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Ch 16 Supply Chains and Working Capital Management
59. For a zero-growth firm, it is possible to increase the percentage of sales that are made on credit and still keep accounts
receivable at their current level, provided the firm can shorten the length of its collection period sufficiently.
a.
True
b.
False
60. A firm's collection policy, i.e., the procedures it follows to collect accounts receivable, plays an important role in
keeping its average collection period short, although too strict a collection policy can reduce profits due to lost sales.
a.
True
b.
False
Ch 16 Supply Chains and Working Capital Management
61. Because money has time value, a cash sale is always more profitable than a credit sale.
a.
True
b.
False
62. 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
Ch 16 Supply Chains and Working Capital Management
63. Which of the following is NOT commonly regarded as being a credit policy variable?
a.
Collection policy.
b.
Credit standards.
c.
Cash discounts.
d.
Payments deferral period.
e.
Credit period.
64. 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
Ch 16 Supply Chains and Working Capital Management
used to finance the 10% growth rate.
65. Which of the following statements is CORRECT?
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.
Ch 16 Supply Chains and Working Capital Management
66. 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.
67. 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
Ch 16 Supply Chains and Working Capital Management
e.
$407,944
68. Famous Farm's payables deferral period (PDP) is 50 days (on a 365-day basis), accounts payable are $100 million, and
its balance sheet shows inventory of $125 million. What is the inventory turnover ratio?
a.
4.73
b.
5.26
c.
5.84
d.
6.42
e.
7.07
Ch 16 Supply Chains and Working Capital Management
69. If a firm busy on terms of 2/10 net 30, it should pay as early as possible during the discount period.
a.
True
b.
False
70. Trade credit can be separated into two components: free trade credit, which is credit received after the discount period
ends, and costly trade credit, which is the cost of discounts not taken.
a.
True
b.
False
Ch 16 Supply Chains and Working Capital Management
71. As a rule, managers should try to always use the free component of trade credit but should use the costly component
only if the cost of this credit is lower than the cost of credit from other sources.
a.
True
b.
False
72. If a firm's suppliers stop offering cash discounts, then its use of trade credit is more likely to increase than to decrease,
other things held constant.
a.
True
b.
False
Ch 16 Supply Chains and Working Capital Management
73. When deciding whether or not to take a cash discount, the cost of borrowing from a bank or other source should be
compared to the cost of trade credit to determine if the cash discount should be taken.
a.
True
b.
False
74. The calculated cost of trade credit can be reduced by paying late.
a.
True
b.
False
Ch 16 Supply Chains and Working Capital Management
75. The calculated cost of trade credit for a firm that buys on terms of 2/10 net 30 is lower (other things held constant) if
the firm plans to pay in 40 days than in 30 days.
a.
True
b.
False
76. One of the effects of ceasing to take trade credit discounts is that the firm's accounts payable will rise, other things
held constant.
a.
True
b.
False
Ch 16 Supply Chains and Working Capital Management
77. "Stretching" accounts payable is a widely accepted, entirely ethical, and costless financing technique.
a.
True
b.
False
78. Accruals are "free" capital in the sense that no explicit interest must normally be paid on accrued liabilities.
a.
True
b.
False
Ch 16 Supply Chains and Working Capital Management
79. Accruals are "spontaneous," but unfortunately, due to law and economic forces, firms have little control over the level
of these accounts.
a.
True
b.
False
80. The facts (1) that no explicit interest is paid on accruals and (2) that the firm can control the level of these accounts at
will makes them an attractive source of funding to meet working capital needs.
a.
True
b.
False
Ch 16 Supply Chains and Working Capital Management
81. 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
82. 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
Ch 16 Supply Chains and Working Capital Management
83. 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
84. 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 uses a current asset financing policy that matches maturities, is conservative, or is
aggressive 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.
Ch 16 Supply Chains and Working Capital Management
e.
Accruals are an expensive but commonly used way to finance working capital.
85. Newsome Inc. buys on terms of 3/15, net 45. It does not take the discount, and it generally pays after 60 days. What is
the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?
a.
25.09%
b.
27.59%
c.
30.35%
d.
33.39%
e.
36.73%
Ch 16 Supply Chains and Working Capital Management
86. Freeman Builders, Inc. buys on terms of 2/15, net 30. It does not take discounts, and it typically pays 60 days after the
invoice date. Net purchases amount to $720,000 per year. What is the nominal annual percentage cost of its non-free trade
credit, based on a 365-day year?
a.
10.86%
b.
12.07%
c.
13.41%
d.
14.90%
e.
16.55%
87. The company you just started has been offered credit terms of 4/30, net 90 days. What will be the nominal annual
percentage cost of its non-free trade credit if it pays 120 days after the purchase? (Assume a 365-day year.)
a.
16.05%
b.
16.90%
c.
17.74%
Ch 16 Supply Chains and Working Capital Management
d.
18.63%
e.
19.56%
88. Howes Inc. purchases $4,562,500 in goods per year from its sole supplier on terms of 2/15, net 50. If the firm chooses
to pay on time but does not take the discount, what is the effective annual percentage cost of its non-free trade credit?
(Assume a 365-day year.)
a.
20.11%
b.
21.17%
c.
22.28%
d.
23.45%
e.
24.63%
Ch 16 Supply Chains and Working Capital Management
89. Andrews Corporation buys on terms of 2/8, net 45 days, it does not take discounts, and it actually pays after 58 days.
What is the effective annual percentage cost of its non-free trade credit? (Use a 365-day year.)
a.
14.34%
b.
15.10%
c.
15.89%
d.
16.69%
e.
17.52%
90. Safety Window and Door Co. buys on terms of 2/15, net 60 days. It does not take discounts, and it typically pays on
time, 60 days after the invoice date. Net purchases amount to $450,000 per year. On average, how much "free" trade
credit does the firm receive during the year? (Assume a 365-day year, and note that purchases are net of discounts.)
a.
$18,493
Ch 16 Supply Chains and Working Capital Management
b.
$19,418
c.
$20,389
d.
$21,408
e.
$22,479
91. Taylor Textbooks Inc. buys on terms of 2/15, net 50 days. It does not take discounts, and it typically pays on time, 50
days after the invoice date. Net purchases amount to $450,000 per year. On average, what is the dollar amount of costly
trade credit (total credit − free credit) the firm receives during the year? (Assume a 365-day year, and note that purchases
are net of discounts.)
a.
$43,151
b.
$45,308
c.
$47,574
d.
$49,952
e.
$52,450
Ch 16 Supply Chains and Working Capital Management
92. Fairweather Corporation purchases merchandise on terms of 2/15, net 40, and its gross purchases (i.e., purchases
before taking off the discount) are $800,000 per year. What is the maximum dollar amount of costly trade credit the firm
could get, assuming it abides by the supplier's credit terms? (Assume a 365-day year.)
a.
$53,699
b.
$56,384
c.
$59,203
d.
$62,163
e.
$65,271
