Deck 12: The Management of Working Capital

Question 1

An increase in the effort put into collection of accounts receivable will result in in the investment in accounts receivable, in bad debts expense, and in collections expenditure.

A) a decrease; an increase; a decrease
B) a decrease; an increase; an increase
C) an increase; a decrease; an increase
D) a decrease; a decrease; an increase

Answer 1

D

Question 2

Which statement concerning working capital is not true?

A) It is possible to have too much working capital.
B) The greater the working capital, the better.
C) It is possible to have too little working capital.
D) There is an 'ideal' level of working capital.

Answer 2

B

Question 3

The statement concerning trade credit that is true is:

A) In most businesses an extra charge is made to those who choose to pay on credit.
B) One business' trade creditor is the other's trade debtor.
C) In a period of inflation it is better to pay off goods bought on credit faster.
D) All of the statements are true.

Answer 3

B

Question 4

Which statement concerning trade credit is not true?

A) Credit can be a more convenient method of paying for goods than cash.
B) Trade credit is an important source of finance for most businesses.
C) Trade credit is generally regarded as a 'free' source of finance.
D) A discount of 1% offered for prompt payment of amounts owning to creditors is hardly worth taking.

Question 5

Which of the following is not necessarily true? Increasing the cash discount which a firm offers to its debtors for prompt payment will:

A) increase the net profit of the firm.
B) reduce the average collection period.
C) reduce average debtors.
D) All of the statements are true.

Question 6

Use the information below to answer the following questions
Aqua Ltd has forecast the yearly demand for its product as 5,000 units. 100 units of material must be used to produce the product. The cost of placing a single order for raw materials is $20, and the cost of holding one unit of material is $0.40 a year.
Refer to the information above. The economic order quantity for raw materials is:

A) 10,000 units.
B) 1,000 units.
C) 100 units.
D) 7,071 units.

Question 7

The most important reason for holding cash is:

A) to obtain tax benefits.
B) to avoid changes in interest rates.
C) to earn interest.
D) for liquidity.

Question 8

Which statement concerning the economic order quantity (EOQ) model is not correct?

A) A decrease in the number of orders increases the overall cost of ordering inventory.
B) The lower the level of inventory held, the greater the number of orders required.
C) The more inventory that is held, the higher the cost of holding inventory.
D) None of the above, i.e. all are correct statements.

Question 9

Credit should be granted to customers in which circumstance?

A) if sales can be increased
B) if bad debts can be minimised
C) if others in the industry grant credit
D) if the benefits exceed the costs

Question 10

Extending the credit period granted, with all other components of the credit policy remaining unchanged, will most likely cause:

A) a decrease in bad debts.
B) a decrease in debtors.
C) a decrease in sales.
D) none of the above.

Question 11

All of these are assumptions of the economic order quantity model, except:

A) demand does not fluctuate seasonally.
B) no buffer inventory is required.
C) the amount of inventory held is constant over the period.
D) there are no discounts for bulk purchases.

Question 12

Which statement concerning the operating cash cycle (OCC) is true?

A) It is possible to have a negative OCC.
B) Reducing the time period for which inventory is held shortens the OCC.
C) The longer the OCC, the greater the amount of working capital required.
D) All of the statements are true.

Question 13

Pink Company expects demand for a product to be 12,005 units annually. It costs $5 per unit to carry inventory for one year. Order costs are $50 per order. The economic order quantity is:

A) 600 units.
B) 240 units.
C) 1,200 units.
D) 490 units.

Question 14

Which of these is not a cost of holding insufficient levels of inventory?

A) lost production because of shortages of raw materials
B) loss of sales
C) high transportation costs on rush deliveries of inventory
D) extra inventory storage costs

Question 15

If inventory turnover changes from 4 times a year to 5 times a year, this means:

A) inventory turnover is too slow.
B) inventory turnover is faster than the industry average.
C) on average, inventory is being sold faster.
D) on average, it is taking longer to sell inventory.

Question 16

A decline in the level of working capital will:

A) working capital is not related to risk.
B) reduce risk.
C) increase risk.
D) leave risk unchanged.

Question 17

Calculate the operating cash cycle if the inventory turnover period is 21 days, the debtor's turnover period is 32 days and the creditor turnover period is 40 days.

A) 13 days
B) 53 days
C) -13 days
D) 93 days

Question 18

A firm has annual credit sales of $2 million, an average debtor's balance of $300,000 and works 365 days a year. The average settlement period for debtors is:

A) 150 days.
B) 15 days.
C) 66.7 days.
D) 54.7 days.

Question 19

Flash Enterprises usually takes 60 days to pay its suppliers. In order to encourage prompt payment, supplier Y offers Flash Enterprises a 1.5% discount for payment within 10 days. What is the annual percentage discount forgone if Flash Enterprises does not take up the discount offer?

