Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)
Your firm purchases goods from its supplier on terms of 2/10, net 40. The effective annual cost to
your firm if it chooses not to take advantage of the trade discount offered and stretches the accounts
payable to 60 days is closest to:
1)
A)
20.1%
B)
11.1%
C)
13.0%
D)
15.9%
2)
Which of the following statements is false?
2)
A)
The credit that the firm is extending to its customer is known as trade credit.
B)
Under the Modigliani–Miller assumptions of perfect capital markets, the amounts of payables
and receivables are irrelevant.
C)
Collection float is the amount of time it takes before payments to suppliers actually result in a
cash outflow for the firm.
D)
One factor that contributes to the length of a firm’s receivables and payables is the delay
between the time a bill is paid and the cash is actually received.
Use the table for the question(s) below.
Luther Industries had sales of $980 million and a cost of goods sold of $560 million in 2006. A simplified balance sheet for the
firm appears below:
Luther Industries
Balance Sheet
As of December 31, 2006
(millions of dollars)
Assets Liabilities and Equity
Cash 25 Accounts payable 60
Accounts receivable 85 Notes payable 425
Inventory 90 Accruals 45
Total current assets 200 Total current liabilities 530
Net plant, property, and equipment 6,100 Long term debt 2,725
Total assets 6,300 Total liabilities 3,255
Common equity 3,045
Total liabilities and equity 6,300
3)
Luther’s cash conversion cycle is closest to:
3)
A)
51 days
B)
129 days
C)
71 days
D)
66 days
4)
Luther’s Inventory days is closest to:
4)
A)
59 days
B)
39 days
C)
42 days
D)
32 days
5)
Which of the following money market investments is a draft written by the borrower and
guaranteed by the bank on which the draft is drawn. Typically used in international trade
transactions. The borrower is an importer who writes the draft in payment for goods?
5)
A)
Certificates of Deposit (CD)
B)
Repurchase Agreement
C)
Treasury Bill
D)
Commercial Paper
E)
Banker’s Acceptance
6)
Which of the following statements is false?
6)
A)
Because accounts receivable days can be calculated from the firm’s financial statement,
outside investors commonly use this measure to evaluate a firm’s credit management policy.
B)
Seasonal sales patterns may cause the number calculated for the accounts receivable days to
change depending on when the calculation takes place.
C)
The aging schedule is also sometimes augmented by analysis of the payments pattern, which
provides information on the percentage of monthly sales that the firm collects in each month
after the sale.
D)
If the aging schedule gets “top–heavy”that is, if the percentages in the upper half of the
schedule begin to increase–the firm will likely need to revisit its credit policy.
7)
Your firm purchases goods from its supplier on terms of 1/10, net 30. The effective annual cost to
your firm if it chooses not to take advantage of the trade discount offered and stretches the accounts
payable to 45 days is closest to:
7)
A)
11.1%
B)
13.0%
C)
20.1%
D)
15.9%
8)
The amount of cash a firm needs to be able to pay its bills is sometimes referred to as a(n)
8)
A)
transactions balance.
B)
precautionary balance.
C)
compensating balance.
D)
operating balance
9)
Which of the following money market investments is essentially a loan arrangement wherein a
securities dealer is the “borrower” and the investor is the “lender.” The investor buys securities from
the securities dealer, with an agreement to sell the securities back to the dealer at a later date for a
specified higher price?
9)
A)
Banker’s Acceptance
B)
Treasury Bill
C)
Commercial Paper
D)
Certificates of Deposit (CD)
E)
Repurchase Agreement
10)
The cash conversion cycle (CCC) is defined as
10)
A)
Inventory Days + Accounts Payable Days – Accounts Receivable Days.
B)
Inventory Days – Accounts Receivable Days – Accounts Payable Days.
C)
Inventory Days + Accounts Receivable Days – Accounts Payable Days.
D)
Inventory Days + Accounts Receivable Days + Accounts Payable Days.
11)
Which of the following statements is false?
11)
A)
The longer a firm’s cash cycle, the more working capital it has, and the more cash it needs to
carry to conduct its daily operations.
B)
A firm’s cash cycle is the length of time between when the firm pays cash to purchase its
initial inventory and when it receives cash from the sale of the output produced from that
inventory.
C)
Most firms buy their inventory on credit, which increases the amount of time between the
cash investment and the receipt of cash from that investment.
D)
Any reduction in working capital requirements generates a positive free cash flow that the
firm can distribute immediately to shareholders.
12)
Which of the following statements is false?
12)
A)
Unlike trade credit, inventory represents one of the required factors of production.
B)
It is the firm’s financial manager who must arrange for the financing necessary to support the
firm’s inventory policy and who is responsible for ensuring the firm’s overall profitability.
