CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
KEYWORDS:
Bloom’s: Comprehension
64. If a firm sells on terms of 2/10 net 30 days, and its DSO is 28 days, then the fact that the 28-day DSO is less than the
30-day credit period tells us that the credit department is functioning efficiently and there are no past-due accounts.
a.
True
b.
False
ANSWER:
False
POINTS:
DIFFICULTY:
TOPICS:
KEYWORDS:
Bloom’s: Comprehension
65. If a firm switched from taking trade credit discounts to paying on the net due date, this might cost the firm some
money, but such a policy would probably have only a negligible effect on the income statement and no effect whatever on
the balance sheet.
a.
True
b.
False
ANSWER:
False
POINTS:
DIFFICULTY:
KEYWORDS:
Bloom’s: Comprehension
66. If a profitable firm finds that it simply must “stretch” its accounts payable, then this suggests that it is
undercapitalized, i.e., that it needs more working capital to support its operations.
a.
True
b.
False
ANSWER:
True
POINTS:
DIFFICULTY:
TOPICS:
KEYWORDS:
Bloom’s: Comprehension
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
67. If one of your firm’s customers is “stretching” its accounts payable, this may be a nuisance but it does not represent a
real financial cost to your firm as long as the customer periodically pays off its entire balance.
a.
True
b.
False
False
68. If the yield curve is upward sloping, then short-term debt will be cheaper than long-term debt. Thus, if a firm’s CFO
expects the yield curve to continue to have an upward slope, this would tend to cause the current ratio to be relatively low,
other things held constant.
a.
True
b.
False
True
69. The risk to the firm of borrowing using short-term credit is usually greater than if it used long-term debt. Added risk
stems from (1) the greater variability of interest costs on short-term than long-term debt and (2) the fact that even if its
long-term prospects are good, the firm’s lenders may not be willing to renew short-term loans if the firm is temporarily
unable to repay those loans.
a.
True
b.
False
True
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
70. Long-term loan agreements always contain provisions, or covenants, that constrain the firm’s future actions. Short-
term credit agreements are just as restrictive in order to protect the interest of the lender.
a.
True
b.
False
False
Difficulty: Moderate
INTE.GENE.16.139 – LO: 21–11
United States – BUSPROG: Reflective Thinking
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Short-term financing
71. A firm constructing a new manufacturing plant and financing it with short-term loans, which are scheduled to be
converted to first mortgage bonds when the plant is completed, would want to separate the construction loan from its
current liabilities associated with working capital when calculating net working capital.
a.
True
b.
False
True
Difficulty: Moderate
INTE.GENE.16.139 – LO: 21–11
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Short-term financing
72. A revolving credit agreement is a formal line of credit. The firm must generally pay a fee on the unused balance of the
committed funds to compensate the bank for the commitment to extend those funds.
a.
True
b.
False
True
Difficulty: Moderate
INTE.GENE.16.140 – LO: 21–12
United States – BUSPROG: Reflective Thinking
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Revolving credit
73. Which of the following will cause an increase in net working capital, other things held constant?
a.
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
b.
c.
d.
e.
Difficulty: Easy
INTE.GENE.16.141 – LO: 21-0
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Working capital
TYPE: Multiple Choice: Conceptual
74. Firms generally choose to finance temporary current operating assets with short-term debt because
a.
short-term interest rates have traditionally been more stable than long-term interest rates.
b.
a firm that borrows heavily on a long-term basis is more apt to be unable to repay the debt than a firm that
borrows short term.
c.
the yield curve is normally downward sloping.
d.
short-term debt has a higher cost than equity capital.
e.
matching the maturities of assets and liabilities reduces risk under some circumstances, and also because short-
term debt is often less expensive than long-term capital.
Difficulty: Easy
INTE.GENE.16.131 – LO: 21-2
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Current asset financing
TYPE: Multiple Choice: Conceptual
75. Which of the following actions should Reece Windows take if it wants to reduce its cash conversion cycle?
a.
Take steps to reduce the DSO.
b.
Start paying its bills sooner, which would reduce the average accounts payable but not affect sales.
c.
