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1. Net working capital is equal to:
a. current assets.
b. current liabilities.
c. current assets divided by current liabilities.
d. current assets minus current liabilities.
e. current assets plus current liabilities.
2. The following information relates to Rodeo Corporation:
Current assets $70,000
Current liabilities $52,500
Long-term assets $210,000
Long-term liabilities $140,000
Based on the information given above, the amount of the current assets financed by the long-term liabilities is:
a. $12,500.
b. $52,500.
c. $102,500.
d. $70,000.
e. $17,500.
3. The following information relates to Zync Corporation:
Current assets $200,000
Current liabilities $150,000
Long-term assets $600,000
Long-term liabilities $400,000
Based on the information given above, the net working capital of the company is:
a. $250,000.
b. $50,000.
c. $350,000.
d. $10,000,000.
e. $650,000.
4. The following information relates to Lobo Corporation:
Cash $20,000
Accounts receivable $50,000
Marketable securities $65,000
Notes payable $10,000
Accrued wages $5,000
Based on this information, the net working capital of the company is:
a. $135,000.
b. $70,000.
c. $55,000.
d. $120,000.
e. $150,000.
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5. The cash conversion cycle refers to the:
a. length of time from the payment for the purchase of raw materials to manufacture a product until the collection of
accounts receivable associated with the sale of the product.
b. average length of time between the cash payment for the purchase of raw materials and labor and their utilization
in the manufacturing process.
c. amount of time a product remains in inventory in various stages of completion.
d. amount of time it takes to collect cash following a sale.
e. length of time from the purchase of raw materials to manufacture a product until the payment for the raw materials
is made.
6. The inventory conversion period refers to the average length of time required:
a. to convert raw materials into finished goods.
b. to sell all the finished goods once the production process is completed.
c. to convert materials into finished goods and then to sell those goods.
d. to collect cash following the sale of inventory.
e. to provide payment in cash for the purchase of raw materials and labor.
7. The inventory turnover of Long Corporation is 16×, and its closing inventory is $20,000. Assuming there are 360 days
in a year, compute the company’s inventory conversion period. (Give answer to one decimal place.)
a. 22.5 days
b. 24.2 days
c. 3.5 days
d. 42.8 days
e. 55.5 days
8. Which of the following mathematical equations is used to compute the payables deferral period (DPO)?
a. Payables deferral period (DPO) = Payables turnover/360
b. Payables deferral period (DPO) = Payables turnover × 360
c. Payables deferral period (DPO) = Daily credit purchases/Accounts payable
d. Payables deferral period (DPO) = Accounts payable/Daily credit purchases
e. Payables deferral period (DPO) = Cost of goods sold/Accounts payables
9. Which of the following mathematical equations is used to calculate days sales outstanding (DSO)?
a. Days sales outstanding (DSO) = Receivables + Daily credit sales
b. Days sales outstanding (DSO) = Payables + Daily credit sales
c. Days sales outstanding (DSO) = Receivables/Cost of goods sold
d. Days sales outstanding (DSO) = Accounts payable/Cost of goods sold
e. Days sales outstanding (DSO) = Receivables/Daily credit sales
10. The following information relates to LoGo Corporation:
Accounts payable $650,000
Credit purchases $21,000,000
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Accounts receivable $2,100,000
What is LoGo’s payables deferral period (DPO)? In your computations, assume there are 360 days in the year.
a. 21.45 days
b. 11.14 days
c. 32.31 days
d. 20.11 days
e. 30.95 days
11. The following information relates to RAM Corporation:
Accounts receivable $160,000
Total credit sales $2,500,000
Accounts payable $220,000
What is RAM’s receivables collection period (DSO)? In your computations, assume there are 360 days in a year.
a. 23.04 days
b. 21.56 days
c. 15.62 days
d. 22.50 days
e. 160.00 days
12. A firm has an accounts receivables turnover equal to 33.5 days, an average inventory equal to $120,000, and an
average accounts payable balance equal to $52,000. What is the firm’s receivables collection period? In your
computations, assume there are 360 days in a year.
a. 3.00 days
b. 77.31 days
c. 14.52 days
d. 12.25 days
e. 10.75 days
13. The following information relates to Musk Corporation:
Inventory conversion period 15 days
Average inventory $28,000
Average accounts payable $25,000
What is Musk’s cost of goods sold during the year? In your computations, assume there are 360 days in a year.
