b.
reduce the amount of
c.
have no effect on the
d.
represent all of the
22. Nicholas would like to improve the management of his company’s accounts payable. One metric he
might find useful is:
a.
days in credit.
b.
days in inventory.
c.
days in payables.
d.
days sales outstanding.
23. A company with accounts payables of $35,000 and cost of goods sold of $300,000 would have days in
payables of
a.
24 days.
b.
32 days.
c.
43 days.
d.
The answer is not one of the above choices.
24. The terms 3/10, net 30 offer
a.
a 3 percent discount on purchases paid for within 30 days.
b.
a 10 percent discount on purchases paid for within 3 days.
c.
a 3 percent discount on purchases paid for within 10 days.
d.
a 10 percent discount on purchases paid for within 30 days.
25. Assuming that cash is available, payment for an account payable with terms of 3/10, net 30 should be
made on day
a.
3.
b.
10.
c.
13.
d.
30.
26. Owen was surprised when he calculated the percentage annual interest rate on his accounts payable.
He discovered that failure to take advantage of the discount offered by suppliers
a.
makes small difference since a business does not pay a high interest rate.
b.
makes a large difference since a business pays a high interest rate.
c.
has no effect on cash flow since the interest rates are so low.
d.
will have erratic effects on rates for the use of a supplier’s money.
27. A company has 30 days in payables, 10 days in inventory and 20 days for the average collection
period. How many days are in the company’s cash conversion process?
a.
0
b.
20
c.
40
d.
60
28. The goal of the managing cash conversion period is to _____ the number of days.
a.
increase
b.
maintain
c.
decrease
d.
match the industry average for
29. Long-term investments are the focus of
a.
cash budgeting.
b.
capital budgeting.
c.
corporate planning.
d.
investment planning.
30. The main purpose of capital budgeting is to help managers make decisions about
a.
discounts to offer to customers.
b.
long-term investments.
c.
non-financial constraints on expansion.
d.
short-term investments.
31. Which question do all types of capital budgeting techniques try to answer?
a.
Do the future benefits from the investment exceed the cost of making the investment?
b.
Is the investment too expensive?
c.
Will the firm’s cash flows be adequate to pay for the investment?
d.
Will the investment’s time requirements fit the needs of the company?
32. “How many dollars in average profits are generated per dollar of average investment?” is answered
using
a.
accounting return on investment.
b.
net present value.
c.
internal rate of return.
d.
investment outlay valuation.
33. “How long will it take to recover the original investment outlay?” is answered using
a.
accounting ratio analysis.
b.
discounted cash flow.
c.
net present value.
d.
payback period technique.
34. Discounted cash flow techniques answer the question of:
a.
Do the cash returns of the investment exceed the cash outlays?
b.
How does the present value of future benefits from the investment compare to the
investment outlay?
c.
How long will it take to recover the original investment outlay?
d.
How much average profit is generated per dollar of average investment?
35. “How does the present value of future benefits from the investment compare to the initial investment
outlay?” is answered using
a.
analysis of long-term investment.
b.
discounted cash flow analysis.
c.
investment outlay valuation.
d.
ratio analysis.
36. Average annual after-tax profits per year divided by the average book value of the investment equals
a.
payback period technique.
b.
average investment outlay.
c.
average investment capability.
d.
accounting return on investment.
37. The payback period and accounting return on investment techniques
a.
recognize the economic life of a project.
b.
ignore the time value of money.
c.
consider only the return for the first year of the investment.
d.
are more difficult to use than the net present value method.
38. An understanding of the present value of a future dollar is important when one is using
a.
the payback period method.
b.
discounted cash flow techniques.
c.
the accounting return on investment technique.
d.
the investment outlay valuation technique.
39. Under the NPV method, the rate of return required to satisfy the firm’s investors is the
a.
opportunity cost.
b.
internal rate of return.
c.
cost of capital.
d.
accounting return on investment.
40. If the net present value of a proposed investment is negative,
a.
the cost of the investment is less than the present value of the future cash flows.
b.
the investment earns the required rate of return.
c.
the present value of the future cash flows would be unaffected by the proposed investment.
d.
the firm should not make the investment, since the present value of the future cash flows is
less than the cost of the investment.
41. IRR
a.
takes into account that cash received today is more valuable than cash received later.
b.
estimates the rate of return that can be expected from an investment.
c.
estimates the current value of future cash flows.
d.
compares the present value of future cash flows with cash outlay.
