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Ch 16 Supply Chains and Working Capital Management
32. 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
33. 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
Ch 16 Supply Chains and Working Capital Management
e.
45 days
34. 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
Ch 16 Supply Chains and Working Capital Management
35. 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
a.
$8,078
b.
$8,975
c.
$9,973
d.
$10,970
e.
$12,067
Ch 16 Supply Chains and Working Capital Management
36. 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
37. Data on Liu Inc. for the most recent year are shown below, along with the inventory conversion period (ICP) of the
firms against which it benchmarks. The firm's new CFO believes that the company could reduce its inventory enough to
Ch 16 Supply Chains and Working Capital Management
reduce its ICP to the benchmarks' average. If this were done, by how much would inventories decline? Use a 365-day
year.
Cost of goods sold =
$85,000
Inventory =
$20,000
Inventory conversion period (ICP) =
85.88
Benchmark inventory conversion period (ICP) =
38.00
a.
$7,316
b.
$8,129
c.
$9,032
d.
$10,036
e.
$11,151
38. Data on Mertz Co. for the most recent year are shown below, along with the payables deferral period (PDP) for the
firms against which it benchmarks. The firm's new CFO believes that the company could delay payments enough to
increase its PDP to the benchmarks' average. If this were done, by how much would payables increase? Use a 365-day
Ch 16 Supply Chains and Working Capital Management
year.
Cost of goods sold =
$75,000
Payables =
$5,000
Payables deferral period (PDP) =
24.33
Benchmark payables deferral period =
30.00
a.
$764
b.
$849
c.
$943
d.
$1,048
e.
$1,164
39. Marshall Inc. recently hired your consulting firm to improve the company's performance. It has been highly profitable
but has been experiencing cash shortages due to its high growth rate. As one part of your analysis, you want to determine
the firm's cash conversion cycle. Using the following information and a 365-day year, what is the firm's present cash
Ch 16 Supply Chains and Working Capital Management
conversion cycle?
Average inventory =
$75,000
Annual sales =
$600,000
Annual cost of goods sold =
$360,000
Average accounts receivable =
$160,000
Average accounts payable =
$25,000
a.
120.6 days
b.
126.9 days
c.
133.6 days
d.
140.6 days
e.
148.0 days
40. Frosty Corporation has the following data, in thousands. Assuming a 365-day year, what is the firm's cash conversion
cycle?
Annual sales =
$45,000
Annual cost of goods sold =
$31,500
Inventory =
$4,000
Accounts receivable =
$2,000
Accounts payable =
$2,400
Ch 16 Supply Chains and Working Capital Management
a.
25 days
b.
28 days
c.
31 days
d.
35 days
e.
38 days
41. Shulman Inc. has the following data, in thousands. Assuming a 365-day year, what is the firm's cash conversion cycle?
Annual sales =
$45,000
Annual cost of goods sold =
$30,000
Inventory =
$4,500
Accounts receivable =
$1,800
Accounts payable =
$2,500
a.
28 days
b.
32 days
Ch 16 Supply Chains and Working Capital Management
c.
35 days
d.
39 days
e.
43 days
42. Kiley Corporation had the following data for the most recent year (in millions). The new CFO believes (1) that an
improved inventory management system could lower the average inventory by $4,000, (2) that improvements in the credit
department could reduce receivables by $2,000, and (3) that the purchasing department could negotiate better credit terms
and thereby increase accounts payable by $2,000. Furthermore, she thinks that these changes would not affect either sales
or the costs of goods sold. If these changes were made, by how many days would the cash conversion cycle be lowered?
Original
Revised
Annual sales: unchanged
$110,000
$110,000
Cost of goods sold: unchanged
$80,000
$80,000
Average inventory: lowered by $4,000
$20,000
$16,000
Average receivables: lowered by $2,000
$16,000
$14,000
Average payables: increased by $2,000
$10,000
$12,000
Days in year
365
365
Ch 16 Supply Chains and Working Capital Management
a.
34.0
b.
37.4
c.
41.2
d.
45.3
e.
49.8
43. Whitson Co. is looking for ways to shorten its cash conversion cycle. It has annual sales of $36,500,000, or $100,000
a day on a 365-day basis. The firm's cost of goods sold is 75% of sales. On average, the company has $9,000,000 in
inventory and $8,000,000 in accounts receivable. Its CFO has proposed new policies that would result in a 20% reduction
in both average inventories and accounts receivable. She also anticipates that these policies would reduce sales by 10%,
while the payables deferral period would remain unchanged at 35 days. What effect would these policies have on the
company's cash conversion cycle? Round to the nearest whole day.
a.
