Question 1

Drawing, Inc. has sales of $860,000 and cost of goods sold of $450,000. The firm had a beginning inventory of $50,000 and an ending inventory of $59,000. What is the length of the days' sales in inventory?

Accepted Answer

The days' sales in inventory is calculated by dividing the average inventory by the cost of goods sold (COGS) and then multiplying by 365 days. First, find the average inventory: (Beginning Inventory + Ending Inventory) / 2 = ($50,000 + $59,000) / 2 = $54,500. Then, divide this by the COGS and multiply by 365: ($54,500 / $450,000) * 365 = 47.86 days.

Question 2

Which of the following resemble checks, but differ in that they are payable by the firm issuing them rather than payable by a bank?

Accepted Answer

Drafts are similar to checks but are payable by the firm issuing them rather than by a bank. They are often used in international and interbank transactions. Concentration banking, wire transfers, and zero-balance accounts do not resemble checks in any way.

Question 3

Which of the following describes the place over which the bank-to-bank transfers are conducted within the United States?

Accepted Answer

Fedwire is the electronic funds transfer system operated by the Federal Reserve Bank which is used for bank-to-bank transfers within the United States. The lockbox system is a service provided by banks to process customer payments received by mail. Concentration banking is a method in which a business maintains a centralized bank account to facilitate cash management. Wire transfers refer to electronic transfers of funds between individuals or businesses.

Question 4

If a firm has a cash cycle of 39 days and an operating cycle of 88 days, what is its average payment period?

Accepted Answer

The cash cycle represents the time it takes for the firm to invest cash in inventory and accounts receivable and then collect that cash when accounts receivable are paid. It is calculated as:

Cash cycle = Inventory conversion period + Accounts receivable collection period - Accounts payable deferral period

Operating cycle represents the time it takes to turn inventory into accounts receivable, and then into cash. It is calculated as:

Operating cycle = Inventory conversion period + Accounts receivable collection period

We can solve for the inventory conversion period by subtracting the accounts receivable collection period from the operating cycle:

Inventory conversion period = Operating cycle - Accounts receivable collection period
Inventory conversion period = 88 days - Inventory conversion period = 49 days

Now we can use the cash cycle formula to find the accounts payable deferral period:

Cash cycle = Inventory conversion period + Accounts receivable collection period - Accounts payable deferral period
39 days = 49 days + Accounts receivable collection period - Accounts payable deferral period
Accounts payable deferral period = 10 days

Therefore, the average payment period is the accounts payable deferral period, which is 10 days. The best choice is B.

Question 5

If a firm has a cash cycle of 25 days and an operating cycle of 57 days, what is its average payment period?

Accepted Answer

The operating cycle is the time it takes a company to purchase inventory, sell it, and collect payment from customers. The cash cycle is the time it takes to convert inventory into cash. 
Average payment period = Operating cycle - Cash cycle 
= 57 days - 25 days 
= 32 days

Question 6

Team Sports Industries has a cash balance of $60,000; accounts payable of $40,000; inventory of $100,000; accounts receivable of $110,000; notes payable of $80,000; and accrued wages and taxes of $10,000. How much net working capital does the firm need to fund?

Accepted Answer

The answer of Team Sports Industries has a cash balance...

Question 7

Scribble, Inc. has sales of $80,000 and cost of goods sold of $64,000. The firm had a beginning inventory of $10,000 and an ending inventory of $12,000. What is the length of the days' sales in inventory?

Accepted Answer

The answer of Scribble, Inc. has sales of $80,000 and...

Question 8

Elle Mae Industries has a cash balance of $50,000; accounts payable of $150,000; inventory of $190,000; accounts receivable of $250,000; notes payable of $210,000; and accrued wages and taxes of $40,000. How much net working capital does the firm need to fund?

Accepted Answer

Net working capital is calculated as current assets minus current liabilities. Here, current assets are $50,000 (cash) + $190,000 (inventory) + $250,000 (accounts receivable) = $490,000. Current liabilities are $150,000 (accounts payable) + $210,000 (notes payable) + $40,000 (accrued wages and taxes) = $400,000. Therefore, net working capital needed is $490,000 - $400,000 = $90,000.

Question 9

If a firm has a cash cycle of 25 days and an operating cycle of 80 days, what is its payables turnover?

Accepted Answer

The payables turnover is calculated by subtracting the cash cycle from the operating cycle. Operating cycle (80 days) - Cash cycle (25 days) = 55 days. However, the question asks for the payables turnover, which is typically expressed in terms of how many times a company pays its suppliers over a period, not in days. The provided options do not directly relate to the typical calculation of payables turnover from the given information, suggesting a misunderstanding in the question's formulation. The correct calculation should involve annual purchases and average accounts payable, which is not possible with the given data. The answer provided as "C) 6.64" seems to be a misinterpretation of the question's intent.

Question 10

If a firm has a cash cycle of 47 days and an operating cycle of 92 days, what is its average payment period?

Accepted Answer

The average payment period can be calculated by subtracting the average inventory period (which is the cash cycle minus the average collection period) from the operating cycle. 
So, Average Payment Period = Operating Cycle - Average Inventory Period
= Operating Cycle - (Cash Cycle - Average Collection Period)
= 92 - (47 - X)  (where X is the average collection period)
= 92 - 47 + X
= 45 + X
We do not know the value of X, but we know that it is positive because the cash cycle is shorter than the operating cycle (meaning collections are faster than payments). Therefore, the average payment period is greater than 45 days but less than 92 days, so the best choice is A.

