Question 1

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) None of the above
F) C) and D)

Question 2

Which of the following statements is NOT CORRECT?

Accepted Answer

A)   Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate.
B)   Accruals are "free" in the sense that no explicit interest is paid on these funds.
C)   A conservative approach to working capital management will result in most if not all permanent current operating assets being financed with long-term capital.
D)   The risk to a firm that borrows with short-term credit is usually greater than if it borrowed using long-term debt. This added risk stems from the greater variability of interest costs on short-term debt and possible difficulties with rolling over short-term debt.E) B) and D)
F) B) and C)

Question 3

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 4

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 5

Inmoo Company's average age of accounts receivable is 45 days, the average age of accounts payable is 40 days, and the average age of inventory is 69 days. Assuming a 365-day year, what is the length of its cash conversion cycle?

Accepted Answer

A)   63 days
B)   67 days
C)   70 days
D)   74 daysE) All of the above
F) A) and B)

Question 6

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) None of the above
G) A) and B)

Question 7

Determining a firm's optimal investment in working capital and deciding how that investment should be financed are critical to working capital management.

Accepted Answer

A) True 
 B)False

Question 8

Cash is often referred to as a "non-earning" asset. Thus, one goal of cash management is to minimize the amount of cash necessary for conducting a firm's normal business activities.

Accepted Answer

A) True 
 B)False

Question 9

Atlanta Cement, Inc. buys on terms of 2/15, net 30. It does not take discounts, and it typically pays 60 days after the invoice date. Net purchases amount to $720,000 per year. What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?

Accepted Answer

A)   10.86%
B)   12.07%
C)   13.41%
D)   14.90%
E)   16.55%F) C) and D)
G) B) and C)

Question 10

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

Question 11

Which of the following statements is CORRECT?

Accepted Answer

A)   Depreciation is included in the estimate of cash flows (Cash flow = Net income + Depreciation) , 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) A) and B)
F) None of the above

Question 12

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

Question 13

Firms generally choose to finance temporary current operating assets with short-term debt because

Accepted Answer

A)   matching the maturities of assets and liabilities reduces risk under some circumstances, and also because short-term debt is often less expensive than long-term capital.
B)   short-term interest rates have traditionally been more stable than long-term interest rates.
C)   a firm that borrows heavily on a long-term basis is more apt to be unable to repay the debt than a firm that borrows short term.
D)   the yield curve is normally downward sloping.E) A) and D)
F) B) and C)

Question 14

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

Question 15

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 16

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 17

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 18

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 receipts are concentrated at the beginning of each month.

Accepted Answer

A) True 
 B)False

Question 19

Gonzales Company currently uses maximum trade credit by not taking discounts on its purchases. The standard industry credit terms offered by all its suppliers are 2/10 net 30 days, and the firm pays on time. The new CFO is considering borrowing from its bank, using short-term notes payable, and then taking discounts. The firm wants to determine the effect of this policy change on its net income. Its net purchases are $11,760 per day, using a 365-day year. The interest rate on the notes payable is 10%, and the tax rate is 40%. If the firm implements the plan, what is the expected change in net income?

Accepted Answer

A)   $32,964
B)   $34,699
C)   $36,526
D)   $38,448
E)   $40,370F) C) and D)
G) B) and D)

Question 20

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) A) and D)
F) C) and D)

Exam 16: Working Capital Management

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
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Cash is often referred to as a "non-earning" asset. Thus, one goal of cash management is to minimize the amount of cash necessary for conducting a firm's normal business activities.

Correct Answer
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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 is NOT CORRECT?

Correct Answer
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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

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 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

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

Atlanta Cement, Inc. buys on terms of 2/15, net 30. It does not take discounts, and it typically pays 60 days after the invoice date. Net purchases amount to $720,000 per year. What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?

Correct Answer
verified

Determining a firm's optimal investment in working capital and deciding how that investment should be financed are critical to working capital management.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Inmoo Company's average age of accounts receivable is 45 days, the average age of accounts payable is 40 days, and the average age of inventory is 69 days. Assuming a 365-day year, what is the length of its cash conversion cycle?

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 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

Which of the following statements is CORRECT?

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

Firms generally choose to finance temporary current operating assets with short-term debt because

Correct Answer
verified

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 receipts are concentrated at the beginning of each month.

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: Working Capital Management

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

Cash is often referred to as a "non-earning" asset. Thus, one goal of cash management is to minimize the amount of cash necessary for conducting a firm's normal business activities.

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 is NOT CORRECT?

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

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 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

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

Atlanta Cement, Inc. buys on terms of 2/15, net 30. It does not take discounts, and it typically pays 60 days after the invoice date. Net purchases amount to $720,000 per year. What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?

Correct AnswerverifiedShow Answer

Determining a firm's optimal investment in working capital and deciding how that investment should be financed are critical to working capital management.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Inmoo Company's average age of accounts receivable is 45 days, the average age of accounts payable is 40 days, and the average age of inventory is 69 days. Assuming a 365-day year, what is the length of its cash conversion cycle?

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 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

Which of the following statements is CORRECT?

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

Firms generally choose to finance temporary current operating assets with short-term debt because

Correct AnswerverifiedShow Answer

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 receipts are concentrated at the beginning of each month.

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

Correct Answer
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