a. $550,000
b. $420,000
c. $750,000
d. $672,000
e. $580,008
14. The following information relates to Gear Corporation:
Inventory conversion period 68.2 days
Receivables collection period 35.8 days
Payables deferral period 24.6 days
Which of the following is the cash conversion cycle of the company?
a. 128.6 days
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b. 79.4 days
c. 57.0 days
d. 79.2 days
e. 60.4 days
15. The following information relates to Dane Corporation:
Inventory conversion period 55.8 days
Days sales outstanding 23.9 days
Days payables outstanding 32.5 days
Which of the following is the cash conversion cycle of the company?
a. –0.6 days
b. 112.2 days
c. 79.7 days
d. 64.4 days
e. 47.2 days
16. If a firm wants to decrease its cash conversion cycle, which of the following actions should it take? Assume
everything else is equal.
a. Loosen credit terms to increase the firm’s sales.
b. Delay payments made to suppliers so that the firm pays late.
c. Purchase more raw materials to increase the average inventory the firm maintains.
d. Increase the amount the firm borrows from its bank.
e. Decrease the common equity on the firm’s balance sheet.
17. The current asset financing policy that calls for matching the maturities of assets with the maturities of liabilities is
known as the:
a. self-liquidating approach.
b. conservative approach.
c. aggressive approach.
d. permanent current ratio approach.
e. temporary net working capital approach.
18. The maturity matching approach calls for matching the maturities of the firm’s:
a. long-term liabilities and equity.
b. long-term liabilities and current liabilities.
c. long-term assets and current assets.
d. assets and equity.
e. assets and liabilities.
19. Which of the following current asset financing policies/approaches asserts that all of a firm’s fixed assets, all of its
permanent current assets, and some of its temporary current assets should be financed with long-term capital?
a. Maturity matching approach
b. Aggressive approach
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c. Conservative approach
d. Self-liquidating approach
e. Permanent current assets approach
20. The three main working capital strategies—aggressive, conservative, and moderate—differ primarily in the:
a. relative amounts of short-term debt a firm uses.
b. minimum level of permanent current assets a firm maintains.
c. relative amount of long-term debt versus equity that a firm uses to finance its permanent current assets.
d. average level of temporary current assets a firm maintains.
e. amount of trade credit a firm uses.
21. ______ are short-term liabilities, which include wages payable and taxes payable, that change spontaneously as the
firm’s normal operations change.
a. Supplier credits
b. Accruals
c. Corporate bonds
d. Notes payable
e. Receivables
22. All else equal, when a firm purchases raw materials on credit from its supplier, which of the following accounts is
affected?
a. Accruals
b. Cash
c. Accounts payable
d. Accounts receivable
e. Notes payable
23. A ______ is the document that specifies the terms and conditions of a bank loan, including the amount, interest rate,
and repayment schedule.
a. promissory note
b. factoring agreement
c. bond indenture
d. trade credit note
e. receivables agreement
24. A ______ is an arrangement in which a bank agrees to permit a firm to borrow any amount up to a specified maximum
during a designated time period.
a. line of credit
b. commercial paper agreement
c. trade credit agreement
d. promissory note
e. factoring arrangement
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25. With a general line of credit, the bank:
a. does not charge a commitment fee.
b. charges a commitment fee on the total amount.
c. charges a commitment fee on the used balance.
d. charges a commitment fee on the unused balance.
e. charges the same total fees as it does with a revolving credit agreement.
26. Which of the following sources of financing is considered spontaneous because it fluctuates naturally with changes in
ordinary business operations/transactions without management making formal decisions?
a. Commercial paper
b. Long-term bond
c. Notes payable
d. Trade credit
e. Equity
27. Which of the following is a correct statement about commercial paper?
a. Commercial paper is a type of secured promissory note issued by banks to small firms.
b. The use of commercial paper is limited to a relatively small number of firms that are exceptionally good credit
risks.
c. Maturities of commercial paper vary from two years to four years.
d. The interest a firm pays on its commercial paper normally is higher than the interest it pays on its long-term
bonds.
e. Commercial paper normally is issued by firms with high financial risks.
