Deck 7: Managing Payables and Accruals

Question 1

A gas station is likely to receive ________ term credit for gasoline purchases; a grocery store is likely to receive _________ term credit for vegetables purchases; and a manufacturer is likely to receive _________ term credit for purchase of plant and equipment.

A)Short,short,short
B)Long,long,long
C)Long,long,short
D)Short,short,long
E)Short,long,long

Answer 1

D

Question 2

A very important cost of paying an invoice late which is difficult to estimate accurately is:

A)interest charges assessed by the supplier
B)the cost of foregone interest revenue
C)lost supplier goodwill
D)the cost of foregone interest expense
E)none of the above

Answer 2

C

Question 3

Credit terms of "2/10,net 30" implies that if payments are made in _____ days a cash discount of _____ % may be taken.

A)2,10
B)10,2
C)10,30
D)30,2

Answer 3

B

Question 4

A payables manager is debating which guideline to adopt for his payables practices.Regardless of the NPV effect of doing so,a best ethical rule to follow in determining when to pay invoices is to

A)stretch payables from all suppliers,not just a few
B)stretch payables only to the extent your customers are stretching your receivables
C)stretch only those payables that you think will not show up as paid late in the company's Dun & Bradstreet report
D)stretch payables only when the company is financially unable to pay them

Question 5

Cleveland Megatron,Inc.is short on cash and finds itself in a "net borrowed position." It has $2 million of its $5 million credit line available at present,however.If the annualized cost of credit line borrowing is lesser than the annualized cash discount rate,the NPV-maximizing decision is to

A)not take the discount,and pay at the end of the credit period
B)compare the annualized cash discount rate to the daily investment rate,and take the discount if the cash discount rate exceeds the investment rate
C)compare the annualized cash discount rate to the daily investment rate,and take the discount if the cash discount rate is le than the investment rate
D)borrow the necessary funds and take the cash discount

Question 6

Accruals provide an attractive and accessible financing source but affected parties may object to their use as a financing source

A)they have a high direct annual percentage cost
B)their availability can change based on the level of business activity
C)suppliers may revolt if the privilege of using accruals is overused
D)their continued availability depends on restrictive loan covenants

Question 7

The XYZ Company has annual average purchases of $200,000 and an ending accounts payable balance of $36,000.How long,on average,does XYZ take to pay for its purchases?

A)11.11 days
B)22.22 days
C)28.78 days
D)32.85 days
E)65.70 days

Question 8

Which of the following constitute(s)a spontaneous financing source? (I)accounts receivable
(II)accounts payable
(III)deferred expenses
(IV)inventories
(V)accrued expenses

A)I and II
B)I and IV
C)II and III
D)III and IV
E)II and V

Question 9

The decision rule a payables manager should follow when considering how best to apply NPV analysis to payables decisions is to _______________,so long as payment is not made late.

A)ignore the NPV and follow usual industry payment practices
B)delay payment for an additional day as long as NPV continues to fall
C)delay payment for an additional day as long as NPV continues to increase
D)always pay within the cash discount period

Question 10

The most reliable measure of a firm's payment practices is

A)days purchases outstanding (DPO)
B)payables balance fractions
C)days of cost of goods sold held in inventory
D)payables turnover ratio

Question 11

A ________________ source of financing provides funds automatically as a company's operations expand.

A)seasonal
B)cyclical
C)spontaneous
D)derivative
E)residual

Question 12

The advantage of consignment to the retailer is

A)not ever having to pay for the goods
B)not having to pay for the goods until the 30th day of the following month
C)not having to pay for the goods unless they are sold
D)a much larger price mark-up over cost than on items typically sold by the retailer

Question 13

The highest tier of ethical decisions,which entails a greater ethical commitment on the part of the decision-maker,is to

A)obey the law
B)consider whether the action would benefit both parties and be prudent,sound,and wise
C)consider whether the well-being of affected parties would be enhanced even if it requires a sacrifice by the decision-maker
D)obey the law as well as cultural mores

Question 14

Credit terms of 2/10,prox net 30 mean that a cash discount of 2% can be taken if payment is made by _________________ or the full invoice must be paid by __________________ .

A)days after the invoice date,30 days after the invoice date
B)days after the invoice date,the 30th day of this calendar month
C)the 10th day of the next calendar month,30 days after the invoice date
D)the 10th day of the next calendar month,the 30th day of the next calendar month
E)days after the good are actually received,30 days after the goods are actually received

Question 15

Which of the following is a payment option for the financial manager purchasing on credit

A)Pay on the day of purchase
B)payment at the end of the cash discount period
C)pay after the end of the credit period
D)all of the above
E)none of the above