Question 1

Accruals are "spontaneous" funds arising automatically from a firm's operations, but unfortunately, due to law and economic forces, firms have little control over the level of these accounts.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)   Net working capital is defined as current assets minus the difference between current liabilities and notes payable, and any increase in the current ratio automatically indicates that net working capital has increased.
B)   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.
C)   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.
D)   Net working capital is defined as current assets minus the difference between current liabilities and notes payable, and any decrease in the current ratio automatically indicates that net working capital has decreased.
E)   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.F) B) and D)
G) None of the above

Question 3

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

Accepted Answer

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

Question 4

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 5

The four primary elements in a firm's credit policy are (1) credit standards, (2) discounts offered, (3) credit period, and (4) collection policy.

Accepted Answer

A) True 
 B)False

Question 6

Whitmer Inc. sells to customers all over the U.S., and all receipts come in to its headquarters in New York City. The firm's average accounts receivable balance is $2.5 million, and they are financed by a bank loan at an 11% annual interest rate. The firm is considering setting up a regional lockbox system to speed up collections, and it believes this would reduce receivables by 20%. If the annual cost of the system is $15,000, what pre-tax net annual savings would be realized?

Accepted Answer

A)   $29,160
B)   $32,400
C)   $36,000
D)   $40,000
E)   $44,000F) All of the above
G) A) and C)

Question 7

Changes in a firm's collection policy can affect sales, working capital, and profits.

Accepted Answer

A) True 
 B)False

Question 8

Edison Inc. 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. The firm is looking for ways to shorten its cash conversion cycle. 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)   -22 days
C)   -18 days
D)   -14 days
E)   -11 daysF) C) and D)
G) B) and D)

Question 9

What's the difference in the projected ROEs under the restricted and relaxed policies?

Accepted Answer

A)   1.20%
B)   1.50%
C)   1.80%
D)   2.16%
E)   2.59%F) None of the above
G) B) and E)

Question 10

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 11

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

Accepted Answer

A) True 
 B)False

Question 12

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 payments are concentrated at the beginning of each month.

Accepted Answer

A) True 
 B)False

Question 13

A lockbox plan is

Accepted Answer

A)   used to protect cash, i.e., to keep it from being stolen.
B)   used to identify inventory safety stocks.
C)   used to slow down the collection of checks our firm writes.
D)   used to speed up the collection of checks received.
E)   used primarily by firms where currency is used frequently in transactions, such as fast food restaurants, and less frequently by firms that receive payments as checks.F) A) and B)
G) A) and E)

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

Your consulting firm was recently hired to improve the performance of Shin-Soenen Inc, which is highly profitable but has been experiencing cash shortages due to its high growth rate. As one part of your analysis, you want to determine the firm's cash conversion cycle. Using the following information and a 365-day year, what is the firm's present cash conversion cycle?

Accepted Answer

A)   120.6 days
B)   126.9 days
C)   133.6 days
D)   140.6 days
E)   148.0 daysF) All of the above
G) C) and E)

Question 16

A firm that follows an aggressive working capital financing approach uses primarily short-term credit and thus is more exposed to an unexpected increase in interest rates than is a firm that uses long-term capital and thus follows a conservative financing policy.

Accepted Answer

A) True 
 B)False

Question 17

Swim Suits Unlimited is in a highly seasonal business, and the following summary balance sheet data show its assets and liabilities at peak and off-peak seasons (in thousands of dollars) From this data we may conclude that

Accepted Answer

A)   Swim Suits' current asset financing policy calls for exactly matching asset and liability maturities.
B)   Swim Suits' current asset financing policy is relatively aggressive; that is, the company finances some of its permanent assets with short-term discretionary debt.
C)   Swim Suits follows a relatively conservative approach to current asset financing; that is, some of its short-term needs are met by permanent capital.
D)   Without income statement data, we cannot determine the aggressiveness or conservatism of the company's current asset financing policy.
E)   Without cash flow data, we cannot determine the aggressiveness or conservatism of the company's current asset financing policy.F) None of the above
G) C) and E)

Question 18

Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?