28. Most firms purchase from their suppliers on credit, recording these debts in their financial statements/accounts as
______.
a. accounts payable
b. notes payable
c. promissory notes
d. inventory
e. accounts receivable
29. A revolving credit agreement is:
a. created because of recurring short-term liabilities such as wages and taxes that change spontaneously with
operations.
b. the name of the credit that is created when one firm buys on credit from another firm.
c. an outright sale of receivables.
d. an unsecured, short-term promissory note issued by large, financially sound firms to raise funds.
e. a formal, committed arrangement in which a bank agrees to lend up to a specified maximum amount of funds
during a designated period.
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30. Which of the following statements about various short-term credit alternatives is correct?
a. The firm has complete control over the terms and the levels of the accruals it uses, which makes this type of credit
an attractive source of additional funding.
b. Commercial paper is a type of secured promissory note issued by large, financially strong firms.
c. Banks generally charge a commitment fee on the used balances of credit lines to compensate for guaranteeing the
availability of revolving credit.
d. The funds used by a firm to maintain a compensating balance with the bank cannot be used by the firm to pay its
bills or to invest in capital budgeting projects.
e. The credit created when one firm buys goods or services on credit from another firm is known as accounts
receivable.
31. A(n) ______ is the amount a bank requires a borrower to maintain in its checking account as a requirement for getting
a loan.
a. general line of credit
b. guaranteed credit agreement
c. indenture
d. compensating balance
e. factoring balance
32. ______ is a type of unsecured promissory note issued by large, financially strong firms.
a. Trade credit
b. Commercial paper
c. A mortgage
d. Preferred equity
e. An accrual arrangement
33. The maturities of commercial paper generally range from:
a. one month to nine months.
b. 10 months to 12 months.
c. one year to three years.
d. one year to 10 years.
e. five years to 10 years.
34. A(n) ______ is a type of legal claim (lien) against a firm’s inventory when it is used as collateral for a loan and the
goods are relatively high priced, slow moving, and easy to identify individually using serial numbers or other
distinguishing characteristics.
a. note payable
b. trust receipt
c. blanket lien
d. bond indenture
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35. A(n) ______ is a type of legal claim (lien) against a firm’s inventory when it is used as collateral for a loan and the
goods are relatively low priced, fast moving, and difficult to identify individually.
a. recourse order
b. bond indenture
c. trust receipt
d. warehouse receipt
e. blanket lien
36. Accruals represent a form of:
a. adjustable-rate debt because a varying rate of interest is paid on the outstanding balance (amount).
b. expensive debt because high rates of interest are paid on the outstanding balance.
c. cheap debt because low rates of interest are paid on the outstanding balance.
d. free debt because no explicit interest is paid on the outstanding balance.
e. fixed-rate debt because a fixed rate of interest is paid on the outstanding balance.
37. Which of the following mathematical equations is used to compute the effective annual rate (EAR)?
a. EAR = (1/Periodic rate of interest)number of borrowing (interest) periods in one year – 1
b. EAR = (1 + Periodic rate of interest)number of borrowing (interest) periods in one year – 1
c. EAR = (1 – Periodic rate of interest)number of borrowing (interest) periods in one year – 1
d. EAR = (1 + Periodic rate of interest)number of borrowing (interest) periods in one year + 1
e. EAR = (1 – Periodic rate of interest)number of borrowing (interest) periods in one year + 1
38. Scarlett Linens offers credit with terms of 3/15, net 30 to its customers. These terms indicate that Scarlett allows its
customers to take a:
a. 15 percent discount from the total invoice price if payment is made on or before Day 30 of the billing cycle; after
that, only a 3 percent discount is available.
b. 30 percent discount from the total invoice price if payment is made on or before Day 15 of the billing cycle; after
that, only a 3 percent discount is available.
c. 3 percent discount from the total invoice price if payment is made on or before Day 15 of the billing cycle;
otherwise, the entire bill is due by Day 30.
d. 15 percent discount from the total invoice price if payment is made on or before Day 3 of the billing cycle;
otherwise, the entire bill is due by Day 30.
e. 30 percent discount from the total invoice price if payment is made on or before Day 3 of the billing cycle;
otherwise, the entire bill is due by Day 15.