C)
Inventory management receives extensive coverage in courses on operations management.
D)
Under the Modigliani–Miller assumptions of perfect capital markets, the amount of inventory
is irrelevant.
13)
Which of the following money market investments is a short–term, unsecured debt obligation
issued by a large corporation. The minimum denomination is $25,000, but most have a face value of
$100,000 or more?
13)
A)
Banker’s Acceptance
B)
Certificates of Deposit (CD)
C)
Repurchase Agreement
D)
Commercial Paper
E)
Treasury Bill
14)
The difference between a firm’s operating cycle and its cash cycle is
14)
A)
its account receivable days.
B)
its accounts payable days.
C)
there is no difference between the cash and operating cycles.
D)
its inventory days.
15)
Your firm purchases goods from its supplier on terms of 1/10, net 30. The effective annual cost to
your firm if it chooses not to take advantage of the trade discount offered is closest to:
15)
A)
20.1%
B)
13.0%
C)
44.6%
D)
16.8%
Use the table for the question(s) below.
Luther Industries had sales of $980 million and a cost of goods sold of $560 million in 2006. A simplified balance sheet for the
firm appears below:
Luther Industries
Balance Sheet
As of December 31, 2006
(millions of dollars)
Assets Liabilities and Equity
Cash 25 Accounts payable 60
Accounts receivable 85 Notes payable 425
Inventory 90 Accruals 45
Total current assets 200 Total current liabilities 530
Net plant, property, and equipment 6,100 Long term debt 2,725
Total assets 6,300 Total liabilities 3,255
Common equity 3,045
Total liabilities and equity 6,300
16)
Luther’s Accounts Receivable days is closest to:
16)
A)
39 days
B)
32 days
C)
42 days
D)
59 days
17)
The amount of cash a firm holds to counter the uncertainty surrounding its future cash needs is
known as a(n)
17)
A)
operating balance
B)
precautionary balance.
C)
speculative balance.
D)
compensating balance.
18)
Collection float is made up of all of the following except
18)
A)
processing float.
B)
availability float.
C)
mail float.
D)
disbursement float.
19)
Which of the following statements is false?
19)
A)
An aging schedule categorizes accounts by the number of days they have been on the firm’s
books.
B)
After a firm decides on its credit standards, it must next establish its credit terms.
C)
The decision of how much credit risk to assume plays a large role in determining how much
money a firm ties up in its payables.
D)
Knowledge of the payments pattern is also useful for forecasting the firm’s working capital
requirements.
20)
Which of the following statements is false?
20)
A)
The accounts receivable balance represents the amount that a firm owes its suppliers for
goods that it has received but for which it has not yet paid.
B)
Trade credit is, in essence, a loan from the selling firm to its customer.
C)
Providing financing at below–market rates is an indirect way to lower prices for only certain
customers.
D)
The Check Clearing for the 21st Century Act (Check 21), which became effective on October
28, 2004, eliminated the disbursement float due to the check–clearing process.
21)
Which one of the following is not one of the three steps involved in establishing a credit policy?
21)
A)
Establishing credit payment patterns
B)
Establishing a collection policy
C)
Establishing credit terms
D)
Establishing credit standards
22)
Which of the following statements is false?
22)
A)
Inventory helps minimize the risk that the firm will not be able to obtain an input it needs for
production.
B)
Because excessive inventory uses cash, efficient management of inventory increases firm
value.
C)
Firms may hold inventory because factors such as seasonality in demand mean that customer
purchases do not perfectly match the most efficient production cycle.
D)
If a firm holds too much inventory, stock–outs, the situation when a firm runs out of product,
may occur, leading to lost sales.
Use the table for the question(s) below.
Luther Industries had sales of $980 million and a cost of goods sold of $560 million in 2006. A simplified balance sheet for the
firm appears below:
Luther Industries
Balance Sheet
As of December 31, 2006
(millions of dollars)
Assets Liabilities and Equity
Cash 25 Accounts payable 60
Accounts receivable 85 Notes payable 425
Inventory 90 Accruals 45
Total current assets 200 Total current liabilities 530
Net plant, property, and equipment 6,100 Long term debt 2,725
Total assets 6,300 Total liabilities 3,255
Common equity 3,045
Total liabilities and equity 6,300
23)
Luther’s Accounts Payable days is closest to:
23)
A)
59 days
B)
39 days
C)
42 days
D)
32 days
24)
The term 2/10 net 30 means?
24)
A)
If the invoice is paid within 2 days a 10% discount can be taken, otherwise a 2% discount can
be taken if the invoice is paid in 30 days.
B)
If the invoice is paid within 10 days a 2% discount can be taken. If the invoice is paid between
11 and 29 days a 1% discount can be taken. After 30 days the full invoice is due.