Sell common stock to retire long-term bonds.
d.
Sell an issue of long-term bonds and use the proceeds to buy back some of its common stock.
e.
Increase average inventory without increasing sales.
Difficulty: Easy
INTE.GENE.16.132 – LO: 21-3
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
76. A lockbox plan is
a.
used to identify inventory safety stocks.
b.
used to slow down the collection of checks our firm writes.
c.
used to speed up the collection of checks received.
d.
used primarily by firms where currency is used frequently in transactions, such as fast food restaurants, and
less frequently by firms that receive payments as checks.
e.
used to protect cash, i.e., to keep it from being stolen.
Difficulty: Easy
INTE.GENE.16.135 – LO: 21-6
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
TYPE: Multiple Choice: Conceptual
77. A lockbox plan is most beneficial to firms that
a.
have widely dispersed manufacturing facilities.
b.
have a large marketable securities portfolio and cash to protect.
c.
receive payments in the form of currency, such as fast food restaurants, rather than in the form of checks.
d.
have customers who operate in many different parts of the country.
e.
have suppliers who operate in many different parts of the country.
Difficulty: Easy
INTE.GENE.16.135 – LO: 21-6
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
TYPE: Multiple Choice: Conceptual
78. Which of the following is NOT commonly regarded as being a credit policy variable?
a.
Collection policy.
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Cash conversion cycle
TYPE: Multiple Choice: Conceptual
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
b.
Credit standards.
c.
Cash discounts.
d.
Payments deferral period.
e.
Credit period.
Difficulty: Easy
INTE.GENE.16.137 – LO: 21-8
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Credit policy
TYPE: Multiple Choice: Conceptual
79. Summary balance sheet data for Greener Gardens Co. is shown below (in thousands of dollars). The company is in a
highly seasonal business, and the data show its assets and liabilities at peak and off-peak seasons:
Peak
Off-Peak
Cash
$ 50
$ 30
Marketable securities
0
20
Accounts receivable
40
20
Inventories
100
50
Net fixed assets
500
500
Total assets
$690
$620
Payables and accruals
$ 30
$ 10
Short-term bank debt
50
0
Long-term debt
300
300
Common equity
310
310
Total claims
$690
$620
From this data we may conclude that
a.
Greener Gardens’ current asset financing policy is relatively aggressive; that is, the company finances some of
its permanent assets with short-term discretionary debt.
b.
Greener Gardens follows a relatively conservative approach to current asset financing; that is, some of its
short-term needs are met by permanent capital.
c.
Without income statement data, we cannot determine the aggressiveness or conservatism of the company’s
current asset financing policy.
d.
Without cash flow data, we cannot determine the aggressiveness or conservatism of the company’s current
asset financing policy.
e.
Greener Gardens’ current asset financing policy calls for exactly matching asset and liability maturities.
Difficulty: Moderate
INTE.GENE.16.131 – LO: 21-2
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
80. Which of the following statements is CORRECT?
a.
Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-
term debt is considered to be an aggressive strategy because of the inherent risks associated with using short-
term financing.
b.
If a company follows a policy of “matching maturities,” this means that it matches its use of common stock
with its use of long-term debt as opposed to short-term debt.
c.
Net working capital is defined as current assets minus the sum of payables and accruals, and any decrease in
the current ratio automatically indicates that net working capital has decreased.
d.
If a company follows a policy of “matching maturities,” this means that it matches its use of short-term debt
with its use of long-term debt.
e.
Net working capital is defined as current assets minus the sum of payables and accruals, and any increase in
the current ratio automatically indicates that net working capital has increased.
Difficulty: Moderate
INTE.GENE.16.131 – LO: 21-2
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Current asset financing
TYPE: Multiple Choice: Conceptual
81. Other things held constant, which of the following would tend to reduce the cash conversion cycle?
a.
Place larger orders for raw materials to take advantage of price breaks.
b.
Take all discounts that are offered.
c.
Continue to take all discounts that are offered and pay on the net date.
d.
Offer longer payment terms to customers.
e.
Carry a constant amount of receivables as sales decline.
