Deck 7: Working Capital Management

Question 1

Factoring is the process of putting up accounts receivable as collateral to obtain cash.

Answer 1

False

Question 2

Which of the following is true about disbursement float?

A) Funds are collected and debited to an account.
B) Funds are collected and credited to an account.
C) Funds are deposited to a checking account immediately when a check is written.
D) Funds are removed from the checking account immediately when the check is written.
E) None of the above.

Answer 2

None of the above.

Question 3

Raw materials inventory is made up of those items that are actually sold by the business.

Answer 3

False

Question 4

The current ratio is current liabilities divided by current assets.

Question 5

Pledging is the process of putting up accounts receivable as collateral to obtain cash.

Question 6

The disbursement float is the amount of time that elapses between depositing the debtor's check in an account and the check clearing the account.

Question 7

Working capital consists of the current assets and current liabilities of a company.

Question 8

The economic order quantity formula balances the cost of ordering an item against the cost of storing an item.

Question 9

If credit sales remain the same and accounts receivable increase, accounts receivable turnover will increase.

Question 10

Working capital consists of the total assets and total liabilities of a company.

Question 11

Finished goods inventory is made up of those items that are actually sold by the business.

Question 12

The three Cs of credit are character, capacity, and comedy.

Question 13

When using an ABC inventory, A items are those 75 percent of the items that make up 5 to 10 percent of the total cost.

Question 14

The three Cs of credit are character, capacity, and collateral.

Question 15

Total ordering cost and total carrying cost are never equal at the EOQ.

Question 16

The current ratio is current assets divided by current liabilities.

Question 17

Net working capital is the difference between total current assets and total current liabilities.

Question 18

Work in process inventory is made up of those items that are actually sold by the business.

Question 19

The collection float is the amount of time that elapses between depositing the debtor's check in an account and the check clearing an account.

Question 20

If credit sales remain the same and accounts receivable decrease, accounts receivable turnover will increase.

Question 21

If a firm has $400,000 in credit sales and $80,000 in average accounts receivable, what will happen to average days collections if accounts receivable increases?

A) Average days collections will stay the same.
B) Average days collections will decrease.
C) Average days collections will increase.
D) Cannot tell with the information provided.

Question 22

When evaluating credit, a customer who has sufficient disposable income and cash flow to pay off a loan is said to have

A) capacity.
B) creditworthiness.
C) collateral.
D) character.

Question 23

Collection float is the amount of time that elapses between a check in an account and the check's , at which point the funds are actually placed in the account.

A) depositing; clearing
B) issuing; clearing
C) receiving; being deposited
D) writing; being deposited
E) A and B above

Question 24

If a firm has $400,000 in credit sales and $50,000 in average account receivable, average days collection is approximately

A) 29.2.
B) 292.
C) 45.63.
D) 5.563.

Question 25

Which of the following is a method used to speed up cash receipts?

A) lock box
B) electronic funds transfer
C) writing a check
D) A and B above
E) B and C above

Question 26

Marketable securities

A) consist of government securities only.
B) normally pay a higher rate of interest than checking accounts.
C) never offer any risk.
D) never require an investment strategy.

Question 27

When evaluating credit, a customer who could sell assets to pay off a loan is said to have

A) collateral.
B) creditworthiness.
C) character.
D) capacity.

Question 28

If a firm has $400,000 in credit sales and $80,000 in average accounts receivable, accounts receivable turnover is

A) 32.
B) 48.
C) 0.20.
D) 5.

Question 29

Credit departments are normally found in

A) most retail firms.
B) most manufacturing firms.
C) most wholesale firms.
D) A and B above.
E) B and C above.

Question 30

When evaluating credit, a customer who has paid all bills on time and has favorable credit references from other creditors is said to have

A) creditworthiness.
B) collateral.
C) capacity.
D) character.

Question 31

Which of the following is true about disbursement float?

A) Funds are collected and credited to an account.
B) Funds are deposited to a checking account immediately when a check is written.
C) Funds are collected and debited to an account.
D) Funds are removed from the checking account immediately when the check clears the checking account.
E) None of the above.

Question 32

The practice of selling a firm's accounts receivable to another firm at a discount is known as

A) excising.
B) exporting.
C) crediting.
D) factoring.

Question 33

Factoring is the process of selling accounts receivable to another firm at

A) the prime lending rate.
B) a price equal to the sales price.
C) a discount off of the original sales price.
D) a premium above the original sales price.

Question 34

The goal of accounts receivable management is to

A) give credit to every customer.
B) have a department of its own in a company.
C) collect money as fast as possible.
D) increase sales by offering credit to customers.