A) 18.25%
B) 1.5%
C) 11%
D) 9.1%

Question 20

Items which comprise inventory are:

A) finished goods.
B) raw materials.
C) work-in-process.
D) all of the above.

Question 21

The statement concerning the just-in-time inventory management system that is not true is:

A) The aim of the system is to eliminate the need for the business to hold inventory.
B) The problem of holding inventory is shifted to the supplier.
C) For the system to work, there must be a close relationship between the business and its supplier.
D) The approach is a theoretical one only and has not really been tried in practice.

Question 22

Which of the following is not a useful measure of the quality of debtors?

A) average collection period
B) the amount owed by the debtor
C) aging of debtor's accounts
D) bad debts as a percentage of sales

Question 23

Chocolate Ltd uses 18,000 litres of chocolate syrup each year. The cost of carrying its chocolate syrup inventory is $0.50 per litre per year. The cost of ordering the syrup is $150 per delivery. The firm uses chocolate syrup at a constant rate throughout the year. The economic order quantity for chocolate syrup is:

A) 5,723 litres.
B) 9,487 litres.
C) 3,286 litres.
D) 2,900 litres.

Question 24

The operating cash cycle is measured as:

A) Inventory turnover period + Debtors turnover period + Creditors turnover period.
B) Inventory turnover period + Debtors turnover period.
C) Inventory turnover period + Debtors turnover period - Creditors turnover period.
D) none of the above.

Question 25

If creditors are paid 12 times a year, what, on average, is the creditors turnover period in days?

A) 12 days
B) 30.4 days
C) 20 days
D) none of the above

Question 26

A company wishes to reduce the amount of working capital it requires to finance its operations. Which of the following would be the least effective way of reducing working capital requirements?

A) increase the payment time for creditors
B) increase the efforts to collect overdue debtor's accounts
C) refuse to sell on credit to any customer
D) offer a discount for early payment by debtors

Question 27

A firm has daily credit sales of $50,000, and its average collection period is 50 days. Its average debtors balance is:

A) $1,000
B) $1,000,000
C) $50,000
D) $2,500,000

Question 28

In relation to the economic order quantity model:

A) the higher the price paid for inventory, the less frequently it should be ordered.
B) the higher the price paid for inventory, the more frequently it should be ordered.
C) the price paid for inventory does not directly affect the frequency of inventory ordering.
D) none of the above is true.

Question 29

Which changes would increase a firm's net working capital, all other things remaining constant?

A) increase in debtors
B) increase in creditors
C) decrease in inventories
D) all of the above

Question 30

The holding of cash to meet the firm's day-to-day commitments means that cash is being held for a:

A) precautionary motive.
B) transactionary motive.
C) speculative motive.
D) none of the above

Question 31

Because of uncertainty of demand, a firm may choose to hold an additional amount of inventory called:

A) re-order stock.
B) transit stock.
C) safety stock.
D) economic order quantity stock.

Question 32

Working capital is a measure of a firm's:

A) liquidity.
B) equity.
C) gearing.
D) profitability.

Question 33

Which statement concerning inventory is not true?

A) All categories of inventory should always be subject to the same degree of control.
B) Electronic point of sale systems greatly assist in the management of inventory.
C) Regular physical stocktakes are part of the efficient management of inventory.
D) None of the above, i.e. all are true statements.

Question 34

If sales are $850,000, the cost of sales is $500,000 and average inventory is $55,000, the average time taken to sell inventory in days is:

A) 40.15 days.
B) 33 days.
C) 23.6 days.
D) 11 days.

Question 35

The business which is likely to have the heaviest investment in working capital is a:

A) wholesaler.
B) service business.
C) manufacturer.
D) retailer.

Question 36

Sales forecasts to help determine the amount of inventory to be held can be based on all of the following except:

A) the judgement of sales staff.
B) the use of statistical techniques.
C) the rate of inflation.
D) None of the above, i.e. all can be used to determine sales forecasts.

Question 37

The firm's operating cash cycle is:

A) the time period between the cash outlay for the purchase of inventory and the ultimate receipt of cash from the sale of goods.
B) the time between when sales are made and cash received.
C) the time period between when inventory is purchased and resold.
D) the time between cash receipt and cash payment.

Question 38

Total purchases are $130,000 and credit purchases are 80% of total purchases. If trade creditors at the beginning of the period are $15,000 and at the end of the period are $13,000m the average settlement period for creditors, in days, is:

A) 74 days.
B) 50 days.
C) 49 days.
D) 39.6 days.

Question 39

When trying to assess the credit standing of a customer, a financial analyst could use which of the following sources?

A) credit ratings and reports from credit agencies
B) ratio calculations
C) financial statements of the credit applicant
D) all of the above

Question 40

The length of the period of credit granted to customers will be affected by:

A) typical credit terms operating within the industry.
B) the degree of competition within the industry.
C) the bargaining power of particular customers.
D) all of the above.

