6) Abbot Corporation has an average collection period of 49 days, an inventory conversion
period of 83 days, and a payables deferral period of 36 days. What is Abbott’s cash
conversion cycle?
A) 96 days
B) 70 days
C) 85 days
D) 132 days
Question Status: Previous edition
Objective: 18.3 Use the cash conversion cycle to measure the eiciency with which a irm manages
its working capital.
Keywords: cash conversion cycle
Principles: Principle 3: Cash Flows Are the Source of Value
7) Abbot Corporation has an average collection period of 49 days, an inventory conversion
period of 83 days, and a payables deferrable period of 36 days. What is Abbott’s operating
cycle?
A) 96 days
B) 70 days
C) 85 days
D) 132 days
Question Status: Previous edition
Objective: 18.3 Use the cash conversion cycle to measure the eiciency with which a irm manages
its working capital.
Keywords: cash conversion cycle
Principles: Principle 3: Cash Flows Are the Source of Value
8) Clark Corporation has an average collection period of 7 days, an inventory conversion
period of 30 days, and a payables deferrable period of 60 days. What is Clark’s operating
cycle?
A) 97 days
B) 37 days
C) 23 days
D) -23 days
Question Status: Previous edition
Objective: 18.3 Use the cash conversion cycle to measure the eiciency with which a irm manages
its working capital.
Keywords: cash conversion cycle
Principles: Principle 3: Cash Flows Are the Source of Value
21
9) Clark Corporation has an average collection period of 7 days, an inventory conversion
period of 30 days, and a payables deferrable period of 60 days. What is Clark’s cash
conversion cycle?
A) 97 days
B) 37 days
C) 23 days
D) -23 days
Question Status: Previous edition
Objective: 18.3 Use the cash conversion cycle to measure the eiciency with which a irm manages
its working capital.
Keywords: cash conversion cycle
Principles: Principle 3: Cash Flows Are the Source of Value
10) Becker.com has an inventory turnover ratio of 52, an accounts receivable balance of
$365,000, average daily credit sales of $36,500, accounts payable of $182,500 and cost of
goods sold of $7,993,500. What is Becker’s operating cycle to the nearest day?
A) 17 days
B) 61 days
C) 27 days
D) -27 days
Question Status: Previous edition
Objective: 18.3 Use the cash conversion cycle to measure the eiciency with which a irm manages
its working capital.
Keywords: cash conversion cycle
Principles: Principle 3: Cash Flows Are the Source of Value
11) Becker.com has an inventory turnover ratio of 52, an accounts receivable balance of
$365,000, average daily credit sales of $36,500, accounts payable of $182,500 and cost of
goods sold of $7,993,500. What is Becker’s cash conversion cycle to the nearest day?
A) 17 days
B) 9 days
C) 27 days
D) -27 days
Question Status: Revised
Objective: 18.3 Use the cash conversion cycle to measure the eiciency with which a irm manages
its working capital.
Keywords: cash conversion cycle
Principles: Principle 3: Cash Flows Are the Source of Value
22
12) ViteS Equipment Company has increased its inventory turnover ratio from 12 to 18. By
how many days has it reduced the operating cycle?
A) 20 days
B) 6 days
C) 10 days
D) 1.5 days
Question Status: Previous edition
Objective: 18.3 Use the cash conversion cycle to measure the eiciency with which a irm manages
its working capital.
Keywords: cash conversion cycle
Principles: Principle 3: Cash Flows Are the Source of Value
13) It is not possible to have a negative cash conversion cycle.
Question Status: Previous edition
Objective: 18.3 Use the cash conversion cycle to measure the eiciency with which a irm manages
its working capital.
Keywords: cash conversion cycle
Principles: Principle 3: Cash Flows Are the Source of Value
14) The operating cycle can never be longer than the cash conversion cycle.
Question Status: Previous edition
Objective: 18.3 Use the cash conversion cycle to measure the eiciency with which a irm manages
its working capital.
Keywords: cash conversion cycle
Principles: Principle 3: Cash Flows Are the Source of Value
15) As the inventory turnover ratio decreases, the inventory conversion cycle increases.
Question Status: Previous edition
Objective: 18.3 Use the cash conversion cycle to measure the eiciency with which a irm manages
its working capital.
Keywords: cash conversion cycle
Principles: Principle 3: Cash Flows Are the Source of Value
23
16) Increasing the accounts payable deferral period also increases the cash conversion
cycle.