Accepted Answer

A)   Payments lags.
B)   Depreciation.
C)   Cumulative cash.
D)   Repurchases of common stock.
E)   Payment for plant construction.F) A) and B)
G) A) and E)

Question 19

Because money has time value, a cash sale is always more profitable than a credit sale.

Accepted Answer

A) True 
 B)False

Question 20

Aggarwal Inc. buys on terms of 2/10, net 30, and it always pays on the 30th day. The CFO calculates that the average amount of costly trade credit carried is $375,000. What is the firm's average accounts payable balance? Assume a 365-day year.

Accepted Answer

A)   $458,160
B)   $482,273
C)   $507,656
D)   $534,375
E)   $562,500F) A) and E)
G) A) and D)

Exam 15: Working Capital

Correct Answer
verified

The four primary elements in a firm's credit policy are (1) credit standards, (2) discounts offered, (3) credit period, and (4) collection policy.

Correct Answer
verified

Accruals are "spontaneous" funds arising automatically from a firm's operations, but unfortunately, due to law and economic forces, firms have little control over the level of these accounts.

Correct Answer
verified

Correct Answer
verified

Aggarwal Inc. buys on terms of 2/10, net 30, and it always pays on the 30th day. The CFO calculates that the average amount of costly trade credit carried is $375,000. What is the firm's average accounts payable balance? Assume a 365-day year.

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 payments are concentrated at the beginning of each month.

Correct Answer
verified

Swim Suits Unlimited is in a highly seasonal business, and the following summary balance sheet data show its assets and liabilities at peak and off-peak seasons (in thousands of dollars) From this data we may conclude that

Correct Answer
verified

A lockbox plan is

Correct Answer
verified

Correct Answer
verified

A firm that follows an aggressive working capital financing approach uses primarily short-term credit and thus is more exposed to an unexpected increase in interest rates than is a firm that uses long-term capital and thus follows a conservative financing policy.

Correct Answer
verified

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

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Changes in a firm's collection policy can affect sales, working capital, and profits.

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

Correct Answer
verified

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

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

Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?

Correct Answer
verified

Because money has time value, a cash sale is always more profitable than a credit sale.

Correct Answer
verified

What's the difference in the projected ROEs under the restricted and relaxed policies?

Correct Answer
verified

Exam 15: Working Capital

Correct AnswerverifiedShow Answer

The four primary elements in a firm's credit policy are (1) credit standards, (2) discounts offered, (3) credit period, and (4) collection policy.

Correct AnswerverifiedShow Answer

Accruals are "spontaneous" funds arising automatically from a firm's operations, but unfortunately, due to law and economic forces, firms have little control over the level of these accounts.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Aggarwal Inc. buys on terms of 2/10, net 30, and it always pays on the 30th day. The CFO calculates that the average amount of costly trade credit carried is $375,000. What is the firm's average accounts payable balance? Assume a 365-day year.

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 payments are concentrated at the beginning of each month.

Correct AnswerverifiedShow Answer

Swim Suits Unlimited is in a highly seasonal business, and the following summary balance sheet data show its assets and liabilities at peak and off-peak seasons (in thousands of dollars) From this data we may conclude that

Correct AnswerverifiedShow Answer

A lockbox plan is

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A firm that follows an aggressive working capital financing approach uses primarily short-term credit and thus is more exposed to an unexpected increase in interest rates than is a firm that uses long-term capital and thus follows a conservative financing policy.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Changes in a firm's collection policy can affect sales, working capital, and profits.

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

Correct AnswerverifiedShow Answer

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

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

Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?

Correct AnswerverifiedShow Answer

Because money has time value, a cash sale is always more profitable than a credit sale.

Correct AnswerverifiedShow Answer

What's the difference in the projected ROEs under the restricted and relaxed policies?

Correct AnswerverifiedShow Answer

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