39. Suppose a firm purchases goods on credit with terms of 3/10, net 25. What is the cost of trade credit (APR) to the firm
if it always pays its bill on Day 8 or sooner? In your computations, assume there are 360 days in a year.
a. 74.23%
b. 24.74%
c. 44.54%
d. 0.00%
e. 111.34%
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40. MoJo Corporation purchases goods on credit with terms of 4.5/15, net 40. Which of the following is the annual cost
(APR) of the non-free trade credit if the firm pays on Day 40 (i.e., the cost of forgoing the discount)? In your
computations, assume there are 360 days in a year.
a. 42.41%
b. 67.85%
c. 0.00%
d. 30.84%
e. 113.09%
41. Tivo Corporation purchases its raw materials on credit with terms of 3/10, net 30. What is the annual percentage rate
(APR) of non-free trade credit if Tivo does not take the discount and pays on Day 30. In your computations, assume there
are 360 days in a year.
a. 54.00%
b. 27.84%
c. 37.11%
d. 55.67%
e. 111.34%
42. Lima Corporation makes purchases on credit with terms of 2/15, net 45. What is the effective annual rate (rEAR) of
non-free trade credit if Lima does not take discounts and pays on Day 45? In your computations, assume there are 360
days in a year.
a. 42.98%
b. 24.49%
c. 148.21%
d. 35.40%
e. 27.43%
43. Gale Corporation recently issued 270-day commercial paper with a face value of $100,000 and a simple interest rate
of 11 percent. Assuming there are 360 days in a year, what is the commercial paper’s annual percentage rate (APR)? The
firm incurs no transaction costs to issue the commercial paper.
a. 11.99%
b. 6.74%
c. 11.00%
d. 8.25%
e. 8.99%
44. Bravo Corporation recently issued 270-day commercial paper with a face value of $2,000,000 and a simple interest
rate of 11 percent. The company paid a transaction fee equal to 0.4 percent of the issue, which was taken out of the issue
amount before the company received any funds. Assuming there are 360 days in a year, what is the commercial paper’s
effective annual rate (rEAR)?
a. 17.51%
b. 11.99%
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c. 12.56%
d. 12.63%
e. 12.82%
45. McGrath Corporation recently issued 180-day commercial paper with a face value of $1,500,000 and a simple interest
rate of 13 percent. The company paid a transaction fee equal to 0.3 percent of the amount issued, which was taken out of
the issue amount before the company received any funds. Assuming there are 360 days in a year, what are the commercial
paper’s annual percentage rate (APR) and effective annual rate (rEAR), respectively?
a. APR = 7.30%; rEAR = 15.12%
b. APR = 9.73%; rEAR = 9.84%
c. APR = 13.97%; rEAR = 14.23%
d. APR = 14.59%; rEAR = 15.12%
e. APR = 15.34%; rEAR = 15.34%
46. Pelican Corporation took out a nine-month $200,000 discount interest loan with a 14 percent quoted (simple) interest
rate. What is the annual percentage (APR) interest rate for the loan?
a. 15.94%
b. 14.96%
c. 15.64%
d. 11.73%
e. 14.00%
47. Musk Corporation needs $225,000 to pay its bills. Musk’s bank offers a one-year 12 percent simple interest loan that
requires a 25 percent compensating balance to be maintained with the bank. Musk currently holds no funds at the lending
bank. How much must Musk borrow to ensure that it has $225,000 to pay its bills?
a. $281,250
b. $300,000
c. $225,000
d. $900,000
e. $168,750
48. Which of the following mathematical expressions computes the annual percentage rate (APR) for short-term
financing?
a. APR = Percentage cost per period × Number of borrowing (interest) periods in one year
b. APR = (1 + Percentage cost per period)Number of borrowing (interest) periods in one year + 1.0
c. APR = (1 + Percentage cost per period)Number of borrowing (interest) periods in one year – 1.0
d. APR = (1 + Percentage cost per period) Number of borrowing (interest) periods in one year
e. APR = Percentage cost per period + 1
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49. Gripp Corporation needs $765,000 to pay one of its suppliers. The bank requires a compensating balance equal to 15
percent on loans to companies. Because Gripp currently holds no funds at the lending bank, it must borrow enough to
have $765,000 available to pay its suppliers after covering the compensating balance. How much must Gripp borrow so
that it has $765,000 to pay its suppliers? In your computations, assume there are 360 days in a year.
a. $879,750
b. $765,000
c. $573,750
d. $900,000
e. $5,100,000
50. Grant Technologies needs $300,000 to pay its supplier. Grant’s bank is offering a 210-day simple interest loan with a
quoted interest rate of 11 percent and a 20 percent compensating balance requirement. Assuming there are 360 days in a
year and Grant currently holds no funds at the lending bank, what is the annual percentage rate (APR) of the loan?
