Chapter 16—Cash Conversion, Inventory, and Receivables Management
MULTIPLE CHOICE
1. The time from the receipt of raw materials to the collection of the cash of the sale of the finished good
is called a firm’s
a.
operating cycle
b.
cash conversion cycle
c.
inventory period
d.
accounts receivables period
2. What can a company do to shorten its cash conversion cycle?
a.
turn inventory over as quickly as possible
b.
collect accounts receivables as quickly as possible
c.
pay accounts as slowly as possible
d.
all of the above
3. The inventory control system technique that segregates inventory into three groups is called the
a.
economic order quantity model
b.
ABC system
c.
material requirements planning system
d.
just-in-time system
4. Which of the following is not one of the five Cs of credit?
a.
character
b.
capacity
c.
capital
d.
credit scoring
5. The terms of sale for customers are called the
a.
credit terms
b.
collection policy
c.
cash discounts
d.
none of the above
6. Bavarian Brew has an average age of inventory of 35 days, an average collection period of 27 days.
What is the company’s operating cycle?
a.
35 days
b.
27 days
c.
62 days
d.
8 days
7. Bavarian Brew has an average age of inventory of 35 days, an average collection period of 27 days,
and an average payment period of 16 days. What is the company’s cash conversion cycle?
a.
62 days
b.
46 days
c.
51 days
d.
43 days
8. Bavarian Brew has an average age of inventory of 35 days, an average collection period of 27 days and
a cash conversion cycle of 16 days. What is the company’s average payment period?
a.
46 days
b.
62 days
c.
16 days
d.
19 days
9. Bavarian Brew has an average payment period of 35 days, an average collection period of 27 days and
a cash conversion cycle of 16 days. What is the company’s average age of inventory?
a.
51 days
b.
43 days
c.
24 days
d.
16 days
10. Bavarian Brew has an average payment period of 35 days, an average age of inventory of 27 days and
a cash conversion cycle of 16 days. What is the company’s average collection period?
a.
24 days
b.
51 days
c.
16 days
d.
38 days
NARRBEGIN: Bavarian Credit Terms
Bavarian Brew Credit Terms
Bavarian Brew is producing and selling brewery equipment to microbreweries nationwide. Bavarian is
charging $15,000 per unit and all of their sales are on credit. Under the current credit policy Bavarian
Brew expects to sell 500 units. The variable costs are $6,000/unit and fixed costs are $1,500,000 per
year. The company is thinking about changing their credit terms from net 30 to 3/10 net 30. The effect
of this change would be a 5% increase in unit sales, but also an increase in bad debt expenses from 2%
to 4% of sales. The company expects 75% of its customers to take advantage of the cash discount.
Currently the company has an average collection period of 38 days, 30 days until the customers mail
their payments and another 8 days to process the payments once they arrive. Bavarian Brew’s
opportunity cost of funds invested in accounts receivable is 12%.
NARREND
11. What is Bavarian Brew’s marginal profit from increased sales?
a.
$500,000
b.
$225,000
c.
$305,000
d.
$425,000
12. What is Bavarian Brew’s total variable cost of annual sales under the old credit policy?
a.
$3,150,000
b.
$2,500,000
c.
$3,000,000
d.
$3,750,000
13. What is Bavarian Brew’s total variable cost of annual sales under the new credit policy?
a.
$3,150,000
b.
$3,000,000
c.
$2,500,000
d.
$3,750,000
14. What is Bavarian Brew’s accounts receivables turnover under the old credit policy?
a.
14.61
b.
10.43
c.
12.69
d.
9.61
15. What is Bavarian Brew’s accounts receivables turnover under the new credit policy?
a.
15.87
b.
14.6
c.
12.69
d.
9.51
16. What is Bavarian Brew’s average investment in accounts receivables under the old credit policy?
a.
$287,631
b.
$236,407
c.
$205,479
d.
$312,175
17. What is Bavarian Brew’s average investment in accounts receivables under the new credit policy?
a.
$198,488
b.
$302,013
c.
$215,753
d.
$236,407
18. What is Bavarian Brew’s cost of the marginal investment in accounts receivables?
a.
$96,534
b.
$9,653
c.
-$13,642
d.
$11,584
19. What is Bavarian Brew’s bad debt expense under the old credit policy?
a.
$125,000
b.
$100,000
c.
$150,000
d.
$175,000
20. What is Bavarian Brew’s bad debt expense under the new credit policy?
a.
$150,000
b.
$315,000
c.
$157,500
d.
$300,000
21. What is Bavarian Brew’s cost of marginal bad debts?
a.
$150,000
b.
$165,000
c.
$142,500
d.
$175,000
22. What is Bavarian Brew’s new average collection period if they introduce the new credit terms?
a.
23 days
b.
33 days
c.
25 days
d.