Difficulty: Moderate
INTE.GENE.16.132 – LO: 21-3
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Cash conversion cycle
TYPE: Multiple Choice: Conceptual
United States – OH – Default City – TBA
Current asset financing
TYPE: Multiple Choice: Conceptual
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
82. Which of the following actions would be likely to shorten the cash conversion cycle?
a.
Change the credit terms offered to customers from 3/10 net 30 to 1/10 net 50.
b.
Begin to take discounts on inventory purchases; we buy on terms of 2/10 net 30.
c.
Adopt a new manufacturing process that saves some labor costs but slows down the conversion of raw
materials to finished goods from 10 days to 20 days.
d.
Change the credit terms offered to customers from 2/10 net 30 to 1/10 net 60.
e.
Adopt a new manufacturing process that speeds up the conversion of raw materials to finished goods from 20
days to 10 days.
e
Difficulty: Moderate
INTE.GENE.16.132 – LO: 21-3
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Cash conversion cycle
TYPE: Multiple Choice: Conceptual
83. Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?
a.
Depreciation.
b.
Cumulative cash.
c.
Repurchases of common stock.
d.
Payment for plant construction.
e.
Payments lags.
a
Difficulty: Moderate
INTE.GENE.16.133 – LO: 21-4
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Cash budget
TYPE: Multiple Choice: Conceptual
84. Which of the following statements concerning the cash budget is CORRECT?
a.
Cash budgets do not include financial items such as interest and dividend payments.
b.
Cash budgets do not include cash inflows from long-term sources such as the issuance of bonds.
c.
Changes that affect the DSO do not affect the cash budget.
d.
Capital budgeting decisions have no effect on the cash budget until projects go into operation and start
producing revenues.
e.
Depreciation expense is not explicitly included, but depreciation’s effects are reflected in the estimated tax
payments.
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
Difficulty: Moderate
INTE.GENE.16.133 – LO: 21-4
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Cash budget
TYPE: Multiple Choice: Conceptual
85. Which of the following items should a company report directly in its monthly cash budget?
a.
Cash proceeds from selling one of its divisions.
b.
Accrued interest on zero coupon bonds that it issued.
c.
New shares issued in a stock split.
d.
New shares issued in a stock dividend.
e.
Its monthly depreciation expense.
Difficulty: Moderate
INTE.GENE.16.133 – LO: 21-4
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Cash budget
TYPE: Multiple Choice: Conceptual
86. Which of the following statements is CORRECT?
a.
The cash budget and the capital budget are developed separately, and although they are both important to the
firm, one does not affect the other.
b.
Since depreciation is a non–cash charge, it neither appears on nor has any effect on the cash budget.
c.
The target cash balance should be set such that it need not be adjusted for seasonal patterns and unanticipated
fluctuations in receipts, although it should be changed to reflect long-term changes in the firm’s operations.
d.
The typical cash budget reflects interest paid on loans as well as income from the investment of surplus cash.
These numbers, as well as other items on the cash budget, are expected values; hence, actual results might
vary from the budgeted amounts.
e.
Shorter-term cash budgets, in general, are used primarily for planning purposes, while longer-term budgets are
used for actual cash control.
Difficulty: Moderate
INTE.GENE.16.133 – LO: 21-4
United States – BUSPROG: Analytic
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
87. Which of the following statements is most consistent with efficient inventory management? The firm has a
a.
low incidence of production schedule disruptions.
b.
below average total assets turnover ratio.
c.
relatively high current ratio.
d.
relatively low DSO.
e.
below average inventory turnover ratio.
Difficulty: Moderate
INTE.GENE.16.136 – LO: 21-7
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Inventory management
TYPE: Multiple Choice: Conceptual
88. Which of the following statements is CORRECT?
a.
In managing a firm’s accounts receivable, it is possible to increase credit sales per day yet still keep accounts
receivable fairly steady, provided the firm can shorten the length of its collection period (its DSO) sufficiently.
b.
Because of the costs of granting credit, it is not possible for credit sales to be more profitable than cash sales.
c.
Since receivables and payables both result from sales transactions, a firm with a high receivables-to-sales ratio
must also have a high payables-to-sales ratio.
d.
