Deck 13: The Management of Working Capital

Question 1

Working capital is a measure of a firm's:

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

Answer 1

B

Question 2

If sales are $950,000, the cost of sales is $600,000 and average inventory is $65,000, the average time taken to sell inventory in days is:

A)39.54 days.
B)23.6 days.
C)11 days.
D)33 days.

Answer 2

A

Question 3

Which of the following is not a procedure or technique for managing inventory?

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

Answer 3

A

Question 4

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

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

Question 5

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

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

Question 6

Annual demand for product W is 120,000 units and the lead-time for orders is four weeks. Demand is steady throughout the year. Assuming no buffer stock is held, at what level of inventory should the company reorder product W?

A)39,000 units.
B)2,250 units.
C)58,500 units.
D)9,230 units.

Question 7

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

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

Question 8

Which items comprise inventory?

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

Question 9

Which business is likely to have the heaviest investment in working capital?

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

Question 10

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

A)Extra inventory storage costs.
B)Lost production because of shortages of raw materials.
C)High transportation costs on rush deliveries of inventory.
D)Loss of sales.

Question 11

Which statement concerning working capital is not true?

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

Question 12

Which item is not part of working capital?

A)cash.
B)plant.
C)accounts receivable.
D)inventory.

Question 13

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

A)Opportunity cost of having funds tied up in inventory.
B)Risk of bad debts.
C)Cost of storage and handling.
D)Risk of obsolescence.

Question 14

What is an advantage of holding inventory?

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

Question 15

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

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

Question 16

What is an assumption of the economic order quantity model?

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

Question 17

A decline in the level of working capital will:

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

Question 18

Which is one of the most difficult inventory costs to measure?

A)ordering costs.
B)interest costs.
C)carrying costs.
D)stock out costs.

Question 19

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

A)Decrease in inventories.
B)Increase in accounts payable.
C)Increase in accounts receivable.
D)All of the above.

Question 20

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

A)The lower the level of inventory held, the greater the number of orders required.
B)A decrease in the number of orders increases the overall cost of ordering inventory.
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 21

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

A)$142,857.
B)$712,329.
C)$486,111.
D)None of the above.

Question 22

A firm has annual credit sales of $2m, an average debtor's balance of $400,000 and works 365 days a year. The average settlement period for accounts receivable is:

A)73 days.
B)15 days.
C)150 days.
D)54.7 days.

Question 23

Which of the following is not and assumption of the economic order quantity model?

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

Question 24

Which statement concerning inventory is not true?

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

Question 25

What is the formula for the average inventory turnover period in days?

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

Question 26

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

A)Character.
B)Capacity.
C)Capability.
D)Capital.

Question 27

What does it mean if inventory turnover changes from 4 times a year to 5 time a year?

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

Question 28

Credit policy is composed of:

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

Question 29

Credit should be granted to customers in which circumstance?

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

Question 30

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

Question 31

If inventory is turned over 8 times a year, what is the inventory turnover period in days?

A)7 days.
B)46 days.
C)19 days.
D)70 days.

Question 32

Which of the following will affect the length of the period of credit granted to customers?

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

Question 33

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.
Chocolate Ltd uses 18,000 litres of chocolate syrup each year. The cost of holding 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)9,487 litres.
B)3,286 litres.
C)5,723 litres.
D)2,900 litres.

Question 34

Wonderland has a plant that manufactures computer chips. Expected demand for these chips in March 2018 is 52,000 units. Wonderland estimates the cost per purchase order to be $25. The monthly holding cost for one chip is 5c.
REQUIRED:
a)i)Compute the economic order quantity for the chips.
ii)Compute the number of orders in March 2018.
b)List the motives for holding cash in a business.
c)Name at least four factors that influence the length of the credit period in a business.

Question 35

In relation to the economic order quantity model:

A)the higher the price paid for inventory, the more frequently it should be ordered.
B)the higher the price paid for inventory, the less 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 36

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 25 days.
B)Every 10 days.
C)Every 19 days.
D)Every 5 days.

Question 37

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

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

Question 38

The ABC system of managing inventory:

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

Question 39

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

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

Question 40

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

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

Question 41

Which statement concerning the operating cash cycle is true?

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

Question 42

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 period between when inventory is purchased and resold.
C)the time between when sales are made and cash received.
D)the time between cash receipt and cash payment.

Question 43

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)Financial statements of the credit applicant.
C)Other suppliers.
D)All of the above.

Question 44

The operating cash cycle is measured as:

A)inventory turnover period + accounts receivable turnover period - creditor turnover period.
B)inventory turnover period + accounts receivable turnover period + accounts payable turnover period.
C)inventory turnover period + accounts receivable turnover period.
D)none of the above.

Question 45

Calculate the operating cash cycle if the inventory turnover period is 21 days, the debtor's turnover period is 37 days and the creditor turnover period is 40 days.

A)93 days.
B)-18 days.
C)18 days.
D)53 days.

Question 46

Which of the following is not a useful measure of the quality of accounts receivable?

A)Bad debts as a percentage of sales.
B)The amount owed by the debtor.
C)Average collection period.
D)Aging of debtors' accounts.

Question 47

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

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

Question 48

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

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

Question 49

The most important reason for holding cash is:

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

Question 50

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

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

Question 51

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 efforts to collect overdue debtor's accounts.
B)Refuse to sell on credit to any customer.
C)Offer a discount for early payment by debtors.
D)Increase the payment time for accounts payable.

Question 52

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

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

Question 53

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

A)Cash budget.
B)Quick ratio.
C)Current ratio.
D)Aging of debtors.

Question 54

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

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

Question 55

Which statement is not true?

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

Question 56

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

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

Question 57

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

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

Question 58

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

Question 59

Calculate the operating cash cycle in days if all sales are for cash, inventory is turned over 8 times a year and creditors are paid on average 5 times a year.

A)-27.4 days.
B)52.1 days.
C)125.1 days.
D)27.4 days.

Question 60

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

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

Question 61

If accounts payable are paid 10 times a year, what, on average, is the accounts payable turnover period in days?

A)20 days.
B)12 days.
C)36.5 days.
D)None of the above.

Question 62

Which statement concerning trade credit is true?

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

Question 63

Which statement concerning trade credit is not true?

A)A discount of 1% offered for prompt payment of amounts owning to creditors is hardly worth taking.
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)Credit can be a more convenient method of paying for goods than cash.

Question 64

Total purchases are $150,000 and credit purchases are 80% of total purchases. If accounts payable at the beginning of the period are $15,000 and at the end of the period are $13,000, the average settlement period for accounts payable, in days, is:

A)50 days.
B)42.6 days.
C)49 days.
D)74 days.

Question 65

Gordon Enterprises usually takes 60 days to pay its suppliers. In order to encourage prompt payment, supplier Y offers Flash Enterprises a 2% discount for payment within 10 days. What is the annual percentage discount forgone if Flash Enterprises does not take up the discount offer?

A)11%.
B)14.6%.
C)9.1%.
D)1.5%.

Question 66

Violet Pty Ltd usually takes 50 days to pay its suppliers. In order to encourage prompt payment, supplier T offers Violet Pty Ltd a 1.5% discount for payment within 10 days. What is the annual percentage cost of the discount to Violet Pty Ltd?

A)20%.
B)18.25%.
C)13.7%.
D)2%.