Question 1

Howes Inc.purchases $4,562,500 in goods per year from its sole supplier on terms of 2/15,net 50.If the firm chooses to pay on time but does not take the discount,what is the effective annual percentage cost of its non-free trade credit? (Assume a 365-day year. )

Accepted Answer

A)   20.11%
B)   21.17%
C)   22.28%
D)   23.45%
E)   24.63%F) B) and E)
G) A) and D)

Question 2

Newsome Inc.buys on terms of 3/15,net 45.It does not take the discount,and it generally pays after 60 days.What is the nominal annual percentage cost of its non-free trade credit,based on a 365-day year?

Accepted Answer

A)   25.09%
B)   27.59%
C)   30.35%
D)   33.39%
E)   36.73%F) C) and D)
G) B) and E)

Question 3

Although short-term interest rates have historically averaged less than long-term rates,the heavy use of short-term debt is considered to be an aggressive current operating asset financing strategy because of the inherent risks of using short-term financing.

Accepted Answer

A) True 
 B)False  True

Question 4

Accruals are "free" capital in the sense that no explicit interest must normally be paid on accrued liabilities.

Accepted Answer

A) True 
 B)False  True

Question 5

A firm that follows an aggressive current asset financing approach uses primarily short-term credit and thus is more exposed to an unexpected increase in interest rates than is a firm that uses long-term capital and thus follows a conservative financing policy.

Accepted Answer

A) True 
 B)False  True

Question 6

Refer to the data for Hardwig Inc.If the firm adopts a restricted policy,how much lower would its interest expense be than under the relaxed policy?

Accepted Answer

A)   $8,418
B)   $8,861
C)   $9,327
D)   $9,818
E)   $10,309F) C) and D)
G) D) and E)

Question 7

A promissory note is the document signed when a bank loan is executed,and it specifies financial aspects of the loan.

Accepted Answer

A) True 
 B)False

Question 8

Freeman Builders,Inc.buys on terms of 2/15,net 30.It does not take discounts,and it typically pays 60 days after the invoice date.Net purchases amount to $720,000 per year.What is the nominal annual percentage cost of its non-free trade credit,based on a 365-day year?

Accepted Answer

A)   10.86%
B)   12.07%
C)   13.41%
D)   14.90%
E)   16.55%F) C) and D)
G) B) and D)

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)   In managing a firm's accounts receivable,it is possible to increase credit sales per day yet still keep accounts receivable fairly steady,provided the firm can shorten the length of its collection period (its DSO) sufficiently.
B)   Because of the costs of granting credit,it is not possible for credit sales to be more profitable than cash sales.
C)   Since receivables and payables both result from sales transactions,a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio.
D)   Other things held constant,if a firm can shorten its DSO,this will lead to a higher current ratio.
E)   A firm that makes 90% of its sales on credit and 10% for cash is growing at a constant rate of 10% annually.Such a firm will be able to keep its accounts receivable at the current level,since the 10% cash sales can be used to finance the 10% growth rate.F) A) and B)
G) B) and C)

Question 10

Fairweather Corporation purchases merchandise on terms of 2/15,net 40,and its gross purchases (i.e. ,purchases before taking off the discount) are $800,000 per year.What is the maximum dollar amount of costly trade credit the firm could get,assuming it abides by the supplier's credit terms? (Assume a 365-day year. )

Accepted Answer

A)   $53,699
B)   $56,384
C)   $59,203
D)   $62,163
E)   $65,271F) A) and B)
G) A) and E)

Question 11

Monar Inc.'s CFO would like to decrease its cash conversion cycle by 10 days (based on a 365 day year) .The company carries average inventory of $750,000.Its annual sales are $10 million,its cost of goods sold is 75% of annual sales,and its average collection period is twice as long as its inventory conversion period.The firm buys on terms of net 30 days,and it pays on time.The CFO believes he can reduce the average inventory to $647,260 with no effect on sales.By how much must the firm also reduce its accounts receivable to meet its goal in the reduction of the cash conversion cycle?

Accepted Answer

A)   $123,630
B)   $130,137
C)   $136,986
D)   $143,836
E)   $151,027F) None of the above
G) B) and E)

Question 12

Thornton Universal Sales' cost of goods sold (COGS) average $2,000,000 per month,and it keeps inventory equal to 50% of its monthly COGS on hand at all times.Using a 365-day year,what is its inventory conversion period?

Accepted Answer

A)   11.7 days
B)   13.0 days
C)   14.4 days
D)   15.2 days
E)   16.7 daysF) B) and D)
G) A) and E)

Question 13

Frosty Corporation has the following data,in thousands.Assuming a 365-day year,what is the firm's cash conversion cycle?
Annual sales =
$45,000
Annual cost of goods sold =
$31,500
Inventory =
$4,000
Accounts receivable =
$2,000
Accounts payable =
$2,400

Accepted Answer

A)   25 days
B)   28 days
C)   31 days
D)   35 days
E)   38 daysF) A) and B)
G) B) and E)

Question 14

Which of the following will cause an increase in net working capital,other things held constant?

Accepted Answer

A)   A cash dividend is declared and paid.
B)   Merchandise is sold at a profit,but the sale is on credit.
C)   Long-term bonds are retired with the proceeds of a preferred stock issue.
D)   Missing inventory is written off against retained earnings.
E)   Cash is used to buy marketable securities.F) C) and D)
G) B) and C)

Question 15

Which of the following items should a company report directly in its monthly cash budget?

Accepted Answer

A)   Cash proceeds from selling one of its divisions.
B)   Accrued interest on zero coupon bonds that it issued.
C)   New shares issued in a stock split.
D)   New shares issued in a stock dividend.
E)   Its monthly depreciation expense.F) B) and E)
G) A) and B)

Question 16

Arnold Inc.purchases merchandise on terms of 2/10 net 30,and it always pays on the 30th day.The CFO calculates that the average amount of costly trade credit carried is $375,000.What is the firm's average accounts payable balance? (Assume a 365-day year. )

Accepted Answer

A)   $458,160
B)   $482,273
C)   $507,656
D)   $534,375
E)   $562,500F) D) and E)
G) A) and E)

Question 17

Other things held constant,if a firm "stretches" (i.e. ,delays paying)its accounts payable,this will lengthen its cash conversion cycle (CCC).

Accepted Answer

A) True 
 B)False

Question 18

Which of the following statements is CORRECT?

Accepted Answer

A)   If cash inflows from collections occur in equal daily amounts but most payments must be made on the 10th of each month,then a regular monthly cash budget will be misleading.The problem can be corrected by using a daily cash budget.
B)   Sound working capital policy is designed to maximize the time between cash expenditures on materials and the collection of cash on sales.
C)   If a firm wants to generate more cash flow from operations in the next month or two,it could change its credit policy from 2/10 net 30 to net 60.
D)   If a firm sells on terms of net 90,and if its sales are highly seasonal,with 80% of its sales in September,then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be lower in October than in August.
E)   Depreciation is included in the estimate of cash flows (Cash flow = Net income = Depreciation) ;hence depreciation is set forth on a separate line in the cash budget.F) None of the above
G) A) and C)

Question 19

Dimon Products' sales are expected to be $5 million this year,with 90% on credit and 10% for cash.Sales are expected to grow at a stable,steady rate of 10% annually in the future.Dimon's accounts receivable balance will remain constant at the current level,because the 10% cash sales can be used to support the 10% growth rate,other things held constant.

Accepted Answer

A) True 
 B)False

Question 20

One of the advantages of short-term debt financing is that firms can obtain short-term credit more quickly than long-term credit.

Accepted Answer

A) True 
 B)False

Exam 16: Supply Chains and Working Capital Management

Howes Inc.purchases $4,562,500 in goods per year from its sole supplier on terms of 2/15,net 50.If the firm chooses to pay on time but does not take the discount,what is the effective annual percentage cost of its non-free trade credit? (Assume a 365-day year. )

Correct Answer
verified

Newsome Inc.buys on terms of 3/15,net 45.It does not take the discount,and it generally pays after 60 days.What is the nominal annual percentage cost of its non-free trade credit,based on a 365-day year?

Correct Answer
verified

Although short-term interest rates have historically averaged less than long-term rates,the heavy use of short-term debt is considered to be an aggressive current operating asset financing strategy because of the inherent risks of using short-term financing.

Correct Answer
verified
True

Accruals are "free" capital in the sense that no explicit interest must normally be paid on accrued liabilities.

Correct Answer
verified
True

A firm that follows an aggressive current asset financing approach uses primarily short-term credit and thus is more exposed to an unexpected increase in interest rates than is a firm that uses long-term capital and thus follows a conservative financing policy.

Correct Answer
verified
True

Refer to the data for Hardwig Inc.If the firm adopts a restricted policy,how much lower would its interest expense be than under the relaxed policy?

Correct Answer
verified

A promissory note is the document signed when a bank loan is executed,and it specifies financial aspects of the loan.

Correct Answer
verified

Freeman Builders,Inc.buys on terms of 2/15,net 30.It does not take discounts,and it typically pays 60 days after the invoice date.Net purchases amount to $720,000 per year.What is the nominal annual percentage cost of its non-free trade credit,based on a 365-day year?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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Correct Answer
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Thornton Universal Sales' cost of goods sold (COGS) average $2,000,000 per month,and it keeps inventory equal to 50% of its monthly COGS on hand at all times.Using a 365-day year,what is its inventory conversion period?

Correct Answer
verified

Frosty Corporation has the following data,in thousands.Assuming a 365-day year,what is the firm's cash conversion cycle? Annual sales = $45,000 Annual cost of goods sold = $31,500 Inventory = $4,000 Accounts receivable = $2,000 Accounts payable = $2,400

Correct Answer
verified

Which of the following will cause an increase in net working capital,other things held constant?

Correct Answer
verified

Which of the following items should a company report directly in its monthly cash budget?

Correct Answer
verified

Arnold Inc.purchases merchandise on terms of 2/10 net 30,and it always pays on the 30th day.The CFO calculates that the average amount of costly trade credit carried is $375,000.What is the firm's average accounts payable balance? (Assume a 365-day year. )

Correct Answer
verified

Other things held constant,if a firm "stretches" (i.e. ,delays paying)its accounts payable,this will lengthen its cash conversion cycle (CCC).

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
verified

One of the advantages of short-term debt financing is that firms can obtain short-term credit more quickly than long-term credit.

Correct Answer
verified

Exam 16: Supply Chains and Working Capital Management

Howes Inc.purchases $4,562,500 in goods per year from its sole supplier on terms of 2/15,net 50.If the firm chooses to pay on time but does not take the discount,what is the effective annual percentage cost of its non-free trade credit? (Assume a 365-day year. )

Correct AnswerverifiedShow Answer

Newsome Inc.buys on terms of 3/15,net 45.It does not take the discount,and it generally pays after 60 days.What is the nominal annual percentage cost of its non-free trade credit,based on a 365-day year?

Correct AnswerverifiedShow Answer

Although short-term interest rates have historically averaged less than long-term rates,the heavy use of short-term debt is considered to be an aggressive current operating asset financing strategy because of the inherent risks of using short-term financing.

Correct AnswerverifiedTrue

Accruals are "free" capital in the sense that no explicit interest must normally be paid on accrued liabilities.

Correct AnswerverifiedTrue

A firm that follows an aggressive current asset financing approach uses primarily short-term credit and thus is more exposed to an unexpected increase in interest rates than is a firm that uses long-term capital and thus follows a conservative financing policy.

Correct AnswerverifiedTrue

Refer to the data for Hardwig Inc.If the firm adopts a restricted policy,how much lower would its interest expense be than under the relaxed policy?

Correct AnswerverifiedShow Answer

A promissory note is the document signed when a bank loan is executed,and it specifies financial aspects of the loan.

Correct AnswerverifiedShow Answer

Freeman Builders,Inc.buys on terms of 2/15,net 30.It does not take discounts,and it typically pays 60 days after the invoice date.Net purchases amount to $720,000 per year.What is the nominal annual percentage cost of its non-free trade credit,based on a 365-day year?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Thornton Universal Sales' cost of goods sold (COGS) average $2,000,000 per month,and it keeps inventory equal to 50% of its monthly COGS on hand at all times.Using a 365-day year,what is its inventory conversion period?

Correct AnswerverifiedShow Answer

Frosty Corporation has the following data,in thousands.Assuming a 365-day year,what is the firm's cash conversion cycle? Annual sales = $45,000 Annual cost of goods sold = $31,500 Inventory = $4,000 Accounts receivable = $2,000 Accounts payable = $2,400

Correct AnswerverifiedShow Answer

Which of the following will cause an increase in net working capital,other things held constant?

Correct AnswerverifiedShow Answer

Which of the following items should a company report directly in its monthly cash budget?

Correct AnswerverifiedShow Answer

Arnold Inc.purchases merchandise on terms of 2/10 net 30,and it always pays on the 30th day.The CFO calculates that the average amount of costly trade credit carried is $375,000.What is the firm's average accounts payable balance? (Assume a 365-day year. )

Correct AnswerverifiedShow Answer

Other things held constant,if a firm "stretches" (i.e. ,delays paying)its accounts payable,this will lengthen its cash conversion cycle (CCC).

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

One of the advantages of short-term debt financing is that firms can obtain short-term credit more quickly than long-term credit.

Correct AnswerverifiedShow Answer

Correct Answer
verified

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True

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True

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True

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