Other things held constant, if a firm can shorten its DSO, this will lead to a higher current ratio.
e.
A firm that makes 90% of its sales on credit and 10% for cash is growing at a constant rate of 10% annually.
Such a firm will be able to keep its accounts receivable at the current level, since the 10% cash sales can be
used to finance the 10% growth rate.
Difficulty: Moderate
INTE.GENE.16.137 – LO: 21-8
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Receivables management
TYPE: Multiple Choice: Conceptual
89. Which of the following statements is CORRECT?
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Cash budget
TYPE: Multiple Choice: Conceptual
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
a.
If a firm that sells on terms of net 30 changes its policy to 2/10 net 30, and if no change in sales volume
occurs, then the firm’s DSO will probably increase.
b.
If a firm sells on terms of 2/10 net 30, and its DSO is 30 days, then the firm probably has some past-due
accounts.
c.
If a firm sells on terms of net 60, and if its sales are highly seasonal, with a sharp peak in December, then its
DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be lower
in January than in July.
d.
If a firm changed the credit terms offered to its customers from 2/10 net 30 to 2/10 net 60, then its sales should
increase, and this should lead to an increase in sales per day, and that should lead to a decrease in the DSO.
e.
Other things held constant, the higher a firm’s days sales outstanding (DSO), the better its credit department.
Difficulty: Moderate
INTE.GENE.16.137 – LO: 21-8
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Days sales outstanding (DSO)
TYPE: Multiple Choice: Conceptual
90. Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable
securities?
a.
The firm is going from its peak sales season to its slack season, so its receivables and inventories will
experience a seasonal decline.
b.
The firm is going from its slack season to its peak sales season, so its receivables and inventories will
experience seasonal increases.
c.
The firm has just sold long-term securities and has not yet invested the proceeds in operating assets.
d.
The firm just won a product liability suit one of its customers had brought against it.
e.
The firm must make a known future payment, such as paying for a new plant that is under construction.
Difficulty: Moderate
INTE.GENE.16.131 – LO: 21-2
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
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Marketable securities
TYPE: Multiple Choice: Conceptual
91. Which of the following statement completions is CORRECT? If the yield curve is upward sloping, then the
marketable securities held in a firm’s portfolio, assumed to be held for emergencies, should
a.
consist mainly of short-term securities because they pay higher rates.
b.
consist mainly of U.S. Treasury securities to minimize interest rate risk.
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
c.
consist mainly of short-term securities to minimize interest rate risk.
d.
be balanced between long- and short-term securities to minimize the adverse effects of either an upward or a
downward trend in interest rates.
e.
consist mainly of long-term securities because they pay higher rates.
Difficulty: Moderate
INTE.GENE.16.142 – LO: 21–10
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Marketable securities
TYPE: Multiple Choice: Conceptual
92. Which of the following statements is CORRECT?
a.
Commercial paper is a form of short-term financing that is primarily used by large, strong, financially stable
companies.
b.
Short-term debt is favored by firms because, while it is generally more expensive than long-term debt, it
exposes the borrowing firm to less risk than long-term debt.
c.
Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate.
d.
Commercial paper is typically offered at a long-term maturity of at least five years.
e.
Trade credit is provided only to relatively large, strong firms.
Difficulty: Moderate
INTE.GENE.16.143 – LO: 21–13
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Current asset financing
TYPE: Multiple Choice: Conceptual
93. Which of the following statements is NOT CORRECT?
a.
Accruals are “free” in the sense that no explicit interest is paid on these funds.
b.
A conservative approach to working capital management will result in most, if not all, permanent current
operating assets being financed with long-term capital.
c.
The risk to a firm that borrows with short-term credit is usually greater than if it borrowed using long-term
debt. This added risk stems from the greater variability of interest costs on short-term debt and possible
difficulties with rolling over short-term debt.
d.
Bank loans generally carry a higher interest rate than commercial paper.
e.
Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate.
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
94. Which of the following statements is CORRECT?
a.
Conservative firms generally use no short-term debt and thus have zero current liabilities.
b.
