Question 1

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

Accepted Answer

Fedwire refers to the electronic funds transfer system operated by the Federal Reserve Banks in the United States, which facilitates bank-to-bank transfers of funds.

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

The average payment period can be calculated as Operating cycle - Cash cycle = 43 days - 10 days = 33 days. Therefore, the best choice is B.

Question 3

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 average payment period is calculated by subtracting the average inventory period (operating cycle - cash cycle) from the average collection period (cash cycle). So, the average payment period in this case would be (80-25) = 55. Therefore, the correct answer is C.

Question 4

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 5

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 6

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, specifically in inventory management. Options A, C, and D do not fit this definition.

Question 7

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 8

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

Accepted Answer

The "five C's" of credit analysis include capacity (the borrower's ability to repay), character (the borrower's credit history and reputation), collateral (assets that can be used to secure the loan), capital (the borrower's financial resources), and conditions (the purpose of the loan and the economic environment). There is no "collectability" as one of the five C's.

Question 9

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 float. Float can occur because of the time it takes for banks to process transactions.

Question 10

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 in that they allow funds to be transferred from one account to another, but they are issued by the firm rather than a bank. Concentration banking involves depositing funds from multiple accounts into a single account to improve efficiency, wire transfers involve electronic transfer of funds, and zero-balance accounts have no balance requirement but still function as regular checking accounts.

Question 11

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 12

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 13

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 = Current Assets - Current Liabilities
Net Working Capital = ($75,000 + $300,000 + $350,000) - ($140,000 + $145,000 + $80,000)
Net Working Capital = $725,000 - $365,000
Net Working Capital = $360,000
Therefore, the firm needs to fund $360,000 in net working capital. The correct answer is choice D.

Question 14

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 formula to calculate days' sales in inventory is:

[(Beginning Inventory + Ending Inventory) / 2] / (Cost of Goods Sold / 365 days)

Using the numbers provided:

[(20,000 + 22,000) / 2] / (75,000 / 365) = 107.07 days

Question 15

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 type of 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 type of account is often used for cash management purposes, as it allows the firm to maintain separate accounts for different purposes while still ensuring that sufficient funds are available to cover all checks.

Question 16

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 17

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

This technique is called Concentration Banking where funds are sent to different regional banks and then transferred to a main concentration account in another bank, reducing collection float. The lockbox system is a technique for reducing the processing float, wire transfers are a means of transferring funds electronically, and collection float is the time between when a payment is made and when funds are available to the recipient.

Question 18

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 time it takes for a firm to convert its resources into cash, and then back into resources again. It is the sum of the firm's inventory conversion period and its accounts receivable collection period, minus its accounts payable payment period.

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

Operating cycle is the time it takes for a company to purchase its inventory, sell its inventory, and collect payment from its customers.

Operating cycle = Inventory conversion period + Accounts receivable collection period

Therefore, the accounts payable payment period can be calculated as follows:

Accounts payable payment period = Cash cycle - Operating cycle
Accounts payable payment period = 47 days - (92 days - Inventory conversion period)
Accounts payable payment period = 47 days - 92 days + Inventory conversion period
Accounts payable payment period = Inventory conversion period - 45 days

We do not have information about the inventory conversion period, but we know that the accounts payable payment period is negative, which means the firm pays its bills before they are due. Therefore, the average payment period is less than 45 days.

The only answer choice that satisfies this condition is A) 45.

Question 19

Which of the following approach 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 daily net cash flows are normally distributed and accounts for both cash inflows and outflows, making it suitable for determining target cash balances.

Question 20

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.

Quiz 14: Working Capital Management and Policies