Question 35

Which of the following would NOT be used in an aging schedule of accounts receivable?

A) days outstanding
B) percentage outstanding
C) customer
D) percentage of cash sales
E) outstanding balance

Question 36

The credit decision involves

A) looking at the borrower's collateral.
B) making sure that the customer is a good credit risk.
C) investigating the customer.
D) granting credit to all applicants.
E) all of the above.

Question 37

Sarah's Computer City sells 5,000 boxes of CD -RW compact discs per year. She determined that she pays $50 to process an order for discs. Her purchase price is $6 for each box of discs and she has determined that storage costs for one year are 25 percent of the purchase price. What is her approximate total ordering cost?

A) $611
B) $43
C) $433
D) $865
E) $87

Question 38

If a firm has $400,000 in credit sales and $80,000 in average accounts receivable, average days collections is approximately

A) 11.
B) 8.
C) 182.
D) 73.

Question 39

Prior to making a credit decision we should always check the applicant's

A) collateral, credit, and cash.
B) capacity, cash, and collateral.
C) character, capacity, and collateral.
D) collateral, character, and current assets.

Question 40

If a firm has $400,000 in credit sales and $100,000 in average accounts receivable, accounts receivable turnover is

A) 4.
B) 5.
C) 14.
D) 25 percent.

Question 41

If a fast food restaurant has a box of toilet tissue with 100 rolls stored on the same shelf as its paper cups, the box of toilet tissue would be classified as inventory.

A) finished goods.
B) maintenance, repair, and operating
C) raw materials
D) work in progress

Question 42

Sarah's Computer City sells 5,000 boxes of CD -RW compact discs per year. She determined that she pays $50 to process an order for discs. Her purchase price is $6 for each box of discs and she has determined that storage costs for one year are 25 percent of the purchase price. Sarah's vendor said that if she purchased 1,000 boxes at a time, she would receive a 10 percent discount. What quantity should Sarah order if the total cost formula is TC = DP +QIP +DS ?
2 Q

A) 578
B) 1,000
C) 500
D) 5,000

Question 43

When using an ABC inventory analysis, the inventory items that make up approximately percent but account for approximately percent of total costs are classified as C items.

A) 10 -15; 75
B) 10 -15; 10 -15
C) 75 -80; 10 -15
D) 75 -80; 75 -80

Question 44

If a fast food restaurant has hamburger patties on a serving tray at the cash register, these would be classified as inventory.

A) finished goods
B) maintenance, repair, and operating
C) raw materials
D) work in progress

Question 45

If a fast food restaurant has hamburger patties in the freezer, these would be classified as inventory.

A) finished goods
B) maintenance, repair, and operating
C) raw materials
D) work in progress

Question 46

Which of the following are similar?

A) credit card
B) line of credit
C) short -term loan
D) A and B above
E) B and C above

Question 47

Sarah's Computer City sells 5,000 boxes of CD -RW compact discs per year. She determined that she pays $50 to process an order for discs. Her purchase price is $6 for each box of discs and she has determined that storage costs for one year are 25 percent of the purchase price. Sarah's vendor said that if she purchased 1,000 boxes at a time, she would receive a 10 percent discount. What is her total cost if she orders her Economic Order Quantity without the discount if the formula for total cost is TC = DP +QIP +DS ?
2 Q

A) $30,866
B) $28,000
C) $27,925
D) $27,866

Question 48

Randy Jones decided to run an ABC analysis of his 500 stock keeping inventory items. He found that his average inventory was $200,000 and that there were 378 items out of the 500 that cost him $24,000. These 378 items would be classified as items.

A) A
B) B
C) C
D) D

Question 49

John assembles computers for the Computer Systems to Go Company. His company purchases Pentium MMX™ chips from Intel. When John is installing the chip it is
Inventory, but
For Intel it is inventory.

A) work in process; finished goods
B) finished goods; raw material
C) raw material; finished goods
D) raw material; work in process

Question 50

Sarah's Computer City sells 5,000 boxes of CD -RW compact discs per year. She determined that she pays $50 to process an order for discs. Her purchase price is $6 for each box of discs and she has determined that storage costs for one year are 25 percent of the purchase price. Sarah's vendor said that if she purchased 1,000 boxes at a time, she would receive a 10 percent discount. The total cost formula is TC = DP +QIP +DS . What is Sarah's annual carrying cost if she takes advantage of the
2 Q
Discount?

