Question 1

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
E)30 days

Accepted Answer

To determine the number of days it takes for the firm to pay its accounts payable, we need to use the formula:

Average accounts payable / (Average daily cost of goods sold)
$180,000 / $12,000 = 15

Therefore, the firm takes an average of 15 days to pay its accounts payable. The correct answer is C) 15 days.

Question 2

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 3

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
E)any time between day 10 and day 30

Accepted Answer

If the buyer chooses not to take the discount, they should pay on day 30 to stay on good terms with the supplier. This is the period of time outlined in the terms of the trade credit. Paying before day 10 or on day 10 would be taking the discount, and paying after day 30 could potentially harm the relationship with the supplier. Therefore, option C is the best choice.

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?
A)15.0 days
B)24.3 days
C)12.2 days
D)16.7 days
E)19.2 days

Accepted Answer

To calculate the average collection period, we need to divide the accounts receivable balance by the average daily sales. 
Average daily sales = (Annual sales / 365) = ($450 million / 365) = $1.2329 million per day 
Average collection period = (Accounts receivable balance / Average daily sales ) = ($30 million / $1.2329 million per day) = 24.3 days. 
Therefore, the answer is B.

Question 5

A firm's practice of ignoring a payment due period and paying later is called:
A)shirking.
B)missing accounts payable.
C)default.
D)a credit event.
E)stretching the accounts payable.

Accepted Answer

Stretching the accounts payable refers to intentionally delaying payment to suppliers beyond the agreed-upon due date in order to improve cash flow. It is a common practice in business, but can have negative consequences if it becomes a pattern or if suppliers decide to cut off the firm's credit.

Question 6

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%
E)17.42%

Accepted Answer

First, we need to calculate the cost of not taking the discount:
Effective Annual Rate = (1+(Discount % / (1- Discount %)))^ (365 / (Days Payable - Discount Period))-1
Effective Annual Rate = (1+(3% / (1-3%)))^ (365 / (60-15)) - 1
Effective Annual Rate = 28.03%

Therefore, the effective annual cost of credit terms of 3/15 net 30, if the firm stretches the accounts payable to 60 days is 28.03%.

Option D is the correct answer.

Question 7

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%
E)29.12%

Accepted Answer

The answer of What is the effective cost of credit...

Question 8

A situation in which a firm runs out of inventory is called a(n):
A)inventory shortage.
B)fire sale.
C)bankruptcy.
D)stock-out.
E)inventory loss.

Accepted Answer

A stock-out is the situation in which a firm runs out of inventory. It occurs when demand for a product exceeds the inventory supply. This can be a problem for businesses as it may lead to lost sales, dissatisfied customers, and damage to the firm's reputation.

Question 9

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%
E)9.5%

Accepted Answer

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

Question 10

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?
A)40 days
B)45 days
C)50 days
D)54 days
E)55 days

Accepted Answer

The effective annual cost of credit formula is used to determine the cost of not taking the discount. Given the terms 2/10 net 20, the firm is paying on the 50th day to result in an effective annual cost of 20.24%.

Question 11

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?
A)70 days
B)65 days
C)60 days
D)55 days
E)50 days

Accepted Answer

The correct answer is A. The firm is paying its accounts payable 70 days after the invoice date. This is because the terms of 3/15 net 30 mean that the firm can take a 3% discount if it pays within 15 days, or it can pay the full amount within 30 days. If the firm takes the discount, it is effectively paying the invoice 15 days early, which means it is paying 70 days after the invoice date.

Question 12

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 which is usually offered interest-free for a short period of time. Therefore, if a firm can utilize this source without incurring any costs, it can be the cheapest form of funding. However, if the firm has to pay interest or fees on overdue payments, it may not be the cheapest option, and alternative sources of funding should be explored.

Question 13

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.
E)No,since it,on average,does not make payment before it is due.

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 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?
A)8.49 %
B)10.91%
C)11.05%
D)18.03%
E)9.64%

Accepted Answer

The answer of What is the effective annual cost of...

Question 15

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.
E)No,since it,on average,does not make payment before it is due.

Accepted Answer

Ally is taking the discount and paying at the end of the discount period, which is the optimal way to manage accounts payable.

Question 16

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.
E)No,since it,on average,does not make payment before it is due.

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.

Question 17

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%
E)42.7%

Accepted Answer

The answer of What is the effective cost of credit...

Question 18

What are the five Cs of Credit?

Accepted Answer

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

Question 19

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?
A)$4,000
B)$132,000
C)$126,000
D)$6,000
E)$6,600

Accepted Answer

To calculate the average daily cost of goods sold, we need to use the following formula:

Average daily cost of goods sold = (Accounts payable balance/Number of days to pay debt)

Substituting the given values, we get:

Average daily cost of goods sold = ($132,000/22) = $6,000

Therefore, the correct answer is D.

Question 20

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%
E)41.4%

Accepted Answer

The effective annual cost of credit terms of 2/20, net 60, when stretching the accounts payable to 80 days, is calculated by considering the discount lost for not paying within the discount period. The formula to calculate the effective annual cost (EAC) is: EAC = [1 + (Discount / (1 - Discount))]^(365 / (Days Paid - Discount Period)) - 1. Here, the discount is 2% (0.02), the discount period is 20 days, and the firm pays in 80 days instead of 60. Plugging these values into the formula gives: EAC = [1 + (0.02 / (1 - 0.02))]^(365 / (80 - 20)) - 1, which approximately equals 13.1%.

Quiz 19: Working Capital Management

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?

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

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?

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?

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

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

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

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

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 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?

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?

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

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?

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

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?

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

What are the five Cs of Credit?

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?

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