A short-term loan can usually be obtained more quickly than a long-term loan, but the cost of short-term debt
is normally higher than that of long-term debt.
c.
If a firm that can borrow from its bank at a 6% interest rate buys materials on terms of 2/10 net 30, and if it
must pay by Day 30 or else be cut off, then we would expect to see zero accounts payable on its balance sheet.
d.
If one of your firm’s customers is “stretching” its accounts payable, this may be a nuisance but it will not have
an adverse financial impact on your firm if the customer periodically pays off its entire balance.
e.
Under normal conditions, a firm’s expected ROE would probably be higher if it financed with short-term
rather than with long-term debt, but using short-term debt would probably increase the firm’s risk.
Difficulty: Moderate
INTE.GENE.16.140 – LO: 21–12
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Short-term financing
TYPE: Multiple Choice: Conceptual
95. Which of the following statements is NOT CORRECT?
a.
Credit policy has an impact on working capital because it influences both sales and the time before receivables
are collected.
b.
The cash budget is useful to help estimate future financing needs, especially the need for short-term working
capital loans.
c.
If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit
policy from 2/10 net 30 to net 60.
d.
Managing working capital is important because it influences financing decisions and the firm’s profitability.
e.
A company may hold a relatively large amount of cash and marketable securities if it is uncertain about its
volume of sales, profits, and cash flows during the coming year.
Difficulty: Moderate
INTE.GENE.16.142 – LO: 21–10
United States – BUSPROG: Analytic
Difficulty: Moderate
INTE.GENE.16.143 – LO: 21–13
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Current asset financing
TYPE: Multiple Choice: Conceptual
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
96. Which of the following statements is CORRECT?
a.
If cash inflows from collections occur in equal daily amounts but most payments must be made on the 10th of
each month, then a regular monthly cash budget will be misleading. The problem can be corrected by using a
daily cash budget.
b.
Sound working capital policy is designed to maximize the time between cash expenditures on materials and
the collection of cash on sales.
c.
If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit
policy from 2/10 net 30 to net 60.
d.
If a firm sells on terms of net 90, and if its sales are highly seasonal, with 80% of its sales in September, then
its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be
lower in October than in August.
e.
Depreciation is included in the estimate of cash flows (Cash flow = Net income = Depreciation); hence
depreciation is set forth on a separate line in the cash budget.
Difficulty: Moderate
INTE.GENE.16.137 – LO: 21-8
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Working capital concepts
TYPE: Multiple Choice: Conceptual
97. Which of the following statements is CORRECT?
a.
A conservative financing policy is one where the firm finances part of its fixed assets with short-term capital
and all of its net working capital with short-term funds.
b.
If a company receives trade credit under terms of 2/10 net 30, this implies that the company has 10 days of
free trade credit.
c.
One cannot tell if a firm has a conservative, aggressive, or moderate current asset financing policy without an
examination of its cash budget.
d.
If a firm has a relatively aggressive current asset financing policy vis-á-vis other firms in its industry, then its
current ratio will probably be relatively high.
e.
Accruals are an expensive but commonly used way to finance working capital.
Difficulty: Moderate
INTE.GENE.16.138 – LO: 21-9
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Working capital policy
TYPE: Multiple Choice: Conceptual
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
98. Albrecht Inc. is a no-growth firm whose sales fluctuate seasonally, causing total assets to vary from $320,000 to
$410,000, but fixed assets remain constant at $260,000. If the firm follows a maturity matching (or moderate) working
capital financing policy, what is the most likely total of long-term debt plus equity capital?
a.
$260,642
b.
$274,360
c.
$288,800
d.
$304,000
e.
$320,000
e
Difficulty: Easy
INTE.GENE.16.131 – LO: 21-2
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Maturity matching
TYPE: Multiple Choice: Problem
99. Brothers Breads has the following data. What is the firm’s cash conversion cycle?
Inventory conversion period =
50 days
Average collection period =
17 days
Payables deferral period =
25 days
a.
31 days
b.
34 days
c.
38 days
d.
42 days
e.