A) $250
B) $578
C) $433
D) $675

Question 51

Sarah's Computer City sells 5,000 boxes of CD -RW compact discs per year. She determined that she pays $50 to process an order for discs. Her purchase price is $6 for each box of discs and she has determined that storage costs for one year are 25 percent of the purchase price. Sarah's vendor said that if she purchased 1,000 boxes at a time, she would receive a 10 percent discount. The total cost formula is TC = DP +QIP +DS . What is Sarah's annual ordering cost if she takes advantage of the
2 Q
Discount?

A) $250
B) $578
C) $433
D) $675

Question 52

Sarah's Computer City sells 5,000 boxes of CD -RW compact discs per year. She determined that she pays $50 to process an order for discs. Her purchase price is $6 for each box of discs and she has determined that storage costs for one year are 25 percent of the purchase price. Sarah's vendor said that if she purchased 1,000 boxes at a time, she would receive a 10 percent discount. The total cost formula is TC = DP +QIP +DS . What is Sarah's annual ordering cost if she does NOT take
2 Q
Advantage of the discount?

A) $250
B) $578
C) $433
D) $675

Question 53

When using an ABC inventory analysis, the inventory items that make up approximately percent but account for approximately percent of total costs are classified as B items.

A) 10 -15; 75
B) 10 -15; 10 -15
C) 75 -80; 10 -15
D) 75 -80; 75 -80

Question 54

When using an ABC inventory analysis, the inventory items that make up approximately percent but account for approximately percent of total costs are classified as A items.

A) 10 -15; 75
B) 10 -15; 10 -15
C) 75 -80; 10 -15
D) 75 -80; 75 -80

Question 55

If a fast food restaurant has a box of toilet tissue with 100 rolls stored with its paper cups, the box of toilet tissue would be classified as
Inventory.

A) finished goods; raw materials inventory and the paper cups would be classified as
B) maintenance, repair, and operating; raw materials
C) maintenance, repair, and operating; work in progress
D) finished goods; work in progress

Question 56

Randy Jones decided to run an ABC analysis of his 500 stock keeping inventory items. He found that his average inventory was $200,000 and that there were 50 items out of the 500 that cost him $23,000. These 50 items would be classified as items.

A) A
B) B
C) C
D) D

Question 57

If a fast food restaurant has hamburger patties on the grill, these would be classified as inventory.

A) finished goods
B) maintenance, repair, and operating
C) raw materials
D) work in progress

Question 58

Randy Jones decided to run an ABC analysis of his 500 stock keeping inventory items. He found that his average inventory was $200,000 and that there were 50 items out of the 500 that cost him $153,000. These 50 items would be classified as items.

A) A
B) B
C) C
D) D

Question 59

Sarah's Computer City sells 5,000 boxes of CD -RW compact discs per year. She determined that she pays $50 to process an order for discs. Her purchase price is $6 for each box of discs and she has determined that storage costs for one year are 25 percent of the purchase price. Sarah's vendor said that if she purchased 1,000 boxes at a time, she would receive a 10 percent discount. What is her total cost with the discount if the formula for total cost is TC = DP +QIP +DS ?
2 Q

A) $27,925
B) $30,866
C) $27,866
D) $28,000

Question 60

Sarah's Computer City sells 5,000 boxes of CD -RW compact discs per year. She determined that she pays $50 to process an order for discs. Her purchase price is $6 for each box of discs and she has determined that storage costs for one year are 25 percent of the purchase price. Sarah's vendor said that if she purchased 1,000 boxes at a time, she would receive a 10 percent discount. The total cost formula is TC = DP +QIP +DS . What is Sarah's annual carrying cost if she does NOT take
2 Q
Advantage of the discount?

A) $250
B) $578
C) $433
D) $675

Question 61

Which of the following typically is NOT classified as an accrued liability?

A) state employment taxes
B) monthly sales tax owed to the city
C) monthly mortgage payments
D) federal employment taxes

Question 62

A bank loan that only incurs finance charges and payment obligations when used for a business is a

A) promissory note.
B) line of credit.
C) note payable.
D) all of the above.

Question 63

Sarah just received an invoice for $12,000 with terms of 2/10, n/30. The invoice date was June 1. Her contract with the vendor indicates a charge of 1.5 percent per month on late payments. If Sarah pays this bill on June 15, she will send the vendor a check for

A) $11,760.
B) $12,000.
C) $12,180.
D) Cannot answer without more information.