30 days
23. What is Bavarian Brew’s cost savings from the reduced investment in accounts receivables if they
implement the new credit terms?
a.
$13,660
b.
$113,836
c.
$19,493
d.
$98,521
24. What is Bavarian Brew’s net profit (loss) from the proposed change in credit terms?
a.
$61,472
b.
$177,188
c.
$13,660
d.
$225,000
25. Miller’s Toys has an average inventory of 2,000 toy trucks. The carrying cost per unit per year is 10¢.
Miller places an order for 3,500 toy trucks on the first of each month and the order cost is $20. What is
the economic order quantity?
a.
894.43
b.
645.28
c.
357.21
d.
4,099
26. The length of time from the receipt of inventory until it is sold is
a.
the average age of inventory
b.
the cash conversion cycle
c.
the average collection period
d.
the operating cycle
27. The operating cycle is the length of time from the receipt of inventory until the
a.
beginning of the cash conversion cycle.
b.
end of the cash conversion cycle.
c.
payment of accounts payable.
d.
collection of cash from sales.
28. The time between the points at which a firm pays for raw materials and at which it receives payment
for finished goods is
a.
the average age of inventory
b.
the cash conversion cycle
c.
the average collection period
d.
the operating cycle
29. If a firm has been experiencing increased sales while its inventory levels have decreased, then
a.
its inventory turnover is decreasing, and its average age of inventory is increasing.
b.
its inventory turnover is decreasing and its average age of inventory is decreasing.
c.
its inventory turnover is increasing and its average age of inventory is increasing.
d.
its inventory turnover is increasing and its average age of inventory is decreasing.
30. Which of the following, considered independently of the others, would increase the cash conversion
cycle?
a.
an increase in inventory turnover
b.
an increase in accounts receivable turnover
c.
an increase in accounts payable turnover
d.
a decrease in average age of inventory
31. A negative cash conversion cycle basically means
a.
the firm is illiquid, with serious cash flow problems
b.
the firm collects on sales more slowly than it pays its payables
c.
the firm collects on sales more quickly than it pays its payables.
d.
the firm’s current cash balance is negative.
32. A firm that moves from traditional inventory stocking methods to a just-in-time (JIT) system should
expect to see
a.
its inventory turnover decrease and its average age of inventory increase.
b.
its inventory turnover decrease and its average age of inventory decrease.
c.
its inventory turnover increase and its average age of inventory increase.
d.
its inventory turnover increase and its average age of inventory decrease.
33. A firm that moves from traditional inventory stocking methods to a just-in-time (JIT) system should
expect to see
a.
reduced inventory levels.
b.
funds released for alternative uses.
c.
potentials for production halts.
d.
all of the above.
34. If a firm is contemplating a relaxation of its credit standards, which of the following might be expected
to result?
a.
decreased unit sales
b.
increased contribution margin
c.
increased investment in accounts receivable
d.
decreased bad debt expense
35. Smart Products is considering changing its credit terms from net 30 to 2/10 net 30. The firm’s financial
managers need to evaluate
a.
the increased investment in accounts receivable due to increased sales.
b.
the reduced level of bad debt expense as customers pay sooner.
c.
the increased contribution margin as customers pay sooner.
d.
all of the above.
NARRBEGIN: Smart Products EOQ
Smart Products
Assume a 365 day year.
Smart Products buys 300,000 units of a crucial input per year from a supplier that fulfills its orders
within two days of receiving them. Smart Products submits its orders directly to the supplier through a
web interface, so its lead time is the supplier’s two day turnaround time. Each order costs Smart
Products about $500 to place, while carrying costs are about $60 per unit per year. The company seeks
to maintain a five day usage level in a safety stock.
NARREND
36. What is Smart Product’s economic order quantity (EOQ) for this input?
a.
2236 units
b.
707 units
c.
822 units
d.
1581 units
37. What is Smart Products’s carrying cost at the EOQ?
a.
$49,320
b.
$313,655
c.
$42,420
d.
$134,160
38. At what inventory level of this input should Smart EOQ reorder?
a.
2236 units
b.
5754 units
c.
4110 units
d.
1644 units
39. Which would improve Smart Product’s total cost at the EOQ more, a 15% reduction in carrying costs
or a 10% reduction in order costs?
a.
decreasing order costs decreases total cost by $10,062
b.
decreasing order costs decreases total costs by $6,700
c.
decreasing carrying costs decreases total costs by $10,062
d.
decreasing carrying costs decreases total costs by $6,700
40. Refer to Smart Products. If management determines that a four day safety stock is appropriate for this
input, what is the new reorder point?
a.
822 units
b.
3288 units
c.
4932 units
d.
4110 units
NARRBEGIN: Sawtooth EOQ
Sawtooth Industries
Sawtooth Industries uses an economic order quantity (EOQ) model to manage its inventory
investment. The company uses about 25,000 molded plastic assemblies each year. Order costs for
these are $150 per order, while carrying costs are about $250 per unit per year. Assume a 365 day
year.