Question 11

If a firm has a cash cycle of 10 days and an operating cycle of 43 days, what is its average payment period?

Accepted Answer

Average Payment Period = Operating Cycle - Cash Cycle
= 43 days - 10 days
= 33 days

Therefore, the correct choice is B (33).

Question 12

Painting, Inc. has sales of $400,000 and cost of goods sold of $275,000. The firm had a beginning inventory of $42,000 and an ending inventory of $38,000. What is the length of the days' sales in inventory?

Accepted Answer

The answer of Painting, Inc. has sales of $400,000 and...

Question 13

If a firm has a cash cycle of 25 days and an operating cycle of 80 days, what is its average payment period?

Accepted Answer

The cash cycle represents the number of days it takes for a firm to convert its investment in inventory into cash receipts from customers. So, Cash cycle = Inventory conversion period + Receivables collection period - Payables deferral period. 
Here, the cash cycle is 25 days, but we are not given the inventory conversion or receivables collection period, so we can only calculate the payables deferral period. 
Operating cycle = Cash cycle + Payables deferral period. 
80 days = 25 days + Payables deferral period
Payables deferral period = 55 days
Therefore, the firm's average payment period is 55 days.

Question 14

Which of the following is NOT one of the "five C's" of credit analysis?

Accepted Answer

The "five C's" of credit analysis are Capacity, Character, Collateral, Conditions, and Capital. Collectability is not one of the five C's.

Question 15

If a firm has a cash cycle of 30 days and an operating cycle of 64 days, what is its average payment period?

Accepted Answer

The cash cycle is the time it takes for a firm to convert its resources into cash, while the operating cycle is the time it takes to convert its resources into cash and then sell its products. Therefore, the difference between the cash cycle and the operating cycle is the average collection period.

Operating cycle = Cash cycle + Average collection period

Rearranging this formula, we get:

Average collection period = Operating cycle - Cash cycle
Average collection period = 64 days - 30 days
Average collection period = 34 days

Since the average collection period is the same as the average payment period (assuming the firm pays its bills as soon as it collects its cash), the answer is B) 34 days.

Question 16

If a firm has a cash cycle of 18 days and an operating cycle of 29 days, what is its payables turnover?

Accepted Answer

Payables turnover = Operating cycle / Payables period

Payables period = Cash cycle = 18 days

Operating cycle = Inventory conversion period + receivables collection period
Given only the operating cycle = 29 days

So, Inventory conversion period + Receivables collection period = 29 days

This means that the payables period = Operating cycle - Inventory conversion period - Receivables collection period = 29 - (unknown)

As we do not know the inventory conversion period and receivables collection period, we cannot calculate the payables turnover using the above formula.

However, we can calculate the days payables outstanding (DPO) using the formula:

DPO = Accounts Payable / (COGS / 365)

Assuming that COGS is constant, a longer cash cycle would mean more days of inventory and receivables outstanding. This would mean that the firm is using its suppliers' financing for a longer period of time and has a higher amount of accounts payable outstanding. Therefore, we can assume that a longer cash cycle would lead to a higher DPO.

Using this logic, a higher DPO would result in a lower payables turnover, and therefore, the correct answer is D) 33.18

Question 17

Daisy D Industries has a cash balance of $75,000; accounts payable of $140,000; inventory of $300,000; accounts receivable of $350,000; notes payable of $145,000; and accrued wages and taxes of $80,000. How much net working capital does the firm need to fund?

Accepted Answer

Net working capital is calculated as current assets minus current liabilities. 
So, 
Net working capital = (Cash + Accounts Receivable + Inventory) - (Accounts Payable + Notes Payable + Accrued Wages and Taxes)
= ($75,000 + $350,000 + $300,000) - ($140,000 + $145,000 + $80,000)
= $725,000 - $365,000
= $360,000. 
Therefore, the firm needs to fund $360,000 of net working capital. The correct choice is D.

Question 18

If a firm has a cash cycle of 10 days and an operating cycle of 43 days, what is its payables turnover?

Accepted Answer

The answer of If a firm has a cash cycle...

Question 19

If a firm has a cash cycle of 32 days and an operating cycle of 67 days, what is its payables turnover?

Accepted Answer

Payables turnover = Operating cycle / Cash cycle - 1
Payables turnover = 67 / 32 - 1 = 10.43

Question 20

Which of the following is a checking account that the firm sets up so that the bank agrees to automatically transfer funds from an interest-bearing account to pay off any checks presented?

Accepted Answer

A zero-balance account is a checking account that the firm sets up so that the bank agrees to automatically transfer funds from an interest-bearing account to pay off any checks presented while maintaining a zero balance in the checking account. This helps the firm to efficiently manage its cash flow while also earning interest on its excess funds. Lockbox system is a system in which customers send payments directly to a post office box that is accessible only by the firm's bank, while concentration banking involves depositing funds from multiple locations into a single bank account for better cash management. Wire transfers involve electronically transferring funds between bank accounts. None of these options involve automatic transfer of funds to maintain a zero balance in the checking account.

Quiz 14: Working Capital Management and Policies