Question 1

BC PrintsBC Prints expects to have sales this year of $15 million under its current credit policy. The present terms are net 30; the DSO is 60 days, and the bad debt loss percentage is 5%. Also, BC Prints' cost of capital is 15%, and its variable costs total 60% of sales. Since BC Prints wants to improve its profitability, a proposal has been made to offer a 2% discount for payment within 10 days; that is, change the credit terms to 2/10, net 30. The consultants predict that sales would increase by $500,000 and that 50% of all customers would take the discount. The new DSO would be 30 days, and the bad debt loss percentage on all sales would fall to 4%.
-Refer to Scenario: BC Prints.What would be the incremental cost of carrying receivables if the change were made?

Accepted Answer

A)  -$108,750 (carrying costs would decline) 
B)  -$225,000 (carrying costs would decline) 
C)  $116,250
D)  $157,900E) B) and D)
F) B) and C)

Question 2

Seligstine Inc.'s DSO was 31 days in March,and 45 days in April.Which of the following is the most likely?

Accepted Answer

A)  Sales increased from March to April.
B)  Sales decreased from March to April.
C)  May's quarterly uncollected balances schedule showed a higher percent of April's sales as uncollected than March's sales.
D)  Some receivables were at least 45 days old.E) C) and D)
F) B) and C)

Question 3

Constant demand,constant carrying costs,and constant ordering costs are the three key assumptions of the EOQ model.

Accepted Answer

A) True 
 B)False

Question 4

Cash discounts are mostly used to get new customers in the door since existing customers almost always use the delayed payment terms.

Accepted Answer

A) True 
 B)False

Question 5

Which statement best describes compensating balances?

Accepted Answer

A)  Compensating balance requirements apply only to businesses, not to individuals.
B)  Compensating balances are essentially costless to most firms, because those firms would normally have such funds on hand to meet transactions needs anyway.
C)  If the required compensating balance is larger than the transactions balance the firm would ordinarily hold, then the effective cost of any loan requiring such a balance is increased.
D)  Banks are prohibited from earning interest on the compensating balances they hold.E) A) and B)
F) A) and C)

Question 6

If a firm's sales and those of its customers are closely correlated with economic conditions,it is possible for the firm's total investment in accounts receivable to decline while its DSO increases.

Accepted Answer

A) True 
 B)False

Question 7

Suppose you have $10,000 in your chequing account.You write a cheque for $2,000 and deposit $3,000.What is your disbursement float?

Accepted Answer

A)  $2,000
B)  $3,000
C)  $7,000
D)  $8,000E) A) and C)
F) B) and D)

Question 8

Working capital management deals with the management of current assets and current liabilities such as accounts receivable and accruals,etc.

Accepted Answer

A) True 
 B)False

Question 9

Which statement best describes float?

Accepted Answer

A)  A lack of synchronization of cash inflows and outflows will result in larger cash balances than would be necessary with better synchronization, but the cash balances can be reduced by increasing disbursement float and decreasing collections float.
B)  The size of a firm's net float is primarily a function of its natural cash flow synchronization and how it clears its cheques.
C)  Lockbox systems are used both for security purposes and to decrease the firm's net float.
D)  If a firm speeds up its collections and slows down its disbursements, this will reduce its net float.E) B) and C)
F) A) and D)

Question 10

Although firms do not segregate funds for various motives of holding cash,they do consider them in setting their overall cash positions.

Accepted Answer

A) True 
 B)False

Question 11

AberwaldAberwald Corporation expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate. Fixed ordering costs are $200 per order, the purchase price per chip is $25, and the firm's inventory carrying costs is equal to 20% of the purchase price. (Assume a 360-day year.) 
-Refer to Scenario: Aberwald.How many orders should Aberwald place during the year?

Accepted Answer

A)  12
B)  25
C)  30
D)  40E) A) and B)
F) None of the above

Question 12

Which best describes why firms maintain float?

Accepted Answer

A)  Float refers to the difference between the firm's available or collected balance at its bank and the firm's net income statement.
B)  Float refers to the difference between the firm's available or collected balance at its bank and the firm's balance sheet.
C)  Float refers to the difference between the firm's available or collected balance at its bank and the firm's book, or ledger, balance
D)  Float refers to the difference between the firm's available or collected accounts receivable balance at its bank and the firm's book, or ledger, balance.E) None of the above
F) All of the above

Question 13

Inventory management is largely self-contained in the sense that very little coordination among the sales,purchasing,and production personnel is required for successful inventory management.

Accepted Answer

A) True 
 B)False

Question 14

What would be the incremental cost of carrying receivables if this change were made?

Accepted Answer

A)  $157,900
B)  $108,750
C)  -$116,250 (carrying costs would decline) 
D)  -$225,000 (carrying costs would decline) E) B) and C)
F) All of the above

Question 15

Which statement best describes DSO?

Accepted Answer

A)  Other things held constant, the higher a firm's DSO, the better its credit department.
B)  If a firm that sells on terms of net 30 changes its policy to 2/10, net 30, and if no change in sales volume occurs, then the firm's DSO will probably increase.
C)  If a firm sells on terms of 2/10, net 30, and its DSO is 30 days, then its aging schedule would probably show some past due accounts.
D)  DSO indicates the maximum number of days it takes a firm's customers to pay their bills.E) A) and D)
F) A) and C)

Question 16

If a firm's terms are 2/10,net 30 days,and its DSO is 28 days,we can be certain that the credit department is functioning efficiently and that the percentage of past due accounts is minimal.

