Question 1

What is the effective cost of credit terms of 2/10,net 30 if the firm stretches the accounts payable to 45 days?

Accepted Answer

C) .02/.98 = .0204
45 -10 = 35 days
365/35 = 10.4
1.0204¹⁰.⁴ - 1 = .2337 = 23.37%

Question 2

A firm has an average accounts payable balance of $180,000.Its average daily cost of goods sold is $12,000.What is the average number of days that the firm takes to pay its debt?

Accepted Answer

C) $180,000 / $12,000 = 15 days

Question 3

What is the effective annual cost of credit terms of 3/15 net 30,if the firm stretches the accounts payable to 60 days?

Accepted Answer

D) 60 -15 = 45; 365 / 45 = 8.11; 3 / 97 = 0.030928; (1.030928)^8.11 - 1 = 28.03%

Question 4

The Holiday Corporation had sales of $450 million this year.Its accounts receivable balance averaged $30 million.How long,on average,does it take the firm to collect on its sales?

Accepted Answer

B) 365/($450 million/$30 million) = 24.3

Question 5

A firm decides to stretch its accounts payable,resulting in an effective annual cost of credit of 22.4%,under terms of 3/15 net 30.When is the firm paying its accounts payable?

Accepted Answer

A) EAR = 11ea4813_56fc_adcd_a73a_f503eda7e1ce_TB1618_11 - 1 = 0.224. Solve for x = 55 + 15 = 70 days.

Question 6

Ally Manufacturing has an average accounts payable balance of $420,000.Its average annual cost of goods sold is $10,220,000.It receives terms of 2/15 net 30 from its suppliers.Is Ally managing its accounts payables well?

Accepted Answer

The answer of Ally Manufacturing has an average accounts payable...

Question 7

If a supplier is offering trade credit of 1/10 net 30,and a buyer chooses not to take the discount,when should they pay,assuming that they wish to stay on good terms with the supplier?

Accepted Answer

The terms "1/10 net 30" mean that the buyer can take a 1% discount off the total amount owed if they pay within 10 days (taking the discount is optional), but the full amount is due in 30 days. 
If the buyer wants to maintain a good relationship with the supplier, they should pay on time, which would be on day 30. Paying beforehand is always an option, but in this case, there is no incentive to do so if they are not taking the discount. Waiting past day 30 could harm the relationship with the supplier and possibly incur late fees. Therefore, paying on day 30 is the best choice to maintain a good relationship with the supplier.

Question 8

A firm should choose to borrow using accounts payable only if trade credit is the cheapest source of funding.

Accepted Answer

If trade credit has a lower cost of capital than other sources of funding like bank loans, bonds or equity financing, then it might be cheaper for the firm to borrow using accounts payable. However, if the cost of trade credit is higher than other sources of funding, then it might not be the most cost-effective option. Therefore, a firm should consider all available funding options and choose the one that offers the lowest cost of capital.

Question 9

A firm's practice of ignoring a payment due period and paying later is called

Accepted Answer

Stretching the accounts payable refers to a company's practice of delaying payment to suppliers beyond the agreed-upon due date in order to manage their cash flows more effectively. This is a common strategy used by businesses to hold on to their cash for as long as possible before paying off any obligations.

Question 10

A firm has an average accounts payable balance of $132,000.The average number of days that the firm takes to pay its debt is 22 days.What is its average daily cost of goods sold?

Accepted Answer

D) $132,000 / 22 days = $6,000

Question 11

What is the effective cost of credit terms of 3/5 net 45 if the firm stretches the accounts payable to 60 days?

Accepted Answer

D) .03/.97 = .0309
60 - 5 = 55 days
365/55 = 6.63
1.0309⁶.⁶³ - 1 = .224 = 22.4%

Question 12

Bercraft Industries has an average accounts payable balance of $280,000.Its average annual cost of goods sold is $4,780,000.It receives terms of 1/20 net 40 from its suppliers.Is Bercraft managing its accounts payables well?

Accepted Answer

To determine if Bercraft is managing its accounts payable well, we need to compare the cost of forgoing the discount (1%) to the cost of borrowing money to pay early. The cost of forgoing the discount is (1% / (1%-1 0%)) x 365 / (40-20) = 18.25%. This is much higher than the cost of borrowing money, so Bercraft should take advantage of the discount and pay at the end of the discount period. On average, Bercraft pays well before payment is due, which is not an optimal strategy for managing accounts payable. Therefore, the correct answer is D.

Question 13

What is the effective annual cost of credit terms of 2/20,net 60,if the firm stretches the accounts payable to 80 days?

Accepted Answer

B) 2 / 98 = 1.0204; 365 / 60 = 6.083; (1.0204)^6.083 = 13.1%

Question 14

What is the effective annual cost of credit terms of 1/10 net 30,if the firm stretches the accounts payable to 45 days?

Accepted Answer

C) 1/99 = 1.01%; 45 - 10 = 35; 365 / 35 = 10.4286; (1.01)^10.4286 = 11.05%

Question 15

A situation in which a firm runs out of inventory is called a(n)

Accepted Answer

A stock-out is a situation where a firm runs out of inventory and is unable to meet customer demand. It can happen due to various reasons like inaccurate demand forecasting, delays in order processing or manufacturing, shipment issues, etc.

Question 16

Effective inventory management builds up assets through increases in inventory and thus increases a firm's value.

Accepted Answer

Effective inventory management aims to minimize holding costs and reduce excess inventory, thereby optimizing the balance between inventory levels and customer demand, not merely increasing inventory to build up assets.

Question 17

A firm decides to stretch its accounts payable,resulting in an effective annual cost of credit of 20.24%,under terms of 2/10 net 20.When is the firm paying its accounts payable?

Accepted Answer

C) EAR = 11ea4813_56fc_adce_a73a_85f51ec33895_TB1618_11 - 1 = 0.2024. Solve for x = 40 + 10 = 50 days.

Question 18

Your firm purchases goods from its supplier on terms of 2/10,net 40.The effective annual cost to your firm if it chooses not to take advantage of the trade discount offered and stretches the accounts payable to 60 days is closest to:

Accepted Answer

B) The difference in days = 60 - 10 = 50 days. You will either pay $0.98 on a dollar of sales in 10 days or $1.00 on a dollar of sales in 30 days.
EAR = 11ea4813_56fc_fbef_a73a_71d680e767a8_TB1618_11 - 1 = 0.11589 or 15.89%

Question 19

What are the five Cs of Credit?

Accepted Answer

The answer of What are the five Cs of Credit?...

Question 20

LeokLee Industries has an average accounts payable balance of $720,000.Its average annual cost of goods sold is $8,760,000.It receives terms of 1/10 net 30 from its suppliers.Is LeokLee managing its accounts payables well?

Accepted Answer

To determine if LeokLee Industries is managing its accounts payables well, we need to consider the terms offered by its suppliers, which are 1/10 net 30. This means the company has the option to take a 1% discount if it pays within 10 days, otherwise, the full amount is due in 30 days. Since the choice indicates that LeokLee chooses not to take the discount but pays when payment is due, it suggests that the company is managing its cash flow by holding onto its cash as long as possible without incurring late fees or penalties. This can be a valid strategy, especially if the company can earn more with the cash in hand than the discount offered. However, without more information on the company's cash management strategies or the opportunity cost of not taking the discount, we cannot definitively say it's the best approach, but it does indicate a level of management over payables.

Quiz 19: Working Capital Management