Deck 15: The Management of Working Capital

Question 1

Firm X has an accounts payable period of 38 and a costs of goods sold of $7,500. Calculate the Average payables.

A)780.44
B)197.37
C)835.64
D)217.26
E)694.61

Answer 1

780.44

Question 2

________ costs fall when larger inventory levels are maintained.

A)Insurance
B)Reorder
C)Storage
D)Carrying
E)Opportunity

Answer 2

Reorder

Question 3

Frank's Franks posted a cost of goods sold of $5,000 and had an average payables of $125. Calculate the Accounts Payable Period.

A)10.2
B)9.125
C)13.41
D)7.65
E)8.54

Answer 3

9.125

Question 4

365 / Receivables Turnover =

A)Payment Period
B)Collection Period
C)Operating Period
D)Receivables Period
E)Payables Period

Question 5

A company has a receivables turnover of 16, a cost of goods sold of $8,000, and an average payables of $1,200. Calculate the collection period.

A)22.81
B)54.75
C)31.25
D)43.16
E)25.64

Question 6

Wayne's Wax World has an inventory turnover of 16 times per year and a cost of goods sold of $1,600. Calculate the average inventory turnover.

A)22.81
B)1,000
C)4.38
D)13.92
E)14.25

Question 7

Which of the following is a cost of holding inventory?

A)Workers comp
B)Reordering costs
C)Conversion costs
D)Insurance costs

Question 8

The combined costs of holding inventory are called

A)opportunity costs.
B)storage costs.
C)carrying costs.
D)stocking charges.
E)maintenance costs.

Question 9

Shortage costs can be enormous.

Question 10

A company has a collection period of 37.5 days, an inventory period of 93.4 days, and a payables turnover of 48.12. Calculate the cash conversion cycle.

A)82.78
B)130.9
C)123.31
D)85.62
E)120.31

Question 11

The cash conversion cycle is found within the:

A)Operating period
B)Accounts payable period
C)Average collection period
D)Holding period

Question 12

Which of the following is not a type of manufacturing inventory?

A)Work in process
B)Raw materials
C)Intangible
D)Finished goods

Question 13

All of the following will increase the cash conversion cycle EXCEPT:

A)An increase in accounts receivable
B)An increase in inventory
C)An increase in costs of goods sold
D)An increase in accounts payable

Question 14

________ are costs associated with the consequences of running out of inventory.

A)Reorder costs
B)Opportunity costs
C)Storage costs
D)Shortage costs
E)Carrying costs

Question 15

What is the equation for the cash conversion cycle?

A)Operating Period + Accounts Payable
B)Operating Period × Accounts Payable
C)Operating Period - Accounts Payable
D)Operating Period / Accounts Payable

Question 16

The ________ is the time it takes to acquire and sell the inventory.

A)collection period
B)turnover
C)inventory period
D)operating period

Question 17

The collection period is:

A)The time it takes to acquire and sell inventory
B)The time from the sale of the product until funds are actually received
C)The time creditors give to pay
D)The time between ordering inventory and having a full inventory

Question 18

The time the vendor gives us to pay is:

A)Cash conversion cycle
B)Receivables turnover
C)Accounts payable period
D)Operating period

Question 19

At least how much of a typical manufacturing firms assets are tied up in inventory?

A)15%
B)25%
C)10%
D)30%
E)35%

Question 20

A company has an accounts payable period of 58 days, a collection period of 28 days, and a cash conversion cycle of 43 days. Calculate the operating period.

A)15
B)101
C)86
D)30
E)28

Question 21

The optimal ordering quantity for a company is 350. If the carrying cost per item is $2.50 and the cost per order is $18, what is the number of total sales expected for the year?

A)7,516
B)5,314
C)10,305
D)8,507
E)6,924

Question 22

Approximately how often should Jed's Supermarket order 20 oz. cans of Splat Spiced Possum if it expects to sell 5,000 cases per year, the ordering cost is $0.50 per order, and the carrying cost is $0.75/case?

A)45.29 times per year
B)61.24 times per year
C)63.67 times per year
D)24.56 times per year
E)55.36 times per year

Question 23

Car-Quake Stereo plans to sell 500 bass boosters this year. If the carrying cost per unit is $1 and the cost per order is $25, what is the optimal number of units per order?

A)150
B)168
C)125
D)173
E)158

Question 24

The primary reason for offering customers credit is to

A)increase the predictability of cash flows.
B)stimulate sales.
C)smooth billing cycles.
D)reduce the risk of nonpayment.
E)speed cash flows.

Question 25

Each of the following is a decision that can be avoided if a firm refuses to offer credit EXCEPT:

A)Collection period
B)Discounts to give fast payers
C)Accounts Payable
D)Who to extend credit to

Question 26

The minimum level of inventory a firm keeps on hand.

A)EOQ
B)Safety Stock
C)Reorder Point
D)Optimum Inventory Level

Question 27

As the number of units per order ________, total carrying costs ________.

A)increases; stay the same
B)increases; increase
C)decreases; increase
D)decreases; stay the same
E)increases; decrease

Question 28

Many industries offer trade credit so frequently, that failing to do so would result in failure. What is the real credit decision for companies in such industries?

A)What terms to offer
B)Which collection company to use
C)How to obtain credit for purchases
D)Maximum credit to extend

Question 29

If credit terms are 2/30, net 60, what is the effective annual rate for a customer's loan when the customer pays the invoice in 60 days?

A)44%
B)16%
C)59%
D)11%
E)28%

Question 30

ABC Co. has an average inventory of 750. The carrying cost per item is 1.25, the ordering cost is $18 per order, and they make 28 orders per year. What is the total carrying cost for ABC Co?

A)$504
B)$937.50
C)$1,166.67
D)$844.50
E)$492.65

Question 31

Carrying costs per unit are $3.00. An average order contains 200 units. According to the economic order quantity model, what are total carrying costs?

A)$300
B)$67
C)$600
D)$400
E)$565

Question 32

The inventory method that relies on deliveries coming right before they are needed is:

A)Just-in-Time
B)Basket
C)LIFO
D)FIFO

Question 33

Inventory carrying costs include all of the following EXCEPT

A)storage costs.
B)the cost of financing the inventory investment.
C)the cost of taking trade discounts.
D)insurance.
E)damage and theft costs.

Question 34

If a firm uses the EOQ model to manage its inventory and its managers decide to hold safety stock, its

A)reorder costs will fall.
B)processing costs will fall.
C)orders will be less frequent.
D)shortage costs will rise.
E)first order is increased to include the extra number of units sold.

Question 35

Which type of firm would benefit the most from a "basket" type of inventory management system?

A)"Category-killer" office supply stores
B)Aircraft manufacturers
C)Defense contractors
D)Public accounting firms
E)Automotive manufacturers

Question 36

The cost of obsolescence, damage, and theft is considered part of:

A)Shortage Costs
B)Opportunity Costs
C)Carrying Costs
D)Insurance Costs

Question 37

A company has predicted annual sales of 2500 units, an ordering cost of $35, and a carrying cost of $1.75 per unit. How many orders should they make this year?

A)71.43
B)12.65
C)7.91
D)23.46
E)15.64

Question 38

Optimal credit policy is one in which the

A)increased cash flow from sales equals the carrying cost of accounts receivable.
B)sales of a firm are maximized.
C)increased profit from sales equals the costs of carrying and administering accounts receivable.
D)customers pay their bills on time, without exception.
E)costs of taking a trade discount equal its benefits.

Question 39

All of the following are costs of credit EXCEPT

A)bad debt losses.
B)credit analysis expenses.
C)lost revenues when customers do not take advantage of trade discounts.
D)the increased investment in accounts receivable.

Question 40

The order cost per order is $10. Expected sales are 500,000 units and 20,000 units are in each order. What is the total order cost?

A)$20,000
B)$500,000
C)$250
D)$200,000
E)$2,000

Question 41

What is the percentage holding cost per period for a credit with the terms of 2/30 net 60?

A).0101
B).2787
C).0667
D).0204
E).0352

Question 42

What stipulates how a firm will handle each phase of the credit decision?

A)Credit Policy
B)Credit Period
C)Trade Credit
D)Cash Discount

Question 43

What is a usual default rate when looking at bad debt losses?

A)2%
B)3%
C)4%
D)5%
E)6%

Question 44

What is a widely used method to speed up the collection of accounts receivable?

A)Zero Rate
B)Cash Discounts
C)LIFO
D)Late Penalties

Question 45

A company is offering a discount with terms 3/15 net 40. What is the discount rate associated with this offer?

A)3%
B)15%
C)40%
D)20%
E)5%

Question 46

If a company has not had prior experience with a client, where might they obtain the credit information?

A)Rating Companies
B)5 C's
C)Complex Programs
D)Friends and family

Question 47

As the amount of credit extended increases, the ________ decreases.

A)Optimal amount of credit
B)Net cost of receivables
C)Cost of receivables
D)Revenues from increased sales

Question 48

All of the following are part of the five "Cs" of credit analysis EXCEPT

A)currency.
B)capital.
C)collateral.
D)conditions.
E)capacity.

Question 49

________ can be found where cost of receivables is equal to the revenues from increased sales.

A)Accounts payable
B)Accounts receivable
C)Optimal amount of credit
D)Cost of extending credit

Question 50

In the 5 C's of credit analysis, ________ is the ability of the borrower to pay.

A)Capacity
B)Capital
C)Character
D)Collateral
E)Collections

Question 51

What would help track the use of discounts offered as well as delinquency occurrence?

A)Debt Table
B)Aging Schedule
C)Invoice Tracker
D)Average Collection Period

Question 52

The length of time it takes a buyer to acquire, process, and sell the inventory is the:

A)Receivables Cycle
B)Receivables Period
C)Inventory Cycle
D)Inventory Period

Question 53

Which of the following is not considered a cost for administering the accounts receivable?

A)analyzing credit
B)increased holdings
C)sending out bills
D)collecting past due accounts

Question 54

The best source of information about a customer's credit is/are

A)the firm's experience with the customer.
B)Dun and Bradstreet.
C)information from the customer's bank.
D)data from financial markets.
E)credit references supplied by the customer.

Question 55

________ is the willingness of the borrower to pay obligations owed.

A)Capital
B)Character
C)Conditions
D)Capacity
E)Collections

Question 56

An accounts receivable aging schedule is used to

A)decide whether to extend credit.
B)determine whether legal action should be taken against a customer with a past due account.
C)provide information about whether the firm's prices are too low.
D)monitor accounts receivable.
E)make decisions regarding the length of time a firm should take before paying suppliers.

Question 57

The annualized interest rate that is realized when not taking advantage of a possible cash discount is known as:

A)High cost financing
B)Low cost financing
C)The effective interest rate
D)The flat rate

Question 58

A company has the possibility to pay off a line of credit early for a 2% discount rate if paid off in 25 days. There are 24.333 discount periods for the year for this money if the discount is not taken. What are the terms for this cash discount?

A)2/25 net 50
B)2/25 net 40
C)2/25 net 60
D)2/25 net 70
E)2/25 net 30

Question 59

Calculate the APR for an invoice that has the terms 1/20 net 45.

A)14.75%
B)18.80%
C)12.25%
D)15.65%
E)10.35%

Question 60

In one sense, holding cash is a waste of resources.

Question 61

Which of the following does not relate to "float"?

A)Stock-outs
B)Check-processing delays
C)Electronic funds transfer (EFT)
D)Concentration banking

Question 62

A bank will typically lend the firm no more than ________% of the book value of receivables.

A)70
B)80
C)60
D)50
E)40

Question 63

The ________ motive for holding cash is to take advantage of bargain purchases or opportunities that might arise.

A)Transactional
B)Precautionary
C)Intuitive
D)Speculative

Question 64

________ float can be calculated by subtracting a firm's book balance from the firm's available balance.

A)Net
B)Collection
C)Electronic funds transfer (EFT)
D)Compensating
E)Disbursement

Question 65

What is an advantage of short term lending for banks?

A)New fees every loan
B)More flexibility
C)Locked in rates
D)Increased clients

Question 66

The total amount that can be borrowed is the firm's:

A)Line of credit
B)Max credit
C)Line limit
D)Credit limit

Question 67

The delay between when you receive payment and when the bank gives you credit is called

A)Disbursement Float
B)Net Float
C)Clearing Float
D)Collection Float

Question 68

The three motives for holding cash are:

A)float reduction, precautionary, and speculative.
B)buffer stock, speculative, and transactional.
C)speculative, transactional, and precautionary.
D)float reduction, buffer stock, and transactional.
E)convenience, transactional, and precautionary.

Question 69

What is a danger in using only short term borrowing?

A)Higher rates than long term borrowing
B)Lower fee per loan
C)Cost of borrowing can increase
D)Less flexibility

Question 70

Why might a bank put a hold on a small personal check?

A)Not wanting to disburse funds they have not yet received
B)Requested by the payee
C)Uncertain the check is good
D)Prevent fraud

Question 71

The firm borrows a portion of the value of its inventory and pays off the loan from the proceeds generated by selling the inventory. This is known as:

A)Inventory financing
B)Receivable financing
C)Sales financing
D)Liquidation financing

Question 72

This kind of financing requires the firm to pledge its accounts receivables to the bank as collateral for the loan.

A)Inventory financing
B)Sales financing
C)Receivable financing
D)Liquidation financing

Question 73

The ________ motive for holding cash is the need to pay debts that arise as a regular consequence of doing business.

A)Transactional
B)Precautionary
C)Speculative
D)Intuitive

Question 74

________ float occurs when there is a delay between when a firm issues a check and when the funds are removed from the checking account balance.

A)Net
B)Book balance
C)Disbursement
D)Collection
E)Electronic funds transfer (EFT)

Question 75

All of the following are forms of short term financing EXCEPT:

A)Receivable financing
B)Inventory financing
C)Lines of Credit
D)Self-liquidating loans

Question 76

A(n)________ is an annotation put on a checking account preventing funds on deposit that can be spent.

A)Hold
B)Stop
C)Float
D)ETF

Question 77

The ________ motive for holding cash is the need for a safety supply to act as a financial reserve against unexpected events.

A)Transactional
B)Precautionary
C)Speculative
D)Intuitive

Question 78

What is a reason the government prefers electronic banking over paper banking?

A)Increased transaction costs
B)Decreased float
C)Decreased electronic use
D)Decreased banking fraud

Question 79

Net float equals

A)disbursement float + collection float.
B)the available balance − the firm's book balance.
C)disbursement float − collection float − the firm's book balance.
D)disbursement float − collection float.
E)disbursement float + collection float − the firm's available balance.

Question 80

What does a self-liquidating bank loan mean?

A)The loan pays of itself.
B)The loan is received in cash only.
C)The loan is used to purchase assets that are worth more than the loan.
D)The loan is used to finance an asset that will pay off the loans.