Question Status: Previous edition
Objective: 18.3 Use the cash conversion cycle to measure the eiciency with which a irm manages
its working capital.
Keywords: cash conversion cycle
Principles: Principle 3: Cash Flows Are the Source of Value
17) Cash Conversion Cycle = Operating Cycle – Accounts Payable Deferral Period.
Question Status: New question
Objective: 18.3 Use the cash conversion cycle to measure the eiciency with which a irm manages
its working capital.
Keywords: cash conversion cycle
Principles: Principle 3: Cash Flows Are the Source of Value
18) A& B Global’s annual credit sales are $18 million; the accounts receivable balance is
$1.5 million; the cost of goods sold is $12.6 million; the inventory balance is $350,000, and
the balance in accounts payable is $700,000.
a. Compute A&B’s operating cycle.
b. Compute A&B’s cash conversion cycle.
Question Status: Previous edition
Objective: 18.3 Use the cash conversion cycle to measure the eiciency with which a irm manages
its working capital.
Keywords: cash conversion cycle
Principles: Principle 3: Cash Flows Are the Source of Value
24
18.4 Managing Current Liabilities
1) A irm buys on terms of 3/10, net 30. What is the cost of trade credit under these terms?
A) 55.7%
B) 47.4%
C) 31.5%
D) 23.2%
Question Status: Previous edition
Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s
use of current liabilities
Keywords: trade credit
Principles: Principle 1: Money Has a Time Value
2) The correct equation for calculating the cost of short-term credit is
A) rate = interest/(principal × time).
B) rate = (principal × time)/interest.
C) rate = principal/(time × interest).
D) rate = principal × interest × time.
Question Status: Revised
Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s
use of current liabilities
Keywords: line of credit
Principles: Principle 1: Money Has a Time Value
3) Which item would constitute poor collateral for an inventory loan?
A) Lumber
B) Vegetables
C) Copper
D) Chemicals
Question Status: Previous edition
Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s
use of current liabilities
Keywords: secured current liabilities
Principles: Principle 1: Money Has a Time Value
25
4) Which of the following statements regarding a line of credit is true?
A) The purpose for which the money is being borrowed must be stated by the borrower.
B) A line of credit agreement usually ixes the interest rate that will be applied to any
extensions of credit.
C) A line of credit agreement is a legal commitment on the part of the bank to provide the
stated credit.
D) Such agreements usually cover the borrower’s iscal year.
Question Status: Previous edition
Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s
use of current liabilities
Keywords: line of credit
Principles: Principle 1: Money Has a Time Value
5) Which of the following is an advantage of using commercial paper for short-term credit?
A) The interest rate is usually lower than for equivalent bank loans.
B) It is a readily available source of credit for most irms
C) It is a type of free credit.
D) It can be issued for very small amounts.
Question Status: Revised
Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s
use of current liabilities
Keywords: line of credit
Principles: Principle 1: Money Has a Time Value
6) The First Webster Bank requires borrowers to maintain a balance of 10% of the line of
credit in a non-interest paying account as compensation for providing the line of credit. If
the borrower would not normally have deposits in such an account
A) the amount borrowed will be higher than the amount needed.
B) the APR will be less than the stated rate.
C) the amount borrowed will be lower than the amount needed.
D) neither the amount borrowed nor the APR will be afected by the required balance.
Question Status: Revised
Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s
use of current liabilities
Keywords: line of credit
Principles: Principle 1: Money Has a Time Value
26
7) A company which foregoes the discount when credit terms are 4/15 net 70 is essentially
borrowing money from his supplier for an additional
A) 40 days.
B) 55 days.
C) 70 days.
D) 85 days.
Question Status: Previous edition
Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s
use of current liabilities
Keywords: trade credit
Principles: Principle 1: Money Has a Time Value
8) A company that foregoes a discount of 1/7 net 30 is essentially borrowing money from
the vendor at
A) 1%.
B) 12.29%.
C) 16.03%.
D) 52.7%.
Question Status: Revised
Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s
use of current liabilities
Keywords: trade credit
Principles: Principle 1: Money Has a Time Value
9) What factors should we consider when selecting a source of short-term credit?
A) Efective cost and availability
B) Liquidity and proitability
C) Historical trend analysis and liquidity
D) None of the above
Question Status: Previous edition
Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s
use of current liabilities
Keywords: line of credit
Principles: Principle 1: Money Has a Time Value
27
10) Once a cash discount period has passed
A) one should pay immediately.
B) there is no inancial incentive to pay before the inal due date.
C) one should pay after the inal due date.
D) cannot be determined from the information.
Question Status: Previous edition
Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s
use of current liabilities
Keywords: trade credit
Principles: Principle 1: Money Has a Time Value
11) Bank Two extends a $3 million line of credit to Capital Corp. The stated rate of interest
is 9.5%. Bank Two requires Capital to maintain compensating balances equal to 10% of the
amount of the line. Assuming that Capital would not normally carry any deposits at the
bank, what is the efective annual rate of interest on the loan?
A) 9.5%
B) 10.6%
C) 11.6%
D) 12.3%
Question Status: Previous edition
Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s
use of current liabilities
Keywords: line of credit
Principles: Principle 1: Money Has a Time Value
12) The Stant Shoe Company established a line of credit with a local bank. The maximum
amount that can be borrowed under the terms of the agreement is $100,000 at an annual
rate of 5%. A compensating balance of 10% of the amount borrowed is required. What is
the largest amount of money Stant will actually be able to use from the line of credit?
A) $90,909
B) $90,000
C) $111,111
D) $100,000
Question Status: Revised
Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s
use of current liabilities
Keywords: line of credit
Principles: Principle 1: Money Has a Time Value
28
13) Smith Enterprises has a line of credit with Fidelity National Bank that allows Smith to
borrow up to $350,000 at an interest rate of 5%. However, Smith must keep a
compensating balance of 10% of any amount borrowed on deposit at Fidelity. Smith does
not normally keep a cash balance account with Fidelity. What is the efective annual cost of
credit (round to nearest .01 percent)?
A) 5.93%
B) 5.84%
C) 5.64%
D) 5.56%
Question Status: Previous edition
Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s
use of current liabilities
Keywords: line of credit
Principles: Principle 1: Money Has a Time Value
14) Georgia Peaches Corporation (GPC) has a line of credit with Trust Company Bank that
allows GPC to borrow up to $300,000 at an annual interest rate of 5.5%. However, GPC
must keep a compensating balance of 20% of any amount borrowed on deposit at the Trust
Company Bank. GPC does not normally have a cash balance account with the Trust
Company. What is the efective annual cost of credit?
A) 6.875%
B) 6.975%
C) 7.075%
D) 7.775%
Question Status: Previous edition
Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s
use of current liabilities
Keywords: line of credit
Principles: Principle 1: Money Has a Time Value
15) Which of the following comparisons between short-term bank loans is correct?
A) Commercial paper interest rates are usually slightly higher than rates on bank loans.
B) Commercial paper is only appropriate for irms requiring a limited amount of short-term
inancing, while banks can ofer substantially larger amounts of funds.
C) Banks demand that borrowers meet exacting credit-worthiness tests, while the lenders
that purchase commercial paper are less strict. Only the most credit-worthy borrowers
have access to bank loans.
D) Commercial paper is less lexible than a line of credit, but the interest rate is lower.
Question Status: Revised
Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s
use of current liabilities
Keywords: temporary sources of inancing
Principles: Principle 1: Money Has a Time Value
16) The Stoney River Textiles Company will borrow $50 million for 180 days from Merrimac
Bank. The bank will charge Stoney River 4.5 % on a discounted basis. What is the annual
percentage rate (APR) to Stoney River (round to the nearest .1 percent)?
A) 2.25%
B) 2.36%
29
C) 4.71%
D) 4.5%
Question Status: Previous edition
Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s
use of current liabilities
Keywords: annual percentage rate
Principles: Principle 1: Money Has a Time Value
17) The Stoney River Textiles Company will borrow $50 million for 180 days from Merrimac
Bank. The bank will charge Stoney River 4.5 % on a discounted basis. What is the dollar
amount of interest Stoney River will need to pay? Assume a 360 day year.
A) $1,125,000
B) $1,099,688
C) $2,250,000
D) 41,074,375
Question Status: Previous edition
Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s
use of current liabilities
Keywords: annual percentage rate
Principles: Principle 1: Money Has a Time Value
18) Fibercom Inc. needs $500,000 for one year. If the loan takes the form of a discounted
note at a stated rate of 4%, how much will Fibercom actually need to borrow?
A) $480,000
B) $500,000
C) $520,833
D) $520,000
Question Status: New question
Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s
use of current liabilities
Keywords: trade credit
Principles: Principle 1: Money Has a Time Value
30