Question 1

Arnold Inc.purchases merchandise on terms of 2/10 net 30, and it always pays on the 30th day.The CFO calculates that the average amount of costly trade credit carried is $375,000.What is the firm's average accounts payable balance? (Assume a 365-day year.)

Accepted Answer

A)   $458,160
B)   $482,273
C)   $507,656
D)   $534,375
E)   $562,500F) A) and B)
G) C) and D)

Question 2

Which of the following statements is CORRECT?

Accepted Answer

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.F) None of the above
G) B) and D)

Question 3

Net operating working capital is defined as operating current assets minus operating current liabilities..

Accepted Answer

A) True 
 B)False

Question 4

Sanders Enterprises arranged a revolving credit agreement of $9,000,000 with a group of banks.The firm paid an annual commitment fee of 0.5% of the unused balance of the loan commitment.On the used portion of the revolver, it paid 1.5% above prime for the funds actually borrowed on a simple interest basis.The prime rate was 3.25% during the year.If the firm borrowed $6,000,000 immediately after the agreement was signed and repaid the loan at the end of one year, what was the total dollar annual cost of the revolver?

Accepted Answer

A)   $285,000
B)   $300,000
C)   $315,000
D)   $330,750
E)   $347,288F) C) and E)
G) B) and E)

Question 5

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 current operating asset financing strategy because of the inherent risks of using short-term financing.

Accepted Answer

A) True 
 B)False

Question 6

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.

Accepted Answer

A) True 
 B)False

Question 7

A firm that follows an aggressive current asset financing approach uses primarily short-term credit and thus is more exposed to an unexpected increase in interest rates than is a firm that uses long-term capital and thus follows a conservative financing policy.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable securities?

Accepted Answer

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.F) C) and E)
G) B) and C)

Question 9

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?

Accepted Answer

A)   $123,630
B)   $130,137
C)   $136,986
D)   $143,836
E)   $151,027F) A) and C)
G) D) and E)

Question 10

The concept of permanent current operating assets reflects the fact that some components of current assets do not shrink to zero even when a business is at its seasonal or cyclical low.Thus, permanent current operating assets represent a minimum level of current assets that must be financed.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements is CORRECT?

Accepted Answer

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.F) C) and D)
G) A) and B)

Exam 16: Supply Chains and Working Capital Management

Correct Answer
verified

A firm that follows an aggressive current asset financing approach uses primarily short-term credit and thus is more exposed to an unexpected increase in interest rates than is a firm that uses long-term capital and thus follows a conservative financing policy.

Correct Answer
verified

Arnold Inc.purchases merchandise on terms of 2/10 net 30, and it always pays on the 30th day.The CFO calculates that the average amount of costly trade credit carried is $375,000.What is the firm's average accounts payable balance? (Assume a 365-day year.)

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
verified

Net operating working capital is defined as operating current assets minus operating current liabilities..

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

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.

Correct Answer
verified

Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable securities?

Correct Answer
verified

The concept of permanent current operating assets reflects the fact that some components of current assets do not shrink to zero even when a business is at its seasonal or cyclical low.Thus, permanent current operating assets represent a minimum level of current assets that must be financed.

Correct Answer
verified

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 current operating asset financing strategy because of the inherent risks of using short-term financing.

Correct Answer
verified

Exam 16: Supply Chains and Working Capital Management

Correct AnswerverifiedShow Answer

A firm that follows an aggressive current asset financing approach uses primarily short-term credit and thus is more exposed to an unexpected increase in interest rates than is a firm that uses long-term capital and thus follows a conservative financing policy.

Correct AnswerverifiedShow Answer

Arnold Inc.purchases merchandise on terms of 2/10 net 30, and it always pays on the 30th day.The CFO calculates that the average amount of costly trade credit carried is $375,000.What is the firm's average accounts payable balance? (Assume a 365-day year.)

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Net operating working capital is defined as operating current assets minus operating current liabilities..

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable securities?

Correct AnswerverifiedShow Answer

The concept of permanent current operating assets reflects the fact that some components of current assets do not shrink to zero even when a business is at its seasonal or cyclical low.Thus, permanent current operating assets represent a minimum level of current assets that must be financed.

Correct AnswerverifiedShow Answer

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 current operating asset financing strategy because of the inherent risks of using short-term financing.

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified