Deck 13: Working Capital Management

Question 1

Which of the following statements is untrue?

A) Working capital is equal to current assets minus current liabilities.
B) Failure to predict the timing of cash shortfalls can result in costly borrowing arrangements.
C) The economic order quantity (EOQ) model is a tool that calculates how much inventory should be held on average.
D) The inability of a selling company to deposit the monetary value of a completed credit sale in its bank and collect interest represents a cost arising from extending credit to customers.
E) An "Ageing of Accounts Receivable" schedule provides an analysis of a company's accounts receivable balance according to the period of time that amounts have been owed.

Answer 1

C

Question 2

The Pickwick Hotel, which hosts a large number of conferences, receives 5% of revenue as a deposit in the month prior to a conference, 40% of revenue is received in the same month that a conference is held and 55% of revenue is collected in the month following a conference. Conference revenue was $60,000, $70,000 and $80,000 in January, February and March, respectively. What conference receipts would have been collected in February?

A) $60,000
B) $65,000
C) $70,000
D) $75,000
E) $80,000

Answer 2

B

Question 3

Which of the following is not an example of inventory carrying cost?

A) The opportunity cost of money tied up in inventory.
B) Handling costs
C) Inventory purchase cost
D) Cost of deterioration of perishable inventory items
E) Cost of inventory insurance.

Answer 3

C

Question 4

Which of the following is not a possible reason for profit in a period not being the same as cash flow in the same period?

A) Revenue is recognised at the time a service is provided, not when cash is received.
B) Many suppliers provide credit terms signifying the purchase of an item can be recorded well before it is paid for.
C) Small immaterial supplies tend to be expensed on purchase and not recorded as inventory, even though they may be held as supplies.
D) Depreciation expense typically occurs well after the asset in question is paid for.
E) Insurance is paid in advance of charging the associated expense to the profit and loss statement.

Question 5

The McLeish Hotel had credit sales of $438,000 last year and had an accounts receivable balance at the year end of $30,000. Based on this information, what is the average amount of days of credit that the McLeish Hotel is extending to its credit customers?

A) 25 days
B) 27 days
C) 29 days
D) 31 days
E) 33 days

Question 6

Your hotel sells 4,500 cases of beer per year. The cost of ordering and receiving a shipment of beer is $50. The cost of holding a case of beer in stock for a year is $5. Use the EOQ model to determine the most economic order quantity for beer.

A) 250
B) 300
C) 350
D) 400
E) 450.

Question 7

You hotel has been offered credit terms of 1/8 net 45. What is the effective annual rate of return earned if the discount offered is taken?

A) 8.19%
B) 9.86%.
C) 9.96%
D) 10.015%.
E) 8.11%.

Question 8

If your hotel receives an invoice on terms of 2/10 net 30, what is the effective annual rate of return earned if the discount offered is taken?

A) 24.33%
B) 24.83%.
C) 26.34%
D) 36.50%.
E) 37.24%.

Question 9

Which of the following statements is untrue?

A) Current liabilities are a cheaper form of financing than long term capital.
B) It is widely acknowledged in the finance literature that long term assets (i.e., fixed assets) should be financed through long term capital.
C) A decrease in net working capital signifies increased risk due to the lower short-term asset coverage of short-term liabilities.
D) A relatively high short to long-term financing ratio has a positive impact on profit and risk.
E) It is normal for short term lending rates to be above long term lending rates.

Question 10

Which of the following statements is untrue?

A) All of the following accounts are included in the calculation of a business's working capital: cash, accounts receivable, inventory and accounts payable.
B) It is rare for a large business's cash flow in a period to be the same as its profit in the same accounting period.
C) It is not appropriate to develop an aging of accounts receivable schedule that spans a period in excess of 90 days.
D) The importance of producing cash budgets is particularly apparent in a business that experiences highly seasonal sales volatility.
E) Inventory carrying costs include: the opportunity cost of the money tied up in inventory, cost of insuring the inventory, pilferage costs, inventory handling costs and the cost of maintaining inventory storage space.

Question 11

The Austinville Hotel, which hosts a large number of conferences, receives 10% of revenue as a deposit in the month prior to a conference, 50% of revenue is received in the same month that a conference is held and 40% of revenue is collected in the month following a conference. Conference revenue was $70,000, $80,000 and $90,000 in January, February and March, respectively. What conference receipts would have been collected in February?

A) $67,000
B) $72,000
C) $77,000
D) $82,000
E) $87,000

Question 12

The Foster Hotel had credit sales of $273,750 last year an average accounts receivable balance of $30,000 during the year. Based on this information, what is the average amount of days of credit that the Foster Hotel is extending to its credit customers?

A) 25 days
B) 30 days
C) 35 days
D) 40 days
E) 45 days

Question 13

An Italian restaurant uses 2,500 tins of tomatoes per year. The cost of ordering and receiving a shipment of tinned tomatoes is $10. The cost of holding a tin of tomatoes in the store room for a year is $5. Use the EOQ model to determine the most economic order quantity for tins of tomatoes.

A) 180 tins of tomatoes
B) 160 tins of tomatoes
C) 140 tins of tomatoes
D) 120 tins of tomatoes
E) 100 tins of tomatoes

Question 14

You hotel has been offered credit terms of 1/12 net 35. What is the effective annual rate of return earned if the discount offered is taken?

A) 16.03%
B) 15.12%.
C) 14.44%
D) 13.21%.
E) 12.96%.

Question 15

Which of the following accounts is not part of working capital.

A) Long term bank loan
B) Accounts receivable
C) Inventory
D) Cash
E) Accounts payable

Question 16

Smiths tours have provided the following sales forecast for the next four months.
$$\begin{array} { l l l l } \text { April } & \text { May } & \text { June } & \text { July } \\\$ 250,000 & \$ 150,000 & \$ 225,000 & \$ 150,000\end{array}$$ Cash sales average 10 per cent of total sales and credit sales are collected 50 per cent in the month of sale and 50 per cent in the month following sale. What are the estimated cash collections in May

A) $105,000.
B) $155,000.
C) $175,000.
D) $195,000.

Question 17

90% of Ridgewell Hotel's sales are made on credit. Sales were $506,945 last year and the hotel had an opening year accounts receivable balance of $37,000, and a year-end accounts receivable balance of $43,000. Based on this information, what is the average amount of days of credit that the Ridgewell Hotel is extending to its credit customers?

A) Approximately 35 days
B) Approximately 28 days
C) Approximately 26 days
D) Approximately 38 days
E) Approximately 32 days

Question 18

A French restaurant sells 450 cases of wine per year. The cost of ordering and receiving a shipment of wine is $2.50. The cost of holding a case of wine in the restaurant cellar for a year is $10. Use the EOQ model to determine the most economic order quantity for the wine.

A) 10 cases of wine
B) 15 cases of wine
C) 20 cases of wine
D) 25 cases of wine
E) 30 cases of wine

Question 19

Your organisation has been offered credit terms of 2/10 net 40. What is the effective annual rate of return earned if the discount offered is taken?

A) 21.66%
B) 23.54%
C) 24.83%
D) 25.78%
E) 26.89%

Question 20

)The Randwick Hotel has a large conferencing facility. It receives 10% of conference revenue as a deposit in the month prior to a conference, 50% of revenue is received in the same month that a conference is held and 40% of revenue is collected in the month following a conference. Conference revenue was $70,000, $80,000 and $90,000 in October, November and December, respectively. What conference receipts would have been collected in November?

A) $69,000
B) $73,000
C) $77,000
D) $81,000
E) $85,000

Question 21

90% of Redmond Hotel's sales are made on credit. Sales were $405,556 last year and the hotel had an opening year accounts receivable balance of $26,000, and a year-end accounts receivable balance of $34,000. Based on this information, what is the average amount of days of credit that the Redmond Hotel is extending to its credit customers?

A) Approximately 29 days
B) Approximately 30 days
C) Approximately 31 days
D) Approximately 32 days
E) Approximately 33 days

Question 22

An Italian restaurant sells 80 cases of wine per month. The cost of ordering and receiving a shipment of wine is $5. The cost of holding a case of wine in the restaurant cellar for a month is $2. Use the EOQ model to determine the most economic order quantity for the wine.

A) 10 cases of wine
B) 15 cases of wine
C) 20 cases of wine
D) 25 cases of wine
E) 30 cases of wine

Question 23

Your organisation has been offered credit terms of 1/10 net 35. What is the approximate effective annual rate of return earned if the discount offered is taken?

A) 11.75%
B) 12.75%
C) 13.75%
D) 14.75%
E) 15.75%