Question 41

Use the information below to answer the following questions
Aqua Ltd has forecast the yearly demand for its product as 5,000 units. 100 units of material must be used to produce the product. The cost of placing a single order for raw materials is $20, and the cost of holding one unit of material is $0.40 a year.
Refer to the information above. How often should the company place an order?

A) every 10 days
B) every 25 days
C) every 19 days
D) every 5 days

Question 42

The economic order quantity model is concerned with answering the question:

A) How much inventory should be held?
B) What is the cost of ordering inventory?
C) What should be the size of an inventory order?
D) All of the above

Question 43

Calculate the operating cash cycle in days if all sales are for cash, inventory is turned over 7 times a year and creditors are paid on average 5 times a year.

A) 52.1 days
B) -20.9 days
C) 125.1 days
D) +20.9 days

Question 44

Procedures and techniques for managing inventory are all of the following except:

A) financial ratios.
B) economic order quantity model.
C) payback method.
D) the ABC system of control.

Question 45

Violet Pty Ltd usually takes 50 days to pay its suppliers. In order to encourage prompt payment, supplier T offers Violet Pty Ltd a 2% discount for payment within 10 days. What is the annual percentage cost of the discount to Violet Pty Ltd?

A) 2%
B) 20%
C) 73%
D) 18.25%

Question 46

If inventory is turned over 7 times a year, the inventory turnover period in days is:

A) 52 days.
B) 7 days.
C) 70 days.
D) 19 days.

Question 47

The ABC system of managing inventory:

A) is the activity-based costing system.
B) is a simple system of managing inventory based on three codes.
C) is a method of applying different levels of inventory control based on the value of each category of inventory.
D) none of the above

Question 48

If the planned level of sales is $146,000 and the planned average collection period is 40 days, the planned average level of debtors will be:

A) $3,650
B) $16,000
C) $14,600
D) $18,500

Question 49

The item that is not part of working capital is:

A) inventory.
B) cash.
C) debtors.
D) plant.

Question 50

Annual demand for product G is 117,000 units and the lead-time for orders is three weeks. Demand is steady throughout the year. Assuming that no buffer stock is held, at what level of inventory should the company re-order product G?

A) 58,500 units
B) 39,000 units
C) 6,750 units
D) 2,250 units

Question 51

Management of working capital is important because it affects the firm's:

A) liquidity.
B) profitability.
C) risk.
D) all of the above.

Question 52

A firm has annual credit sales of $5,000,000 and an average collection period of 52 days. What is their average debtors balance, assuming a 365-day year?

A) $712,345
B) $486,111
C) $142,857
D) none of the above

Question 53

Credit policy is composed of:

A) collection policies.
B) vetting of customers before offering credit.
C) credit terms.
D) all of the above.

Question 54

Which of the following is not one of the 'five C's' of deciding which customers should be granted credit?

A) capacity
B) capability
C) capital
D) character

Question 55

The motive behind the holding of cash balances to protect the firm from unforeseen cash requirements is known as:

A) the precautionary motive.
B) the transaction motive.
C) the legal motive.
D) the speculative motive.

Question 56

Which of the following is the most useful tool for managing cash?

A) cash budget
B) quick ratio
C) aging of debtors
D) current ratio

Question 57

An advantage of holding inventory is:

A) sales are not lost because things are out of stock.
B) ability to buy before prices rise.
C) no interruptions to production.
D) all of the above.

Question 58

The formula for the average inventory turnover period in days is:

A) Cost of sales/Average inventory.
B) Average inventory held/Sales.
C) (Average inventory held/Cost of sales) × 365 .
D) none of the above.

Question 59

Which statement is not true?

A) A firm should always have a surplus holding of cash.
B) If a firm has a cash surplus, it should make the best use of the surplus.
C) If a firm has a cash deficit, it may need to reschedule its cash payments.
D) If a firm has a cash deficit, it may need to arrange to borrow money.

Question 60

Improving cash flow in relation to debtors and creditors, respectively, requires:

A) slowing collections and speeding up payments.
B) speeding up collections and slowing payments.
C) slowing collections and slowing payments.
D) speeding up collections and speeding up payments.

Question 61

Which of these is not considered a cost of holding inventory?

A) opportunity cost of having funds tied up in inventory
B) risk of obsolescence
C) risk of bad debts
D) cost of storage and handling

Question 62

An assumption of the economic order quantity model is:

A) constant carrying and ordering costs.
B) demand is constant over the planning period.
C) instantaneous delivery of orders.
D) all of the above.

Question 63

Working capital for a manufacturer normally makes up percentage of total assets.

A) a significant
B) a huge
C) an unimportant
D) fifty

Question 64

Which of these is not a way in which the length of the operating cycle can be reduced?

A) Reduce the time taken to pay creditors.
B) Impose tighter controls on debtors to encourage prompt payment.
C) Cut back on the average time inventory is held.
D) None of the above, i.e. all are ways in which the length of the operating cycle can be reduced.