Question 64

Sam's Discount Appliance Company just received a shipment of 30 washing machines. The invoice list price for each washing machine is $365. The manufacturer's catalogue indicates that Sam can take the following discounts: 30/15/10 with 30 percent being the normal markup, 15 percent for free delivery and hookup, and 10 percent for local advertising and point -of -sale displays. If Sam does not advertise this brand of washer and charges $50 for delivery and setup, he will pay the vendor for each washing machine.

A) $219.00
B) $229.95
C) $255.50
D) $217.18

Question 65

Trade discounts are offered and cash discounts are offered .

A) for specific services performed by credit customers; for specific services performed by cash customers
B) for specific services performed for the vendor; to speed up collection of credit sales
C) to speed up collection of credit sales; for specific services performed for the vendor
D) to speed up collection of credit accounts; to speed up collection of trade accounts

Question 66

Sarah just received an invoice for $12,000 with terms of 2/10, n/30. The invoice date was June 1. Her contract with the vendor indicates a charge of 1.5 percent per month on late payments. If Sarah pays this bill on July 15, she will send the vendor a check for

A) $11,760.
B) $12,000.
C) $12,180.
D) Cannot answer without more information.

Question 67

Sam's Discount Appliance Company just received a shipment of 30 washing machines. The invoice list price for each washing machine is $365. The manufacturer's catalogue indicates that Sam can take the following discounts: 30/15/10 with 30 percent being the normal markup, 15 percent for free delivery and hookup, and 10 percent for local advertising and point -of -sale displays. If Sam provides free delivery and hookup, advertises these washers in the Sunday paper and has a prominent display in his store, he will pay the vendor for each washing machine.

A) $255.50
B) $200.75
C) $229.95
D) $195.46

Question 68

The primary difference between a line of credit and a short -term loan is

A) we borrow the entire amount with both the short -term loan and the line of credit.
B) we borrow the entire amount with the short -term loan, but borrow only what we need with the line of credit.
C) we borrow only what we need for the current month with both the short -term loan and the line of credit.
D) we make payments on the line of credit every month to insure that we will have good credit.

Question 69

Sarah just received an invoice for $12,000 with terms of 2/10, n/30. The invoice date was June 1. Her contract with the vendor indicates a charge of 1.5 percent per month on late payments. If Sarah pays this bill on June 5, she will send the vendor a check for

A) $11,760.
B) $12,000.
C) $12,180.
D) Cannot answer without more information.

Question 70

If we borrowed $10,000 on a line of credit September 1, and the bank charges 12 percent per annum, compounded daily, the interest due on October 1 is approximately

A) $33.80.
B) $40.00.
C) $98.63.
D) $100.00.

Question 71

The primary concern in current liabilities management is to pay obligations

A) before they are due.
B) after they are due.
C) when they are due.
D) All of the above are concerns.

Question 72

Sam's Discount Appliance Company just received a shipment of 30 washing machines. The invoice list price for each washing machine is $365. The manufacturer's catalogue indicates that Sam can take the following discounts: 30/15/10 with 30 percent being the normal markup, 15 percent for free delivery and hookup, and 10 percent for local advertising and point -of -sale displays. If Sam performs all services required by the vendor, his single equivalent discount will be

A) 53.55%.
B) 45.00%.
C) 46.45%.
D) 55.00%.

Question 73

Sarah just received an invoice for $12,000 with terms of 2/10, n/30. The invoice date was June 1. Her contract with the vendor indicates a charge of 1.5 percent per month on late payments. If Sarah pays this bill on June 30, she will pay effective annual interest on this account of approximately

A) 24%.
B) 18%.
C) 36.7%.
D) 30%.

Question 74

Business obligations that are normally paid within one year are

A) mortgages.
B) short -term debt.
C) long -term debt.
D) equipment loans.

Question 75

If we borrowed $10,000 on a line of credit September 1, and the bank charges 12 percent per annum, compounded daily, the daily interest due on the line of credit is approximately

A) $0.03
B) $3.28.
C) $4.00.
D) $10.00.

Question 76

Sam's Discount Appliance Company just received a shipment of 30 washing machines. The invoice list price for each washing machine is $365. The manufacturer's catalogue indicates that Sam can take the following discounts: 30/15/10 with 30 percent being the normal markup, 15 percent for free delivery and hookup, and 10 percent for local advertising and point -of -sale displays. If Sam performs all services required by the vendor, his net cost rate factor will be

A) 55.00%.
B) 45.00%.
C) 46.45%.
D) 53.55%.

Question 77

The obligations of a business that are accumulated during the normal course of a business are

A) short -term debt.
B) accrued liabilities.
C) actual liabilities.
D) long -term debt.