Question 1

Your firm purchases goods from its supplier on terms of 1/10 net 30.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 45 days is closest to:
A)13.0%
B)11.1%
C)15.9%
D)20.1%

Accepted Answer

The answer of Your firm purchases goods from its supplier...

Question 2

What is the effective annual cost of credit terms of 1/10 net 30,if the firm stretches the accounts payable to 45 days?
A)8.49 %
B)10.91%
C)11.05%
D)18.03%

Accepted Answer

The credit terms 1/10 net 30 mean that if the customer (or in this case, the firm) pays the invoice within 10 days, they can take a 1% discount off the total amount due. If they do not take the discount, then the full amount is due within 30 days.

If the firm chooses to pay after the discount period and take the maximum amount of time to pay (45 days), then they are essentially borrowing money from the supplier for 45 days without any interest.

To calculate the effective annual cost of this credit, we need to know the cost of not taking the discount and stretching out the payment period. The calculation is:

[(1 - 0.01)/(0.01)] x [365/(45-10)] = 11.05%

Therefore, the effective annual cost of credit is 11.05%. Option C is the closest answer choice.

Question 3

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?
A)Yes,since it,on average,chooses not to take the discount,but pays when payment is due.
B)Yes,since it,on average,takes the discount,and pays at the end of the discount period.
C)Yes,since it,on average,stretches payment beyond the due payment date.
D)No,since it,on average,does not take advantage of the discount period and pays well before payment is due.

Accepted Answer

Bercraft Industries is not managing its accounts payables well because it, on average, does not take advantage of the discount period and pays well before payment is due. By not taking the discount, Bercraft is losing out on potential savings and paying its suppliers earlier than necessary, which could negatively impact its own cash flow.

Question 4

Which of the following statements is FALSE?
A)The lower the discount percentage offered,the greater the cost of forgoing the discount and using trade credit.
B)A firm should choose to borrow using accounts payable only if trade credit is the cheapest source of funding.
C)A firm should always pay on the latest day allowed.
D)A firm should strive to keep its money working for it as long as possible without developing a bad relationship with its suppliers or engaging in unethical practices.

Accepted Answer

The answer of Which of the following statements is FALSE?
A)The...

Question 5

What is the effective annual cost of credit terms of 3/15 net 30,if the firm stretches the accounts payable to 60 days?
A)1.7%
B)3.35%
C)12.65%
D)28.03%

Accepted Answer

The credit terms 3/15 net 30 mean that if the customer pays within 15 days, they can take a 3% discount. Otherwise, the full amount is due in 30 days. However, the firm stretches the accounts payable to 60 days which means they are not taking advantage of the discount and paying the full amount after 60 days.

To calculate the effective annual cost of this credit, we can use the following formula:

Effective Annual Cost = [(1 + Discount % / (1 - Discount %)]^(365 / Average Payment Period) - 1

Discount % = 3%
Average Payment Period = (15 days + 30 days) / 2 = 22.5 days

Effective Annual Cost = [(1 + 0.03) / (1 - 0.03)]^(365 / 60) - 1
= 0.2803 or 28.03%

Therefore, the effective annual cost of credit is 28.03%. This means that by stretching the accounts payable to 60 days, the firm is paying a high cost of credit. Hence, option D is the best choice.

Question 6

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:
A)20.1%
B)15.9%
C)13.0%
D)11.1%

Accepted Answer

The answer of Your firm purchases goods from its supplier...

Question 7

Which of the following is NOT a benefit of holding inventory?
A)minimizes the risk that the firm will not be able to obtain an input it needs for production
B)seasonality of demand,meaning that customer purchases often do not match the most efficient production cycle,leading to a buildup of inventory in off-peak periods
C)minimizes order cost from placing multiple orders throughout the year
D)minimizes risks involved in spoilage and obsolescence

Accepted Answer

Option D is not a benefit of holding inventory; rather, it represents a risk or disadvantage associated with holding inventory. Inventory holding can lead to spoilage and obsolescence, especially for perishable goods or products with a limited lifecycle, which is a cost to the firm, not a benefit.

Question 8

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?
A)Yes,since it,on average,chooses not to take the discount,but pays when payment is due.
B)Yes,since it,on average,takes the discount,and pays at the end of the discount period.
C)Yes,since it,on average,stretches payment beyond the due payment date.
D)No,since it,on average,does not take advantage of the discount period and pays well before payment is due.

Accepted Answer

LeokLee Industries is managing its accounts payables well because it, on average, chooses not to take the discount but pays when the payment is due. This indicates that the company is not in a hurry to avail the discount and chooses to pay when it is due, which results in better cash management. Additionally, the fact that the company's average accounts payable balance is in line with its annual cost of goods sold suggests that it is not over-leveraging its payable accounts.

Question 9

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

Accepted Answer

Accounts payable is a form of trade credit where a firm delays payments to its suppliers for goods or services received. If the supplier offers a discount for early payment, and the discount rate is lower than the cost of other sources of funding, then accounts payable can be a cheaper funding option for the firm. However, if the supplier does not offer a discount, or the discount rate is higher than the cost of other sources of funding, then accounts payable may not be the cheapest option for the firm. Therefore, it is important for the firm to compare the cost of accounts payable with the cost of other funding sources before deciding to use it.