a. 8.02%
b. 14.14%
c. 11.00%
d. 13.75%
e. 12.55%
51. Kerry Corporation must pay $500,000 to its supplier. Kerry’s bank has offered a 270-day simple interest loan with a
quoted interest rate of 12 percent. The bank requires a 20 percent compensating balance requirement on business loans. If
Kerry currently holds no funds at the lending bank, what is the loan’s effective annual rate (rEAR)? In your computations,
assume there are 360 days in a year.
a. 11.25%
b. 15.00%
c. 12.00%
d. 15.27%
e. 11.35%
52. BarLey Inc. recently borrowed $125,000 from its bank at a simple interest rate of 12 percent. The loan is for one year,
and the loan agreement requires the interest to be added to the amount borrowed and the total amount to be repaid in
monthly installments. Compute the amount of the monthly payments on the loan.
a. $11,667
b. $12,222
c. $11,111
d. $11,997
e. $12,677
53. Yesterday, Mars Inc. borrowed $225,000 from its bank at a simple interest rate of 12 percent. The loan is for nine
months and the loan agreement requires the interest to be added to the amount borrowed and the total amount to be repaid
in monthly installments. What is the loan’s approximate annual percentage rate (APR).
a. 17.59%
b. 16.20%
c. 21.60%
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d. 15.83%
e. 16.99%
54. Fast Corporation recently borrowed $600,000 from its bank at a simple interest rate of 14 percent. The loan is for 10
months. The loan agreement requires interest to be added to the amount borrowed and the total amount to be repaid in
monthly installments. What is the loan’s monthly payment?
a. $68,400.00
b. $67,000.00
c. $57,000.00
d. $69,767.44
e. $51,600.00
55. Venus Inc. recently borrowed $750,000 from its bank at a simple interest rate of 10 percent. The loan is for six
months. The loan agreement requires the interest to be added to the amount borrowed and the total amount to be repaid in
monthly installments. What is the loan’s effective annual rate (EAR)?
a. 18.18%
b. 17.50%
c. 18.32%
d. 14.12%
e. 16.94%
56. Because multinational corporations operate in countries with different languages, different cultures, different political
environments, and different economic conditions, _____.
a. the management of their working capital accounts is much simpler than in purely domestic firms.
b. the firms should manage the working capital accounts of their foreign subsidiaries the same as the foreign firms in
the countries where their subsidiaries are located manage their working capital accounts.
c. the management of their working capital accounts is not at all similar to the management of working capital
accounts in purely domestic firms.
d. their decisions regarding the management of their working capital accounts often significantly affect their abilities
to survive in the long-run.
e. their decisions regarding the management of their working capital accounts are concerned with short-run survival
only because the firms don’t know how long they will be able to operate in the foreign countries before the host
governments expropriate their properties.
57. Net working capital represents the amount of current assets that is financed with long-term funds.
a. True
b. False
58. The inventory conversion period of a firm is equivalent to the average age of its inventory.
a. True
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59. The maturity matching approach to current asset financing uses long-term funds to finance all permanent asset
requirements.
a. True
b. False
60. At the extreme, a firm that adheres to the conservative approach to finance current assets will finance all of its
seasonal needs with long-term financing alternatives, thereby eliminating the need to use short-term financing. Such a
firm will have extra permanent funds during off-peak periods, allowing it to store liquidity in the form of short-term
investments during the off-season.
a. True
b. False
61. The outright sale of receivables by firms to financial organizations is called factoring.
a. True
b. False
62. Accruals are generally considered free debt in the sense that no explicit interest is paid on funds “raised” through
them.
a. True
b. False
63. Commercial paper is a discount interest loan.
a. True
b. False
64. Computation of the annual percentage rate (APR) recognizes interest compounding, whereas computation of the
effective annual rate (EAR) does not.
a. True
b. False
65. The effective annual rate (rEAR) it pays on a loan is lower whenever a firm must use some of the proceeds from the
loan to meet the bank’s compensating balance requirement.
a. True
b. False
66. For the most part, the techniques used to manage working capital accounts in multinational corporations are same as
the techniques used in purely domestic corporations.
a. True
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b. False
67. Decisions made by multinational corporations to manage working capital accounts can have significant consequences
on the long-run survival of the firms.
a. True
b. False
68. The task of managing working capital accounts in multinational corporations is far simpler than in purely domestic
firms because domestic firms are not affected by different languages, different cultures, different political environments,
different economic conditions, and so forth.
a. True
b. False