Question 1

An informal line of credit and a revolving credit agreement are similar except that the line of credit creates a legal obligation for the bank and thus is a more reliable source of funds for the borrower.

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) A) and B)
G) A) and C)

Question 3

"Stretching" accounts payable is a widely accepted,entirely ethical,and costless financing technique.

Accepted Answer

A) True 
 B)False

Question 4

One of the effects of ceasing to take trade credit discounts is that the firm's accounts payable will rise,other things held constant.

Accepted Answer

A) True 
 B)False

Question 5

Whaley & Whaley has the following data.What is the firm's cash conversion cycle?
Inventory conversion period =
41 days
Average collection period =
31 days
Payables deferral period =
38 days

Accepted Answer

A)   31 days
B)   34 days
C)   37 days
D)   41 days
E)   45 daysF) C) and D)
G) A) and D)

Question 6

If a firm busy on terms of 2/10 net 30,it should pay as early as possible during the discount period.

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

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

Question 8

Which of the following statements is most consistent with efficient inventory management? The firm has a

Accepted Answer

A)   low incidence of production schedule disruptions.
B)   below average total assets turnover ratio.
C)   relatively high current ratio.
D)   relatively low DSO.
E)   below average inventory turnover ratio.F) A) and B)
G) A) and C)

Question 9

Since depreciation is a non-cash charge,it neither appears on nor has any effect on the cash budget.Thus,if the depreciation charge for the coming year doubled or halved,this would have no effect on the cash budget.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following statements is CORRECT?

Accepted Answer

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

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

Shorter-term cash budgets⎯say a daily cash budget for the next month⎯are generally used for actual cash control while longer-term cash budgets⎯say monthly cash budgets for the next year⎯are generally used for planning purposes.

Accepted Answer

A) True 
 B)False

Question 13

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) C) and D)

Question 14

If a firm has set up a revolving credit agreement with a bank,the risk to the firm of being unable to obtain funds when needed is lower than if it had an informal line of credit.

Accepted Answer

A) True 
 B)False

Question 15

Albrecht Inc.is a no-growth firm whose sales fluctuate seasonally,causing total assets to vary from $320,000 to $410,000,but fixed assets remain constant at $260,000.If the firm follows a maturity matching (or moderate) working capital financing policy,what is the most likely total of long-term debt plus equity capital?

Accepted Answer

A)   $260,642
B)   $274,360
C)   $288,800
D)   $304,000
E)   $320,000F) B) and E)
G) A) and B)

Question 16

Loans from commercial banks generally appear on balance sheets as notes payable.A bank's importance is actually greater than it appears from the dollar amounts shown on balance sheets because banks provide nonspontaneous funds to firms.

Accepted Answer

A) True 
 B)False

Question 17

The maturity matching,or "self-liquidating," approach to financing involves obtaining the funds for permanent current assets with a combination of long-term capital and short-term capital that varies depending on the level of interest rates.When short-term rates are relatively high,short-term assets will be financed with long-term debt to reduce costs.

Accepted Answer

A) True 
 B)False

Question 18

The aging schedule is a commonly used method for monitoring receivables.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following statements is CORRECT?

Accepted Answer

A)   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.
B)   If a firm sells on terms of 2/10 net 30,and its DSO is 30 days,then the firm probably has some past-due accounts.
C)   If a firm sells on terms of net 60,and if its sales are highly seasonal,with a sharp peak in December,then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be lower in January than in July.
D)   If a firm changed the credit terms offered to its customers from 2/10 net 30 to 2/10 net 60,then its sales should increase,and this should lead to an increase in sales per day,and that should lead to a decrease in the DSO.
E)   Other things held constant,the higher a firm's days sales outstanding (DSO) ,the better its credit department.F) A) and E)
G) B) and D)

Question 20

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

Exam 16: Supply Chains and Working Capital Management

Shorter-term cash budgets⎯say a daily cash budget for the next month⎯are generally used for actual cash control while longer-term cash budgets⎯say monthly cash budgets for the next year⎯are generally used for planning purposes.

Correct Answer
verified

One of the effects of ceasing to take trade credit discounts is that the firm's accounts payable will rise,other things held constant.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following statements is most consistent with efficient inventory management? The firm has a

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

Correct Answer
verified

"Stretching" accounts payable is a widely accepted,entirely ethical,and costless financing technique.

Correct Answer
verified

Correct Answer
verified

The aging schedule is a commonly used method for monitoring receivables.

Correct Answer
verified

Since depreciation is a non-cash charge,it neither appears on nor has any effect on the cash budget.Thus,if the depreciation charge for the coming year doubled or halved,this would have no effect on the cash budget.

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

Loans from commercial banks generally appear on balance sheets as notes payable.A bank's importance is actually greater than it appears from the dollar amounts shown on balance sheets because banks provide nonspontaneous funds to firms.

Correct Answer
verified

If a firm has set up a revolving credit agreement with a bank,the risk to the firm of being unable to obtain funds when needed is lower than if it had an informal line of credit.

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

An informal line of credit and a revolving credit agreement are similar except that the line of credit creates a legal obligation for the bank and thus is a more reliable source of funds for the borrower.

Correct Answer
verified

Correct Answer
verified

Whaley & Whaley has the following data.What is the firm's cash conversion cycle? Inventory conversion period = 41 days Average collection period = 31 days Payables deferral period = 38 days

Correct Answer
verified

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

Correct Answer
verified

If a firm busy on terms of 2/10 net 30,it should pay as early as possible during the discount period.

Correct Answer
verified

Exam 16: Supply Chains and Working Capital Management

Shorter-term cash budgets⎯say a daily cash budget for the next month⎯are generally used for actual cash control while longer-term cash budgets⎯say monthly cash budgets for the next year⎯are generally used for planning purposes.

Correct AnswerverifiedShow Answer

One of the effects of ceasing to take trade credit discounts is that the firm's accounts payable will rise,other things held constant.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is most consistent with efficient inventory management? The firm has a

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

Correct AnswerverifiedShow Answer

"Stretching" accounts payable is a widely accepted,entirely ethical,and costless financing technique.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The aging schedule is a commonly used method for monitoring receivables.

Correct AnswerverifiedShow Answer

Since depreciation is a non-cash charge,it neither appears on nor has any effect on the cash budget.Thus,if the depreciation charge for the coming year doubled or halved,this would have no effect on the cash budget.

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

Loans from commercial banks generally appear on balance sheets as notes payable.A bank's importance is actually greater than it appears from the dollar amounts shown on balance sheets because banks provide nonspontaneous funds to firms.

Correct AnswerverifiedShow Answer

If a firm has set up a revolving credit agreement with a bank,the risk to the firm of being unable to obtain funds when needed is lower than if it had an informal line of credit.

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

An informal line of credit and a revolving credit agreement are similar except that the line of credit creates a legal obligation for the bank and thus is a more reliable source of funds for the borrower.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Whaley & Whaley has the following data.What is the firm's cash conversion cycle? Inventory conversion period = 41 days Average collection period = 31 days Payables deferral period = 38 days

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

If a firm busy on terms of 2/10 net 30,it should pay as early as possible during the discount period.

Correct AnswerverifiedShow Answer

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