Question 1

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) A) and E)

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)   A firm that makes 90% of its sales on credit and 10% for cash is growing at a constant rate of 10% annually. Such a firm will be able to keep its accounts receivable at the current level, since the 10% cash sales can be used to finance the 10% growth rate.
B)   In managing a firm's accounts receivable, it is possible to increase credit sales per day yet still keep accounts receivable fairly steady, provided the firm can shorten the length of its collection period (its DSO)  sufficiently.
C)   Because of the costs of granting credit, it is not possible for credit sales to be more profitable than cash sales.
D)   Since receivables and payables both result from sales transactions, a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio.
E)   Other things held constant, if a firm can shorten its DSO, this will lead to a higher current ratio.F) A) and C)
G) B) and D)

Question 3

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 + ΔNOWC]) , 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) A) and B)
G) B) and D)

Question 4

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 B)
G) B) and C)

Question 5

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 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) B) and D)
G) A) and B)

Question 7

Buskirk Construction buys on terms of 2/15, net 60 days. It does not take discounts, and it typically pays on time, 60 days after the invoice date. Net purchases amount to $450,000 per year. On average, how much "free" trade credit does the firm receive during the year? (Assume a 365-day year, and note that purchases are net of discounts.)

Accepted Answer

A)   $18,493
B)   $19,418
C)   $20,389
D)   $21,408
E)   $22,479F) A) and E)
G) None of the above

Question 8

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 9

Ingram Office Supplies, 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 10

Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable securities?

Accepted Answer

A)   The firm must make a known future payment, such as paying for a new plant that is under construction.
B)   The firm is going from its peak sales season to its slack season, so its receivables and inventories will experience a seasonal decline.
C)   The firm is going from its slack season to its peak sales season, so its receivables and inventories will experience seasonal increases.
D)   The firm has just sold long-term securities and has not yet invested the proceeds in operating assets.
E)   The firm just won a product liability suit one of its customers had brought against it.F) A) and D)
G) None of the above

Question 11

Which of the following statements is CORRECT?

Accepted Answer

A)   Other things held constant, the higher a firm's days sales outstanding (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 the firm probably has some past due accounts.
D)   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.
E)   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.F) B) and E)
G) A) and B)

Question 12

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 E)
G) A) and C)

Question 13

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) :   Peak ‾ Off-Peak ‾Cash$50$30Marketable securities020Accounts receivable4020Inventories10050Net fixed assets00‾500‾Total assets$690‾‾$620‾Payables and accruals$30$10Short-term bank debt500Long-term debt300300Common equity310‾310‾Total claims$620‾‾$620‾‾\begin{array}{lcc}&\underline{	ext { Peak }} &\underline {	ext { Off-Peak } }\	ext {Cash}&\$50&\$30\	ext {Marketable securities}&0 & 20 \	ext {Accounts receivable}&40 & 20 \	ext {Inventories}&100 & 50 \	ext {Net fixed assets}& \underline{00} & \underline{500} \ 	ext {Total assets}&\underline{\underline{\$ 690}} & \underline{\$ 620}\\	ext {Payables and accruals}&\$ 30 & \$ 10 \	ext {Short-term bank debt}&50 & 0 \	ext {Long-term debt}&300 & 300 \	ext {Common equity}& \underline{310}&  \underline{310} \	ext {Total claims}&\underline{\underline{\$ 620}}&\underline{\underline{\$ 620}}\end{array}CashMarketable securitiesAccounts receivableInventoriesNet fixed assetsTotal assetsPayables and accrualsShort-term bank debtLong-term debtCommon equityTotal claims​ Peak ​$5004010000​$690​​$3050300310​$620​​​ Off-Peak ​$30202050500​$620​$100300310​$620​​​ 
 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) A) and E)
G) A) and B)

Question 14

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

Question 15

Refer to Exhibit 15.1. Assume now that the company believes that if it adopts a restricted policy, its sales will fall by 15% and EBIT will fall by 10%, but its total assets turnover, debt ratio, interest rate, and tax rate will all remain the same. In this situation, what's the difference between the projected ROEs under the restricted and relaxed policies?

Accepted Answer

A)   2.24%
B)   2.46%
C)   2.70%
D)   2.98%
E)   3.27%F) All of the above
G) C) and D)

Question 16

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

Accepted Answer

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

Question 17

Which of the following statements is CORRECT?

Accepted Answer

A)   Under normal conditions, a firm's expected ROE would probably be higher if it financed with short-term rather than with long-term debt, but using short-term debt would probably increase the firm's risk.
B)   Conservative firms generally use no short-term debt and thus have zero current liabilities.
C)   A short-term loan can usually be obtained more quickly than a long-term loan, but the cost of short-term debt is normally higher than that of long-term debt.
D)   If a firm that can borrow from its bank at a 6% interest rate buys materials on terms of 2/10, net 30, and if it must pay by Day 30 or else be cut off, then we would expect to see zero accounts payable on its balance sheet.
E)   If one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but it will not have an adverse financial impact on your firm if the customer periodically pays off its entire balance.F) B) and C)
G) B) and E)

Question 18

A firm constructing a new manufacturing plant and financing it with short-term loans, which are scheduled to be converted to first mortgage bonds when the plant is completed, would want to separate the construction loan from its current liabilities associated with working capital when calculating net working capital.

Accepted Answer

A) True 
 B)False

Question 19

If the yield curve is upward sloping, then short-term debt will be cheaper than long-term debt. Thus, if a firm's CFO expects the yield curve to continue to have an upward slope, this would tend to cause the current ratio to be relatively low, other things held constant.

Accepted Answer

A) True 
 B)False

Question 20

Margetis Inc. carries an average inventory of $750,000. Its annual sales are $10 million, its cost of goods sold is 75% of annual sales, and its receivables collection period is twice as long as its inventory conversion period. The firm buys on terms of net 30 days, and it pays on time. Its new CFO wants to decrease the cash conversion cycle by 10 days, based on a 365-day year. He believes he can reduce the average inventory to $647,260 with no effect on sales. By how much must the firm also reduce its accounts receivable to meet its goal in the reduction of its cash conversion cycle?

Accepted Answer

A)   $123,630
B)   $130,137
C)   $136,986
D)   $143,836
E)   $151,027F) B) and C)
G) All of the above

Exam 15: Working Capital Management

Correct Answer
verified

Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable securities?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

If the yield curve is upward sloping, then short-term debt will be cheaper than long-term debt. Thus, if a firm's CFO expects the yield curve to continue to have an upward slope, this would tend to cause the current ratio to be relatively low, other things held constant.

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

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

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

Correct Answer
verified

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

Which of the following statements is CORRECT?

Correct Answer
verified

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

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

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 most consistent with efficient inventory management? The firm has a

Correct Answer
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Which of the following statements is CORRECT?

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Exam 15: Working Capital Management

Correct AnswerverifiedShow Answer

Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable securities?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

If the yield curve is upward sloping, then short-term debt will be cheaper than long-term debt. Thus, if a firm's CFO expects the yield curve to continue to have an upward slope, this would tend to cause the current ratio to be relatively low, other things held constant.

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

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

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

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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

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

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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