−26 days
b.
−22 days
c.
−18 days
Ch 16 Supply Chains and Working Capital Management
d.
−14 days
e.
−11 days
44. Pascarella Inc. is revising its payables policy. It has annual sales of $50,735,000, an average inventory level of
$15,012,000, and average accounts receivable of $10,008,000. The firm's cost of goods sold is 85% of sales. The company
makes all purchases on credit and has always paid on the 30th day. However, it now plans to take full advantage of trade
credit and to pay its suppliers on the 40th day. The CFO also believes that sales can be maintained at the existing level but
inventory can be lowered by $1,946,000 and accounts receivable by $1,946,000. What will be the net change in the cash
conversion cycle, assuming a 365-day year?
a.
−26.6 days
b.
−29.5 days
c.
−32.8 days
Ch 16 Supply Chains and Working Capital Management
d.
−36.4 days
e.
−40.5 days
45. Fontana Painting had the following data for the most recent year (in millions). The new CFO believes that the
company could improve its working capital management sufficiently to bring its NWC and CCC up to the benchmark
companies' level without affecting either sales or the costs of goods sold. Fontana finances its net working capital with a
bank loan at an 8% annual interest rate, and it uses a 365-day year. If these changes had been made, by how much would
the firm's pre-tax income have increased?
Original
Benchmark
Data
Related CCC
CCC
Sales
$100,000
Cost of goods sold
$ 80,000
Inventory (ICP)
$ 20,000
91.25
38.00
Receivables (DSO)
$ 16,000
58.40
20.00
Ch 16 Supply Chains and Working Capital Management
Payables (PDP)
$ 5,000
22.81
30.00
126.84
28.00
a.
1,901
b.
2,092
c.
2,301
d.
2,531
e.
2,784
46. Monar Inc.'s CFO would like to decrease its cash conversion cycle by 10 days (based on a 365 day year). The
company carries average inventory of $750,000. Its annual sales are $10 million, its cost of goods sold is 75% of annual
sales, and its average collection period is twice as long as its inventory conversion period. The firm buys on terms of net
30 days, and it pays on time. The CFO believes he can reduce the average inventory to $647,260 with no effect on sales.
By how much must the firm also reduce its accounts receivable to meet its goal in the reduction of the cash conversion
cycle?
Ch 16 Supply Chains and Working Capital Management
a.
$123,630
b.
$130,137
c.
$136,986
d.
$143,836
e.
$151,027
47. The overriding goal of inventory management is to ensure that the firm never suffers a stock-out, i.e., never runs out
of an inventory item.
a.
True
b.
False
Ch 16 Supply Chains and Working Capital Management
48. The twin goals of inventory management are (1) to ensure that the inventories needed to sustain operations are
available, but (2) to hold the costs of ordering and carrying inventories to the lowest possible level.
a.
True
b.
False
49. 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.
Ch 16 Supply Chains and Working Capital Management
e.
below average inventory turnover ratio.
50. The average accounts receivable balance is a function of both the volume of credit sales and the days sales
outstanding.
a.
True
b.
False
51. If a firm has a large percentage of accounts over 30 days old, this is proof positive that its receivables manager is not
Ch 16 Supply Chains and Working Capital Management
doing a good job.
a.
True
b.
False
52. The aging schedule is a commonly used method for monitoring receivables.
a.
True
b.
False
53. The four primary elements in a firm's credit policy are (1) credit standards, (2) cash discounts offered, (3) credit
Ch 16 Supply Chains and Working Capital Management
period, and (4) collection policy.
a.
True
b.
False
54. Changes in a firm's collection policy can affect sales, working capital, and profits.
a.
True
b.
False
55. Not taking cash discounts is costly, and as a result, firms that do not take them are usually those that are performing
Ch 16 Supply Chains and Working Capital Management
poorly and have inadequate cash balances.
a.
True
b.
False
56. Suppose a firm changes its credit policy from 2/10 net 30 to 3/10 net 30. The change is meant to meet competition, so
no increase in sales is expected. The average accounts receivable balance will probably decline as a result of this change.
a.
True
b.
False
Ch 16 Supply Chains and Working Capital Management
57. 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.
a.
True
b.
False
58. Dimon Products' sales are expected to be $5 million this year, with 90% on credit and 10% for cash. Sales are
expected to grow at a stable, steady rate of 10% annually in the future. Dimon's accounts receivable balance will remain
constant at the current level, because the 10% cash sales can be used to support the 10% growth rate, other things held
constant.
a.
True
b.
False