C)
If the invoice is paid within 10 days a 2% discount can be taken, otherwise the full invoice is
due in 30 days.
D)
If the invoice is paid within 2 days a 10% discount can be taken, otherwise the full invoice is
due in 30 days.
25)
Which of the following statements is false?
25)
A)
The firm’s cash cycle is the average length of time between when a firm originally purchases
its inventory and when it receives the cash back from selling its product.
B)
The main components of net working capital are cash, inventory, receivables, and payables.
C)
Working capital includes the cash that is needed to run the firm on a day–to–day basis. It does
not include excess cash, which is cash that is not required to run the business and can be
invested at a market rate.
D)
If the firm pays cash for its inventory, the firm’s operating cycle is identical to the firm’s cash
cycle
26)
Which of the following statements is false?
26)
A)
The lower the discount percentage offered, the greater the cost of forgoing the discount and
using trade credit.
B)
A firm should always pay on the latest day allowed.
C)
A firm should choose to borrow using accounts payable only if trade credit is the cheapest
source of funding.
D)
A firm should strive to keep its money working for it as long as possible without developing a
bad relationship with its suppliers or engaging in unethical practices.
27)
Which of the following money market investments is short–term debt issued by a bank with a
minimum denomination of $100,000?
27)
A)
Commercial Paper
B)
Repurchase Agreement
C)
Certificates of Deposit (CD)
D)
Treasury Bill
E)
Banker’s Acceptance
28)
Which of the following statements is false?
28)
A)
If the accounts payable outstanding is 40 days and the terms are 2/10, net 30, the firm can
conclude that it generally pays late and may be risking supplier difficulties.
B)
Suppliers may react to a firm whose payments are always late by imposing terms of cash on
delivery (COD) or cash before delivery (CBD).
C)
Some firms ignore the payment due period and pay later, in a practice referred to as pushing
the accounts payable.
D)
Similar to the situation with its accounts receivable, a firm should monitor its accounts
payable to ensure that it is making its payments at an optimal time.
29)
Which of the following is not a direct costs associated with inventory?
29)
A)
Stock out costs
B)
Acquisition costs
C)
Carrying costs
D)
Order costs
30)
Which of the following money market investments is a short–term debt obligations of the U.S.
government?
30)
A)
Treasury Bill
B)
Banker’s Acceptance
C)
Commercial Paper
D)
Certificates of Deposit (CD)
E)
Repurchase Agreement
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
Use the table for the question(s) below.
Luther Industries had sales of $980 million and a cost of goods sold of $560 million in 2006. A simplified balance sheet for the
firm appears below:
Luther Industries
Balance Sheet
As of December 31, 2006
(millions of dollars)
Assets Liabilities and Equity
Cash 25 Accounts payable 60
Accounts receivable 85 Notes payable 425
Inventory 90 Accruals 45
Total current assets 200 Total current liabilities 530
Net plant, property, and equipment 6,100 Long term debt 2,725
Total assets 6,300 Total liabilities 3,255
Common equity 3,045
Total liabilities and equity 6,300
31)
Calculate the number of days in Luther’s Operating Cycle.
32)
Luther Industries bills its accounts on terms of 2/10, net 30. The firm’s accounts receivable include $250,000 that
has been outstanding for 10 or fewer days, $375,000 outstanding for 11 to 30 days, $70,000 outstanding for 31 to
40 days, $35,000 outstanding for 41 to 50 days, $20,000 outstanding for 51 to 60 days, and $8,000 outstanding for
more than 60 days. Prepare an aging schedule for Luther Industries.
33)
Describe “just–in–time” inventory management.
34)
Goldsboro Industries has an average accounts payable balance of $680,000. Its annual cost of goods sold is
$4,500,000, and it receives terms of 1/10, net 40 from its suppliers. Goldsboro chooses to forgo this discount. Is
Goldsboro managing its accounts payables well?
35)
KT Enterprises would like to construct and operate a new ice skating rink. In addition to the capital
expenditures on the rink, management estimates that the project will require an investment today of $220,000 in
net working capital. The firm will recover the investment in net working capital fifteen years from today, when
management anticipates closing the rink. The discount rate for this type of cash flow is 8% per year. Calculate
the present value of the cost of working capital for the ice skating rink.
36)
What is a compensating balance?
37)
Your firm purchases goods from its supplier on terms of 2/10, net 45. Calculate the effective annual cost to your
firm if it chooses not to take advantage of the trade discount offered.
38)
Kinston Industries has an average accounts payable balance of $220,000. Its annual cost of goods sold is
$5,475,000, and it receives terms of 2/10, net 30 from its suppliers. Kinston chooses to forgo this discount. Is
Kinston managing its accounts payables well?
Answer Key
Testname: C26
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Answer Key
Testname: C26
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