Question 10

What is the effective cost of credit terms of 2/10,net 30 if the firm stretches the accounts payable to 45 days?
A)49.76%
B)36.12%
C)23.37%
D)44.59%

Accepted Answer

The effective cost of credit can be calculated using the formula:
[(1 + discount %) / (1 - discount %) ^ (365 / (number of days credit is extended - discount period))] - 1

Plugging in the given values, we get:
[(1 + 0.02) / (1 - 0.02) ^ (365/ (45 - 10))] - 1
= 0.237 = 23.7%

Therefore, the effective cost of credit is 23.7%. The best choice is C, as it is the only option that matches this value.

Question 11

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?
A)anytime before day 10
B)on day 10
C)on day 30
D)any time after day 30

Accepted Answer

The terms "1/10 net 30" mean that the buyer can take a 1% discount if they pay within 10 days, otherwise, the full amount is due within 30 days. If the buyer wishes to stay on good terms with the supplier, they should pay by day 30 to meet the agreed-upon terms. Paying before day 10 would be ideal to receive the discount, but it is not necessary to maintain a good relationship with the supplier. After day 30, the buyer would be considered past due and could potentially damage the relationship with the supplier.

Question 12

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?
A)2 days
B)8 days
C)15 days
D)21 days

Accepted Answer

The formula for calculating the number of days to pay accounts payable is:

Number of days = (Accounts Payable / Daily Cost of Goods Sold)

Plugging in the given values, we get:

Number of days = ($180,000 / $12,000) = 15 days

Therefore, the answer is C. The firm takes an average of 15 days to pay its debts.

Question 13

What is the effective cost of credit terms of 3/5 net 45 if the firm stretches the accounts payable to 60 days?
A)12.9%
B)35.6%
C)39.9%
D)22.4%

Accepted Answer

D) 3 / 97 = 1.031%; 60 days - 5 days = 55 days; Number of 55 days in a year = 365 days / 55 days = 6.636; Effective Annual cost = (1.0309)^6.636 - 1 = 22.40%

Question 14

Evertz Metals buys and stockpiles $4,000,000 worth of dolomite to use in its smelting processes.How is this inventory cost best categorized?
A)an acquisition cost
B)a carrying cost
C)an order cost
D)a holding cost

Accepted Answer

The answer of Evertz Metals buys and stockpiles $4,000,000 worth...

Question 15

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 16

What are the five C's of Credit?

Accepted Answer

The answer of What are the five C's of Credit?...

Question 17

What is the effective annual cost of credit terms of 2/20,net 60,if the firm stretches the accounts payable to 80 days?
A)6.4 %
B)13.1%
C)21.1%
D)34.2%

Accepted Answer

B) 2 / 98 = 1.0204%; 80 days - 20 days = 60 days; Number of 60 days in a year = 365 / 60 = 6.083; Effective Annual cost = (1.0204)⁶^.083 - 1 = 13.1%

Question 18

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?
A)Yes,since it,on average,chooses not to take the discount,but pays when payment is due.
B)Yes,since it,on average,takes the discount,and pays at the end of the discount period.
C)Yes,since it,on average,stretches payment beyond the due payment date.
D)No,since it,on average,does not take advantage of the discount period and pays well before payment is due.

Accepted Answer

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

Question 19

Which of the following statements is FALSE?
A)Similar to the situation with its accounts receivable,a firm should monitor its accounts payable to ensure that it is making its payments at an optimal time.
B)Some firms ignore the payment due period and pay later,in a practice referred to as pushing the accounts payable.
C)Suppliers may react to a firm whose payments are always late by imposing terms of cash on delivery (COD)or cash before delivery (CBD).
D)If the accounts payable outstanding is 40 days and the terms are 2/10 net 30,the firm can conclude that it generally pays late and may be risking supplier difficulties.

Accepted Answer

The answer of Which of the following statements is FALSE?
A)Similar...

Question 20

Which of the following is NOT a reason why a firm may typically choose not to stretch its accounts payable?
A)Delaying payment can increase the effective cost of credit in some circumstances.
B)The supplier may demand COD or CBD in future.
C)The supplier may choose to discontinue business with delinquent customers.
D)The firm's credit rating may be damaged.

Accepted Answer

The answer of Which of the following is NOT a...

Quiz 19: Working Capital Management

Your firm purchases goods from its supplier on terms of 1/10 net 30.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 45 days is closest to:

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

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?

Which of the following statements is FALSE?

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

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:

Which of the following is NOT a benefit of holding inventory?

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?

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

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

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?

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?

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

Evertz Metals buys and stockpiles $4,000,000 worth of dolomite to use in its smelting processes.How is this inventory cost best categorized?

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

What are the five C's of Credit?

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

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?

Which of the following statements is FALSE?

Which of the following is NOT a reason why a firm may typically choose not to stretch its accounts payable?