NARREND
41. What is Sawtooth Industries’ economic order quantity (EOQ) for these parts?
a.
122 units
b.
289 units
c.
224 units
d.
173 units
42. Using the EOQ, how many orders will Sawtooth place each year?
a.
about 68
b.
about 145
c.
about 86
d.
about 112
43. What is Sawtooth’s total cost at the EOQ?
a.
$43,375
b.
$21,750
c.
$49,025
d.
$46,000
NARRBEGIN: Big Thompson credit terms
Big Thompson Industries (BTI)
Big Thompson Industries (BTI) currently produces and sells 50,000 units of a motor relay used in
high-end electronics. All sales are on credit, for a price of $750 per unit to all customers. These motor
relays incur $525 in variable costs and $3,000,000 in fixed costs per year. With current credit
standards, BTI’s average collection period is 30 days. Managers are considering a relaxation in
standards, and forecast a 6 percent increase in sales, along with an increase in the average collection
period to 45 days. Additionally, bad debt expense is expected to increase from 1.5 percent to 2.5
percent of sales. Investments of this type are expected to earn a 14% return. Assume a 365 day year
NARREND
44. With the current standards, what is BTI’s average investment in receivables?
a.
$1,080,247
b.
$2,157,534
c.
$2,746,854
d.
$3,240,741
45. What is BTI’s contribution margin?
a.
$750 per unit
b.
$525 per unit
c.
$225 per unit
d.
$1, 275 per unit
46. Refer to Big Thompson. What is the forecasted increase in profits from increased sales if credit
standards are changed?
a.
$2,250,000
b.
$450,000
c.
$1,575,000
d.
$675,000
47. What will be BTI’s average investment in accounts receivable under the new standards?
a.
$3,430,479
b.
$3,240,741
c.
$2,280,738
d.
$2,746,854
48. Refer to Big Thompson. What is the cost of the marginal investment in accounts receivable?
a.
$480,267
b.
$302,055
c.
$274,185
d.
$178,212
49. Refer to Big Thompson. What is the marginal cost of bad debt expense if the new standards are
adopted?
a.
$993,750
b.
$937,500
c.
$562,500
d.
$431,250
50. Should BTI relax its credit standards?
a.
Yes, the forecast is for a $496,788 net gain.
b.
Yes, the forecast is for a $65,538 net gain.
c.
No, the forecast predicts a $243,750 net loss.
d.
No, the forecast predicts a $609,462 net loss.
51. Between 1981 and 2002, the median level of current assets as a portion of total assets for large firms
has
a.
decreased.
b.
remained the same.
c.
increased.
d.
not been studied.
52. A firms’ operating cycle measures
a.
the time that elapses from the firm’s receipt of raw materials until it pays for those
materials.
b.
the time that elapses from the payment of raw materials until the firm is paid for its
finished product.
c.
the time that elapses from the firm’s receipt of raw materials to begin production to its
collection of cash from the sale of the finished product.
d.
none of the above.
53. The operating cycle is composed of
a.
the average age of a firm’s inventory.
b.
the average collection period.
c.
both a and b.
d.
none of the above.
NARRBEGIN: Polyana
Polyana Shoe Store
The Polyana Shoe Store had sales last year of $50,000,000 based upon a cost of goods sold of
$40,000,000. Polyana also has inventory, accounts receivable, and accounts payable of $5,000,000,
$7,000,000, and $9,000,000, respectively.
NARREND
54. What is Polyana’s average age of inventory?
a.
.125 days
b.
8.000 days
c.
36.500 days
d.
45.625 days
55. What is Polyana’s average collection period?
a.
.140 days
b.
7.140 days
c.
51.100 days
d.
63.875 days
56. What is Polyana’s average payment period?
a.
.1 days
b.
10.0 days
c.
29.2 days
d.
82.1 days
57. What is Polyana’s cash conversion cycle period?
a.
.365 days
b.
2.740 days
c.
14.600 days
d.
133.225 days
58. If Polyana were to increase its gross profit margin during the previous year, without changing its
accounts receivable level, then what would have happened to Polyana’s cash conversion cycle?
a.
decrease
b.
remain the same
c.
increase
d.
it is impossible to tell without more information
59. A firm is trying to determine the optimum level for an operating asset which will have an effect on
financing costs as well as lost sales cost. The optimum level is that which
a.
minimizes the financing costs.
b.
minimizes the lost sales costs.
c.
minimizes the total amount of financing and lost sales costs.
d.
it is impossible to determine without knowing more.
60. If we can ignore marketing and production costs, the firm can increase inventory management
efficiency by
a.
increasing inventory levels.
b.
decreasing inventory levels.
c.
increasing a firm’s investment in inventory.
d.
none of the above.