46 days
Difficulty: Easy
United States – OH – Default City – TBA
Working capital concepts
TYPE: Multiple Choice: Conceptual
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
100. Fireside Inc. has the following data. What is the firm’s cash conversion cycle?
Inventory conversion period =
38 days
Average collection period =
19 days
Payables deferral period =
20 days
a.
33 days
b.
37 days
c.
41 days
d.
45 days
e.
49 days
Difficulty: Easy
INTE.GENE.16.132 – LO: 21-3
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Cash conversion cycle
TYPE: Multiple Choice: Problem
101. Whaley & Whaley has the following data. What is the firm’s cash conversion cycle?
Inventory conversion period =
41 days
Average collection period =
31 days
Payables deferral period =
38 days
a.
31 days
b.
34 days
c.
37 days
d.
41 days
e.
45 days
INTE.GENE.16.132 – LO: 21-3
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Cash conversion cycle
TYPE: Multiple Choice: Problem
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
102. Mark’s Manufacturing’s average age of accounts receivable is 45 days, the average age of accounts payable is 40
days, and the average age of inventory is 69 days. Assuming a 365-day year, what is the length of its cash conversion
cycle?
a.
63 days
b.
67 days
c.
70 days
d.
74 days
e.
78 days
103. Baltimore Baking is preparing its cash budget and expects to have sales of $30,000 in January, $35,000 in February,
and $35,000 in March. If 20% of sales are for cash, 40% are credit sales paid in the month after the sale, and another 40%
are credit sales paid 2 months after the sale, what are the expected cash receipts for March?
a.
$24,057
b.
$26,730
c.
$29,700
d.
$33,000
e.
$36,300
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
104. Krackle Korn Inc. had credit sales of $3,500,000 last year and its days sales outstanding was DSO = 35 days. What
was its average receivables balance, based on a 365-day year?
a.
$335,616
b.
$352,397
c.
$370,017
d.
$388,518
e.
$407,944
a
Difficulty: Easy
INTE.GENE.16.137 – LO: 21-8
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Accounts receivable balance
TYPE: Multiple Choice: Problem
105. Buchholz Corporation follows a moderate current asset investment policy, but it is now considering a change,
perhaps to a restricted or maybe to a relaxed policy. The firm’s annual sales are $400,000; its fixed assets are $100,000; its
target capital structure calls for 50% debt and 50% equity; its EBIT is $35,000; the interest rate on its debt is 10%; and its
Difficulty: Easy
INTE.GENE.16.133 – LO: 21-4
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Cash budget
TYPE: Multiple Choice: Problem
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
tax rate is 40%. With a restricted policy, current assets will be 15% of sales, while under a relaxed policy they will be
25% of sales. What is the difference in the projected ROEs between the restricted and relaxed policies?
a.
4.25%
b.
4.73%
c.
5.25%
d.
5.78%
e.
6.35%
c
Difficulty: Moderate
INTE.GENE.16.130 – LO: 21-1
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
TYPE: Multiple Choice: Problem
106. Data on Nathan Enterprises for the most recent year are shown below, along with the days sales outstanding of the
firms against which it benchmarks. The firm’s new CFO believes that the company could reduce its receivables enough to
reduce its DSO to the benchmarks’ average. If this were done, by how much would receivables decline? Use a 365-day
year.
Sales
$110,000
Accounts receivable
$16,000
Days sales outstanding (DSO)
53.09
Benchmark days sales outstanding (DSO)
20.00
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
a.
$8,078
b.
$8,975
c.
$9,973
d.
$10,970
e.
$12,067
c
Difficulty: Moderate
INTE.GENE.16.132 – LO: 21-3
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Days sales outstanding (DSO)
TYPE: Multiple Choice: Problem
107. Thornton Universal Sales’ cost of goods sold (COGS) average $2,000,000 per month, and it keeps inventory equal to
50% of its monthly COGS on hand at all times. Using a 365-day year, what is its inventory conversion period?
a.
11.7 days
b.
13.0 days
c.
14.4 days
d.
15.2 days
e.
16.7 days
Difficulty: Moderate
INTE.GENE.16.132 – LO: 21-3