Question 1

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.

Accepted Answer

A) True 
 B)False

Question 2

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 3

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

Question 4

Cass & Company has the following data. What is the firm's cash conversion cycle?

Accepted Answer

A)   31 days
B)   34 days
C)   38 days
D)   42 days
E)   46 daysF) B) and D)
G) All of the above

Question 5

The facts that (1) no explicit interest is paid on accruals and (2) the firm can vary the level of these accounts at will makes them an attractive source of funding to meet the firm's working capital needs.

Accepted Answer

A) True 
 B)False

Question 6

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 7

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 8

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 E)
G) A) and B)

Question 9

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 10

The target cash balance is typically (and logically) set so that it does not need to be adjusted for either seasonal patterns or unanticipated random fluctuations.

Accepted Answer

A) True 
 B)False

Question 11

Synchronization of cash flows is an important cash management technique, as proper synchronization can reduce the required cash balance and increase a firm's profitability.

Accepted Answer

A) True 
 B)False

Question 12

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

Question 13

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 days
E)   78 daysF) None of the above
G) A) and B)

Question 14

A line of credit can be either a formal or an informal agreement between a borrower and a bank regarding the maximum amount of credit the bank will extend to the borrower during some future period, assuming the borrower maintains its financial strength.

Accepted Answer

A) True 
 B)False

Question 15

When deciding whether or not to take a trade discount, the cost of borrowing from a bank or other source should be compared to the cost of trade credit to determine if the cash discount should be taken.

Accepted Answer

A) True 
 B)False

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 B)
G) A) and C)

Question 17

A revolving credit agreement is a formal line of credit. The firm must generally pay a fee on the unused balance of the committed funds to compensate the bank for the commitment to extend those funds.

Accepted Answer

A) True 
 B)False

Question 18

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) C) and D)
G) A) and D)

Question 19

Helena Furnishings wants to reduce its cash conversion cycle. Which of the following actions should it take?

Accepted Answer

A)   Increases average inventory without increasing sales.
B)   Take steps to reduce the DSO.
C)   Start paying its bills sooner, which would reduce the average accounts payable but not affect sales.
D)   Sell common stock to retire long-term bonds.
E)   Sell an issue of long-term bonds and use the proceeds to buy back some of its common stock.F) A) and B)
G) B) and C)

Question 20

The cash budget and the capital budget are handled separately, and although they are both important, they are developed completely independently of one another.

Accepted Answer

A) True 
 B)False

Exam 17: Working Capital

The cash budget and the capital budget are handled separately, and although they are both important, they are developed completely independently of one another.

Correct Answer
verified

The facts that (1) no explicit interest is paid on accruals and (2) the firm can vary the level of these accounts at will makes them an attractive source of funding to meet the firm's working capital needs.

Correct Answer
verified

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.

Correct Answer
verified

A revolving credit agreement is a formal line of credit. The firm must generally pay a fee on the unused balance of the committed funds to compensate the bank for the commitment to extend those funds.

Correct Answer
verified

A line of credit can be either a formal or an informal agreement between a borrower and a bank regarding the maximum amount of credit the bank will extend to the borrower during some future period, assuming the borrower maintains its financial strength.

Correct Answer
verified

When deciding whether or not to take a trade discount, the cost of borrowing from a bank or other source should be compared to the cost of trade credit to determine if the cash discount should be taken.

Correct Answer
verified

Correct Answer
verified

Helena Furnishings wants to reduce its cash conversion cycle. Which of the following actions should it take?

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
verified

Cass & Company has the following data. What is the firm's cash conversion cycle?

Correct Answer
verified

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

Synchronization of cash flows is an important cash management technique, as proper synchronization can reduce the required cash balance and increase a firm's profitability.

Correct Answer
verified

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

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

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

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

The target cash balance is typically (and logically) set so that it does not need to be adjusted for either seasonal patterns or unanticipated random fluctuations.

Correct Answer
verified

Exam 17: Working Capital

The cash budget and the capital budget are handled separately, and although they are both important, they are developed completely independently of one another.

Correct AnswerverifiedShow Answer

The facts that (1) no explicit interest is paid on accruals and (2) the firm can vary the level of these accounts at will makes them an attractive source of funding to meet the firm's working capital needs.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

A revolving credit agreement is a formal line of credit. The firm must generally pay a fee on the unused balance of the committed funds to compensate the bank for the commitment to extend those funds.

Correct AnswerverifiedShow Answer

A line of credit can be either a formal or an informal agreement between a borrower and a bank regarding the maximum amount of credit the bank will extend to the borrower during some future period, assuming the borrower maintains its financial strength.

Correct AnswerverifiedShow Answer

When deciding whether or not to take a trade discount, the cost of borrowing from a bank or other source should be compared to the cost of trade credit to determine if the cash discount should be taken.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Helena Furnishings wants to reduce its cash conversion cycle. Which of the following actions should it take?

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

Cass & Company has the following data. What is the firm's cash conversion cycle?

Correct AnswerverifiedShow Answer

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

Synchronization of cash flows is an important cash management technique, as proper synchronization can reduce the required cash balance and increase a firm's profitability.

Correct AnswerverifiedShow Answer

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

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

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

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

The target cash balance is typically (and logically) set so that it does not need to be adjusted for either seasonal patterns or unanticipated random fluctuations.

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified