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Financial Management: Core Concepts, 4e (Brooks)
Chapter 13 Working Capital Management
1) Managing the relationship between current assets and current liabilities of the firm in order to
improve the flow of funds is called ________.
A) the business operating cycle
B) the cash conversion cycle
C) working capital management
D) the production cycle
2) The ________ is the period from the start of cash outflow for producing a product or service
until the associated cash inflow materializes from the sale of that product or service.
A) cash conversion cycle
B) accounts receivable cycle
C) current ratio
D) business operating cycle
3) The ________ starts at the time production begins and ends with the collection of cash from
the sale of the product.
A) accounts receivable cycle
B) business operating cycle
C) cash conversion cycle
D) production cycle
4) The ________ begins at the time a firm first starts to make a product and lasts until the time
the customer buys the product.
A) business operating cycle
B) accounts receivable cycle
C) cash conversion cycle
D) production cycle
5) The production cycle ________.
A) is the period from the start of cash outflow for producing a product or service until the
associated cash inflow materializes from the sale of that product or service
B) begins at the time a firm first starts to make a product and lasts until the time the customer
buys the product
C) starts when production begins and ends with the collection of cash from the sale of the
product
D) starts when the customer takes delivery of the product and ends when the firm receives
payment for the product
6) Which of the following is NOT true of the cash conversion cycle?
A) It is the net period from the start of cash outflow for producing a product or service until the
associated cash inflow materializes from the sale of that product or service.
B) Cash Conversion Cycle = Production Cycle + Collection Cycle - Payment Cycle
C) Cash Conversion Cycle = Production Cycle + Collection Cycle + Payment Cycle
D) The cash conversion cycle essentially measures how quickly a company can convert its
products or services into cash.
7) Using the information provided, what is the inventory turnover for the firm?
Allied Industries, Inc.
Selected Income Statement Items, 2017
Cash Sales $1,500,000
Credit Sales $7,500,000
Total Sales $9,000,000
COGS $6,000,000
Allied Industries, Inc.
Selected Balance Sheet Accounts
12/31/2017 12/31/2016 Change
Accounts Receivable $270,000 $240,000 $30,000
Inventory $125,000 $100,000 $25,000
Accounts Payable $110,000 $90,000 $20,000
A) 23.53 times
B) 53.33 times
C) 48.00 times
D) 60.00 times
8) Using the information provided, what is the length of the production cycle for the firm?
Allied Industries, Inc.
Selected Income Statement Items, 2017
Cash Sales $1,500,000
Credit Sales $7,500,000
Total Sales $9,000,000
COGS $6,000,000
Allied Industries, Inc.
Selected Balance Sheet Accounts
12/31/2017 12/31/2016 Change
Accounts Receivable $270,000 $240,000 $30,000
Inventory $125,000 $100,000 $25,000
Accounts Payable $110,000 $90,000 $20,000
A) 6.08 days
B) 7.60 days
C) 53.33 days
D) 6.84 days
9) Using the information provided, what is the accounts receivable turnover for the firm?
Allied Industries, Inc.
Selected Income Statement Items, 2017
Cash Sales $1,500,000
Credit Sales $7,500,000
Total Sales $9,000,000
COGS $6,000,000
Allied Industries, Inc.
Selected Balance Sheet Accounts
12/31/2017 12/31/2016 Change
Accounts Receivable $270,000 $240,000 $30,000
Inventory $125,000 $100,000 $25,000
Accounts Payable $110,000 $90,000 $20,000
A) 23.53 times
B) 29.41 times
C) 53.33 times
D) 60.00 times
10) Using the information provided, what is the collection cycle for the firm?
Allied Industries, Inc.
Selected Income Statement Items, 2017
Cash Sales $1,500,000
Credit Sales $7,500,000
Total Sales $9,000,000
COGS $6,000,000
Allied Industries, Inc.
Selected Balance Sheet Accounts
12/31/2017 12/31/2016 Change
Accounts Receivable $270,000 $240,000 $30,000
Inventory $125,000 $100,000 $25,000
Accounts Payable $110,000 $90,000 $20,000
A) 6.84 days
B) 7.60 days
C) 10.34 days
D) 12.41 days
11) Using the information provided, what is the accounts payable turnover for the firm?
Allied Industries, Inc.
Selected Income Statement Items, 2017
Cash Sales $1,500,000
Credit Sales $7,500,000
Total Sales $9,000,000
COGS $6,000,000
Allied Industries, Inc.
Selected Balance Sheet Accounts
12/31/2017 12/31/2016 Change
Accounts Receivable $270,000 $240,000 $30,000
Inventory $125,000 $100,000 $25,000
Accounts Payable $110,000 $90,000 $20,000
A) 15 times
B) 60 times
C) 75 times
D) 90 times
12) Using the information provided, what is the accounts payable cycle for the firm?
Allied Industries, Inc.
Selected Income Statement Items, 2017
Cash Sales $1,500,000
Credit Sales $7,500,000
Total Sales $9,000,000
COGS $6,000,000
Allied Industries, Inc.
Selected Balance Sheet Accounts
12/31/2017 12/31/2016 Change
Accounts Receivable $270,000 $240,000 $30,000
Inventory $125,000 $100,000 $25,000
Accounts Payable $110,000 $90,000 $20,000
A) 4.06 days
B) 4.87 days
C) 6.08 days
D) 24.33 days
13) Jolly Roger Kite Company has a payment cycle of 17 days, a collection cycle of 31 days, and
a production cycle of 12 days. What is the average cash conversion cycle for the Jolly Roger
Company?
A) 2 days
B) 36 days
C) 26 days
D) 60 days
14) The cash conversion cycle is the net period from the start of cash outflow for producing a
product or service until the associated cash inflow materializes from the sale of that product or
service.
15) The cash conversion cycle is comprised of the production cycle minus the collection cycle
plus the payment cycle.
16) To determine the average cash conversion cycle, we must first compute the average
production cycle, the average collection cycle, and the average payment cycle.
17) Managing assets and liabilities in such a way as to improve the company's flow of funds is
what capital budgeting is all about.
18) The business operating cycle has two components: the production cycle and the collection
cycle.
19) The time between when a raw material is ordered and received and when it is paid for is
called the cash conversion cycle.
20) One way to reduce a firm's cash conversion cycle would be to have as many customers as
possible pay using credit rather than cash.
21) Cash customers generally provide for a shorter cash conversion cycle than do credit
customers in part because there is no additional collection cycle for the cash customers as there is
with credit customers.
22) The cash conversion cycle consists of three parts. List and define these three parts. How do
they fit together to form the cash conversion cycle? You may answer this last question with a
formula if you wish.
23) Eagle Paints
Selected Income Statement Items, 2017
Cash Sales $2,500,000
Credit Sales $9,500,000
Total Sales $12,000,000
COGS $7,000,000
Eagle Paints
Selected Balance Sheet Accounts
12/31/2017 12/31/13 Change
Accounts Receivable $550,000 $400,000 $150,000
Inventory $275,000 $250,000 $25,000
Accounts Payable $150,000 $110,000 $40,000
Using the information provided, what is the inventory turnover for Eagle Paints? What is the
average production cycle for the firm? What is the average collection cycle? What could Eagle
Paints do to reduce the average collection cycle?
12
Copyright © 2019 Pearson Education, Inc.
13.2 Managing Accounts Receivable and Setting Credit Policy
1) ACME Inc.,bills its clients on the first of the month. For example, any sale made in the month
of July is billed August 1 and is due September 1. Clients traditionally pay as follows: 70% by
the end of the first month (August), 20% by the end of the second month (September), 9% by the
end of the third month (October), and 1% default on their bills. The firm's CEO wants to know
the anticipated cash flow for April. Use the following information to estimate April cash flows.
A) $94,000
B) $81,600
C) $84,640
D) $89,920
2) ACME Inc., bills its clients on the first of the month. For example, any sale made in the month
of July is billed August 1 and is due September 1. Clients traditionally pay as follows: 70% by
the end of the first month August), 20% by the end of the second month (September), 9% by the
end of the third month (October), and 1% default on their bills. What is the dollar value of
January billings collected in April?
A) $7,040
B) $7,920
C) $3,920
D) $0.00
3) ACME Inc., a music publishing firm located in Tennessee, bills its clients on the first of the
month. For example, any sale made in the month of July is billed August 1 and is due September
1. Clients traditionally pay as follows: 70% by the end of the first month (August), 20% by the
end of the second month (September), 9% by the end of the third month (October), and 1%
default on their bills. If accounts receivable are collected as anticipated, what is the last month in
which January sales will be collected?
A) March
B) April
C) May
D) June
4) ACME Inc., a music publishing firm located in Tennessee, bills its clients on the first of the
month. For example, any sale made in the month of July is billed August 1 and is due September
1. Clients traditionally pay as follows: 50% by the end of the first month (August), 40% by the
end of the second month (September), 7% by the end of the third month (October), and 3%
default on their bills. What is the total dollar value of first-quarter actual sales that will NOT be
collected?
A) $2,900
B) $3,760
C) $5,160
D) $7,740
5) Murphy's Repair has the following outstanding account receivables at the end of the month.
The monthly late fee is 1.50% of the outstanding balance at the end of each billing month
following the sale (February sales receive a late fee in April if not paid by March 31). Determine
the total late fees due for the following.
Invoice #
Bill Date
Customer
Original $
Late Fees $
Current Date
6872
6/15/2017
RLO
$321.00
9/30/2017
7100
6/25/2017
JBL
$417.00
9/30/2017
7469
7/12/2017
DLL
$585.00
9/30/2017
A) $19.85
B) $31.08
C) $48.17
D) $0.00
6) Murphy's Repair has the following outstanding account receivables at the end the month.
Calculate the number of days late for each outstanding invoice.
Invoice #
Bill Date
Customer
Due Date
Age of A/R
Current Date
6872
6/15/2017
RLO
7/15/2017
9/30/2017
7100
6/25/2017
JBL
7/25/2017
9/30/2017
7469
7/12/2017
DLL
8/12/2017
9/30/2017
A) 71 days, 61 days, and 16 days
B) 76 days, 66 days, and 48 days
C) 75 days, 65 days, and 48 days
D) 77 days, 67 days, and 49 days
7) Estimating ________ is one part of managing short-term cash needs. The second part is
estimating ________.
A) cash inflow; accounts payable
B) cash inflow; cash outflow
C) accounts receivable; cash outflow
D) accounts receivable; cash inflow
8) When a company deals only in cash, the cash conversion cycle becomes ________.
A) the collection cycle
B) the payable cycle
C) the production cycle
D) the collection cycle - the payable cycle
9) Extending credit to a customer has three major components ________.
A) a policy on how customers will qualify for credit, a policy on the payment plan allowed
creditors, and a policy for collecting overdue bills
B) a policy on how customers will qualify for credit, a policy on paying commissions on sales,
and a policy for collecting overdue bills
C) a policy on how customers will qualify for credit, a policy on the payment plan allowed
creditors, and a policy on accounting for depreciation
D) a policy on how customers will qualify for credit, a policy on accounting for depreciation, and
a policy on paying commissions on sales
10) ________ is the collective term used to describe a firm's decisions as to how customers will
qualify for credit, what payment plan is allowed to creditors, and how overdue bills will be
collected.
A) Credit history
B) Credit policy
C) Collection policy
D) Payment policy
11) Which of the following is a consideration when a company decides which customers should
receive credit?
A) The amount of potential business from the customer
B) The credit policies of competing firms
C) The results of credit screening
D) All are considerations that the company takes into account.
12) Little Runabout Inc. makes small trailers for light-duty towing behind SUVs and small
pickup trucks. Its trailers typically sell for $2,500. Many of its customers have asked for credit
terms to aid in purchasing the trailers. The firm's finance department has estimated the following
profile for its light-duty trailers and customer base:
Annual sales: 12,000 trailers
Annual production costs per trailer: $1,500
Lost sales if credit is not provided for customers: 2,000 trailers
Default rate if all customers purchase on credit: 3.00%
What is the profit if the firm has a cash-only policy?
A) $12,000,000
B) $25,000,000
C) $8,000,000
D) $10,000,000
13) Little Runabout Inc. makes small trailers for light-duty towing behind SUVs and small
pickup trucks. Its trailers typically sell for $2,500. Many of its customers have asked for credit
terms to aid in purchasing the trailers. The firm's finance department has estimated the following
profile for its light-duty trailers and customer base:
Annual sales: 10,000 trailers
Annual production costs per trailer: $1,500
Lost sales if credit is not provided for customers: 2,000 trailers
Default rate if all customers purchase on credit: 3.00%
What is the profit if the firm has a credit policy?
A) $25,000,000
B) $9,250,000
C) $450,000
D) $8,000,000
14) Little Runabout Inc. makes small trailers for light-duty towing behind SUVs and small
pickup trucks. Its trailers typically sell for $2,500. Many of its customers have asked for credit
terms to aid in purchasing the trailers. The firm's finance department has estimated the following
profile for its light-duty trailers and customer base:
Annual sales: 10,000 trailers
Annual production costs per trailer: $1,500
Lost sales if credit is not provided for customers: 2,000 trailers
Default rate if all customers purchase on credit: 3.00%
What is the change in the profit if the firm moves from a cash-only policy to a credit policy?
A) $1,250,000
B) $8,000,000
C) $9,250,000
D) $15,000,000
15) Little Runabout Inc. makes small trailers for light-duty towing behind SUVs and small
pickup trucks. Its trailers typically sell for $2,500. Many of its customers have asked for credit
terms to aid in purchasing the trailers. The firm's finance department has estimated the following
profile for its light-duty trailers and customer base:
Annual sales: 12,000 trailers
Annual production costs per trailer: $1,500
Lost sales if credit is not provided for customers: 2,000 trailers
Default rate if all customers purchase on credit: 3.00%
What is the dollar value of bad debts the firm expects to accumulate over a year?
A) $9,250,000
B) $6,500,000
C) $540,000
D) $450,000
16) Little Runabout Inc. makes small trailers for light-duty towing behind SUVs and small
pickup trucks. Its trailers typically sell for $2,500. Many of its customers have asked for credit
terms to aid in purchasing the trailers. The firm's finance department has estimated the following
profile for its light-duty trailers and customer base:
Annual sales: 12,000 trailers
Annual production costs per trailer: $1,500
Lost sales if credit is not provided for customers: 2,000 trailers
Default rate if all customers purchase on credit: 3.00%
What is the dollar value of bad debts the firm expects to accumulate over a year? Given this
amount, what is the maximum average amount per unit sold that the firm should spend on credit
screening?
A) $450,000; $37.50
B) $450,000; $45.00
C) $4,500,000; $450.00
D) $4,500,000; $$562.50
17) ACME Inc., has credit terms of 1/10 net 30. Customers should take the discount and pay in
10 days if they CANNOT earn more than ________ (APR) on their investments.
A) 13.01%
B) 20.13%
C) 18.43%
D) 12.29%
18) ACME Inc., has credit terms of 2/15 net 45. Customers should take the discount and pay in
15 days if they CANNOT earn more than ________ (EAR) on their investments.
A) 17.81%
B) 27.86%
C) 24.83%
D) 16.55%