42. A reason that a small firm would not use a discounted cash flow technique in evaluating capital
investments would be
a.
company management has a preference for another quantitative method.
b.
liquidity is less of an issue for a small company.
c.
non-financial issues may be more important for a small firm.
d.
small firms invest more in short-term assets than large companies.
MATCHING
Match the term with its definition. Some terms may not be used.
a.
Accounting return on investment technique
b.
Capital budgeting analysis
c.
Discounted cash flow techniques
d.
Internal rate of return
e.
Net present value
f.
Payback period technique
g.
Working capital cycle
h.
Working capital management
1. An analytical method that helps managers make decisions about long-term investments
2. A capital budgeting technique that compares expected average annual after-tax profits to the average
book value of an investment
3. The daily flow of resources through a firm’s working capital accounts
4. The present value of expected future cash flows less the initial investment outlay
5. A capital budgeting technique that measures the amount of time it will take to recover the initial cash
outlay of an investment
6. The rate of return a firm expects to earn on a project
7. Capital budgeting techniques that compare the present value of future cash flow with the cost of the
initial investment
Match the term with its definition. Some terms may not be used.
a.
Cash conversion period
e.
Days sales outstanding
b.
Cost of capital
f.
Lock box
c.
Days in inventory
g.
Pledged accounts receivable
d.
Days in payables
h.
Working capital management
8. A post office box for receiving remittances from customers
9. The number of days, on average, that a company holds inventory
10. The management of current assets and current liabilities
11. The number of days, on average, that a firm extends credit to its customers
12. Accounts receivable used as collateral for a loan
13. The time required to convert paid-for inventory and accounts receivable into cash
14. The number of days, on average, that a business takes to pay its accounts payable
ESSAY
1. Discuss the importance of working capital management and how it relates to the working-capital cycle
of a small business.
2. Discuss cash flow characteristics of firms that have a cash culture in relation to the recession.
3. After identifying the stages of the accounts receivables life cycle, discuss areas that are of concern in
the process.
4. Shelly is a photographer who sells her original copyrighted photographs to regional and national
magazines for illustrations of written articles. She has noticed a slowdown in payment and needs
suggestions as to what she can do to decrease her average collection period.
5. Dana produces fine chocolates for her retail shop which is open 6 days a week. The sales are $156,000
annually with a cost of goods sold of 45% of sales and inventory of 5%. Calculate the days in
inventory and indicate any concerns for the shop considering the national average is 15 days.
6. Ralph has always enjoyed fireworks and has set up a booth between June 4th through July 4th.
Additional inventory is scheduled to be sent throughout the month. Ralph is now wondering if he has
ordered too much. List three reasons that could have motivated Ralph in his inventory buying.
7. Calculate the annual interest rate associated with each of the following terms:
a. 2/5, net 30
b. 2/10, net 20
c. 3/15, net 30.
8. What are key issues in managing accounts payable?
9. Jane has started a gift basket company that specializes in regional products. Several corporations use
her baskets for the holidays, to welcome new employees, and for their sales staff to use as gifts for
corporate clients. Because she noticed her average collection period from last quarter to this quarter
had doubled to 60 days, she then realized the company’s days in inventory has increased from 30 to 40
days and the days in payables dropped from 35 to 30 days. After calculating each quarter’s cash
conversion periods, what do the changes indicate?
10. After defining capital budgeting, give examples of the types of capital budgeting decisions a small
business owner would make.
11. After discussing three techniques for making capital budgeting decisions, which one(s) incorporate the
time value of money?
12. Assume that the cost of certain equipment a business is considering purchasing is $100,000. The
equipment will be depreciated over five years, at which point the salvage value is expected to be
$8,000. Anticipated after-tax profits (losses) are as follows:
Year
After-Tax Profits/Losses
1
($10,000)
2
20,000
3
25,000
4
35,000
5
20,000
Compute the accounting return on investment technique showing the formulas and computations.
13. Compare the two investment proposals below, using the payback period technique. The projected cost
of each investment proposal is $100,000.
Project A
Project B
Year
(Cash flow)
(Cash flow)
1
$25,000
$25,000
2
20,000
20,000
3
10,000
40,000
4
10,000
30,000
5
–
10,000
14. Many small business owners do not use discounted cash flow techniques. What are the reasons why
they do not?