Accepted Answer

A) True 
 B)False

Question 17

The collection process is a fairly inexpensive component of doing business,although sometimes difficult to implement.

Accepted Answer

A) True 
 B)False

Question 18

A firm that makes 90% of its sales on credit and 10% for cash is currently growing at a stable,steady rate of 10% annually.This firm's accounts receivable can be kept at their current level,since the 10% cash sales can be used to support the 10% growth rate.

Accepted Answer

A) True 
 B)False

Question 19

If easing a firm's credit policy lengthens the collection period and results in a worsening of the aging schedule,then why might a firm take this action?

Accepted Answer

A)  to slow down an unsustainable growth in sales
B)  to meet competitive pressures
C)  to increase the payments deferral period
D)  to shorten the cash collection cycleE) A) and C)
F) B) and C)

Question 20

The addition of a safety stock to the EOQ model increases the EOQ proportionately.

Accepted Answer

A) True 
 B)False

Exam 18: Current Asset Management

Inventory management is largely self-contained in the sense that very little coordination among the sales,purchasing,and production personnel is required for successful inventory management.

Correct Answer
verified

Constant demand,constant carrying costs,and constant ordering costs are the three key assumptions of the EOQ model.

Correct Answer
verified

The addition of a safety stock to the EOQ model increases the EOQ proportionately.

Correct Answer
verified

Which statement best describes compensating balances?

Correct Answer
verified

Which statement best describes DSO?

Correct Answer
verified

A firm that makes 90% of its sales on credit and 10% for cash is currently growing at a stable,steady rate of 10% annually.This firm's accounts receivable can be kept at their current level,since the 10% cash sales can be used to support the 10% growth rate.

Correct Answer
verified

Correct Answer
verified

Although firms do not segregate funds for various motives of holding cash,they do consider them in setting their overall cash positions.

Correct Answer
verified

Seligstine Inc.'s DSO was 31 days in March,and 45 days in April.Which of the following is the most likely?

Correct Answer
verified

If easing a firm's credit policy lengthens the collection period and results in a worsening of the aging schedule,then why might a firm take this action?

Correct Answer
verified

Working capital management deals with the management of current assets and current liabilities such as accounts receivable and accruals,etc.

Correct Answer
verified

The collection process is a fairly inexpensive component of doing business,although sometimes difficult to implement.

Correct Answer
verified

What would be the incremental cost of carrying receivables if this change were made?

Correct Answer
verified

Cash discounts are mostly used to get new customers in the door since existing customers almost always use the delayed payment terms.

Correct Answer
verified

If a firm's terms are 2/10,net 30 days,and its DSO is 28 days,we can be certain that the credit department is functioning efficiently and that the percentage of past due accounts is minimal.

Correct Answer
verified

If a firm's sales and those of its customers are closely correlated with economic conditions,it is possible for the firm's total investment in accounts receivable to decline while its DSO increases.

Correct Answer
verified

Which best describes why firms maintain float?

Correct Answer
verified

Correct Answer
verified

Which statement best describes float?

Correct Answer
verified

Suppose you have $10,000 in your chequing account.You write a cheque for $2,000 and deposit $3,000.What is your disbursement float?

Correct Answer
verified

Exam 18: Current Asset Management

Inventory management is largely self-contained in the sense that very little coordination among the sales,purchasing,and production personnel is required for successful inventory management.

Correct AnswerverifiedShow Answer

Constant demand,constant carrying costs,and constant ordering costs are the three key assumptions of the EOQ model.

Correct AnswerverifiedShow Answer

The addition of a safety stock to the EOQ model increases the EOQ proportionately.

Correct AnswerverifiedShow Answer

Which statement best describes compensating balances?

Correct AnswerverifiedShow Answer

Which statement best describes DSO?

Correct AnswerverifiedShow Answer

A firm that makes 90% of its sales on credit and 10% for cash is currently growing at a stable,steady rate of 10% annually.This firm's accounts receivable can be kept at their current level,since the 10% cash sales can be used to support the 10% growth rate.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Although firms do not segregate funds for various motives of holding cash,they do consider them in setting their overall cash positions.

Correct AnswerverifiedShow Answer

Seligstine Inc.'s DSO was 31 days in March,and 45 days in April.Which of the following is the most likely?

Correct AnswerverifiedShow Answer

If easing a firm's credit policy lengthens the collection period and results in a worsening of the aging schedule,then why might a firm take this action?

Correct AnswerverifiedShow Answer

Working capital management deals with the management of current assets and current liabilities such as accounts receivable and accruals,etc.

Correct AnswerverifiedShow Answer

The collection process is a fairly inexpensive component of doing business,although sometimes difficult to implement.

Correct AnswerverifiedShow Answer

What would be the incremental cost of carrying receivables if this change were made?

Correct AnswerverifiedShow Answer

Cash discounts are mostly used to get new customers in the door since existing customers almost always use the delayed payment terms.

Correct AnswerverifiedShow Answer

If a firm's terms are 2/10,net 30 days,and its DSO is 28 days,we can be certain that the credit department is functioning efficiently and that the percentage of past due accounts is minimal.

Correct AnswerverifiedShow Answer

If a firm's sales and those of its customers are closely correlated with economic conditions,it is possible for the firm's total investment in accounts receivable to decline while its DSO increases.

Correct AnswerverifiedShow Answer

Which best describes why firms maintain float?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which statement best describes float?

Correct AnswerverifiedShow Answer

Suppose you have $10,000 in your chequing account.You write a cheque for $2,000 and deposit $3,000.What is your disbursement float?

Correct AnswerverifiedShow Answer

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