days
E)   -11 daysF) A) and B)
G) A) and D)

Question 19

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 tells us that the credit department is functioning efficiently and there are no past-due accounts.

Accepted Answer

A) True 
 B)False

Question 20

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

Exam 16: Supply Chains and Working Capital Management

Short-term financing is riskier than long-term financing since,during periods of tight credit,the firm may not be able to rollover (renew)its debt.This is especially true if the funds are used to finance long-term assets rather than short-term assets.

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 tells us that the credit department is functioning efficiently and there are no past-due accounts.

Correct Answer
verified

Which of the following actions should Reece Windows take if it wants to reduce its cash conversion cycle?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Net working capital,defined as current assets minus the sum of payables and accruals,is equal to the current ratio minus the quick ratio.

Correct Answer
verified

The average accounts receivable balance is a function of both the volume of credit sales and the days sales outstanding.

Correct Answer
verified

Which of the following statements concerning the cash budget is CORRECT?

Correct Answer
verified

Correct Answer
verified

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

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

The maturity of most bank loans is short term.Bank loans to businesses are frequently made as 90-day notes which are often rolled over,or renewed,rather than repaid when they mature.However,if the borrower's financial situation deteriorates,then the bank may refuse to roll over the loan.

Correct Answer
verified

A line of credit can be either a formal or an informal agreement between a borrower and a bank regarding the maximum amount of credit the bank will extend to the borrower during some future period,assuming the borrower maintains its financial strength.

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

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).

Correct Answer
verified

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

Correct Answer
verified

Correct Answer
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Correct Answer
verified

Short-term marketable securities are held for two separate and distinct purposes: (1)to provide liquidity as a substitute for cash and (2)as a non-operating investment.Marketable securities held while awaiting reinvestment are not available for liquidity purposes.

Correct Answer
verified

A promissory note is the document signed when a bank loan is executed,and it specifies financial aspects of the loan.

Correct Answer
verified

Exam 16: Supply Chains and Working Capital Management

Short-term financing is riskier than long-term financing since,during periods of tight credit,the firm may not be able to rollover (renew)its debt.This is especially true if the funds are used to finance long-term assets rather than short-term assets.

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 tells us that the credit department is functioning efficiently and there are no past-due accounts.

Correct AnswerverifiedShow Answer

Which of the following actions should Reece Windows take if it wants to reduce its cash conversion cycle?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Net working capital,defined as current assets minus the sum of payables and accruals,is equal to the current ratio minus the quick ratio.

Correct AnswerverifiedShow Answer

The average accounts receivable balance is a function of both the volume of credit sales and the days sales outstanding.

Correct AnswerverifiedShow Answer

Which of the following statements concerning the cash budget is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

The maturity of most bank loans is short term.Bank loans to businesses are frequently made as 90-day notes which are often rolled over,or renewed,rather than repaid when they mature.However,if the borrower's financial situation deteriorates,then the bank may refuse to roll over the loan.

Correct AnswerverifiedShow Answer

A line of credit can be either a formal or an informal agreement between a borrower and a bank regarding the maximum amount of credit the bank will extend to the borrower during some future period,assuming the borrower maintains its financial strength.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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).

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Short-term marketable securities are held for two separate and distinct purposes: (1)to provide liquidity as a substitute for cash and (2)as a non-operating investment.Marketable securities held while awaiting reinvestment are not available for liquidity purposes.

Correct AnswerverifiedShow Answer

A promissory note is the document signed when a bank loan is executed,and it specifies financial aspects of the loan.

Correct AnswerverifiedShow Answer

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