Question 1

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 resemble checks in that they are written orders for payment, but instead of being payable by a bank, they are payable by the firm issuing them.

Question 2

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
Average payment period = 43 - 10
Average payment period = 33 days

Question 3

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 4

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 cash cycle is the amount of time it takes for a company to convert its investment in inventory back into cash. It is calculated as:

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

The operating cycle is the amount of time it takes for a company to purchase inventory, sell it, and collect payment from customers. It is calculated as:

Operating cycle = Inventory conversion period + Accounts receivable collection period

We can rearrange the cash cycle formula to solve for the average payment period as:

Average payment period = Inventory conversion period + Accounts receivable collection period - Cash cycle
Average payment period = 92 - 47
Average payment period = 45 days

Therefore, the best choice is A) 45.

Question 5

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. This ensures that the firm's checking account always maintains a zero balance and minimizes the risk of overdrafts.

Question 6

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 7

Scribble, Inc. has sales of $100,000 and cost of goods sold of $75,000. The firm had a beginning inventory of $20,000 and an ending inventory of $22,000. What is the length of the days' sales in inventory?

Accepted Answer

The answer of Scribble, Inc. has sales of $100,000 and...

Question 8

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 9

Which of the following approaches for determining the target cash balance assumes that the distribution of daily net cash flows is normally distributed, and allows for both cash inflows and outflows?

Accepted Answer

The Miller-Orr model assumes that the distribution of daily net cash flows is normally distributed and allows for both cash inflows and outflows. The model helps determine the optimal target cash balance to minimize transaction costs while ensuring that the firm always has enough cash on hand to cover its obligations. The other models listed do not make the same assumptions or are not related to determining target cash balance.

Question 10

Which of the following is NOT a fundamental factor ignored by the target cash balance models?

Accepted Answer

The answer of Which of the following is NOT a...

Question 11

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 12

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

The answer of Daisy D Industries has a cash balance...

Question 13

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 14

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 15

Which of the following is the technique for reducing collection float by having funds sent to several geographically situated regional banks and then transferring to a main concentration account in another bank?

Accepted Answer

Concentration banking involves having funds sent to regional banks and then transferring them to a main concentration account in another bank, reducing collection float by consolidating funds in one centralized account. The lockbox system involves having customers send payments directly to a bank's lockbox for processing, while wire transfers involve electronically moving funds between accounts. Collection float refers to the time it takes for funds to become available after a transaction.

Question 16

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 used by the Federal Reserve Banks to transfer funds between member banks. It is the primary mechanism used by banks to conduct bank-to-bank transfers within the United States. The other options listed, such as lockbox systems and concentration banking, are not specifically related to bank-to-bank transfers but rather refer to different types of banking systems or processes.

Question 17

Which of these is defined as the excess amounts of a current asset kept on hand to meet unexpected shocks in demand?

Accepted Answer

Safety stock is defined as the excess amounts of a current asset kept on hand to meet unexpected shocks in demand.

Question 18

Which of these is the period of time after a check has been written, but not yet cleared and deposited?

Accepted Answer

The period of time after a check has been written, but not yet cleared and deposited is called the float.

Question 19

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, Capital, and Conditions. Collectability is not one of the five C's.

Question 20

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 is the time period between the payment for raw materials and the receipt of cash from the sale of finished goods. In this case, the cash cycle is 25 days. The operating cycle, on the other hand, includes the time period between the purchase of raw materials and the collection of cash from the sale of finished goods. Therefore, the operating cycle is longer than the cash cycle, at 80 days.

The accounts payable period (average payment period) is part of the operating cycle and represents the time a firm takes to pay its suppliers. It can be calculated as:

Accounts payable period = (Accounts payable / Cost of goods sold) x 365

As the information about the cost of goods sold and accounts payable is not given, we cannot calculate the accounts payable period directly. However, we know that the operating cycle is 80 days, and this includes the time to pay suppliers. Therefore, the average payment period can be estimated as:

Average payment period = Operating cycle - Cash cycle
Average payment period = 80 - 25
Average payment period = 55 days

Therefore, the best choice is C.

Quiz 14: Working Capital Management and Policies