a. 100 daysb. 60 daysc. 50 daysd. 40 dayse. 33 daysCash conversion cycle Answer: a Diff: E R. For the Cook County Company, the average age of accounts receivable is 60days, the average age of accounts payable is 45 days, and the average age of inventory is72 days. Assuming a 365-
day year, what is the length of the firm’s cash conversion
cycle?a. 87 daysb. 90 daysc. 65 daysd. 48 dayse. 66 daysInventory turnover ratio and DSO Answer: a Diff: E N.
Bowa Construction’s days sales outstanding is 50 days (on a 365
The company’s accounts receivable equal $100 million and its balance sheet shows
inventory equal to $125 million.
What is the company’s inventory turnover ratio?
a. 5.84b. 4.25c. 3.33d. 2.75e. 7.25Medium:Cash budget Answer: c Diff: M. Chadmark
Corporation’s budgeted monthly sales are $3,000. Forty percent
of its customers pay in the first month and take the 2 percent discount. The remaining 60
percent pay in the month following the sale and don’t receive a discount. Chadmark’s
bad debts are
very small and are excluded from this analysis. Purchases for next month’s
sales are constant each month at $1,500. Other payments for wages, rent, and taxes are
constant at $700 per month. Construct a single month’s cash budget with the information
given. What is the average cash gain or (loss) during a typical month for Chadmark Corporation?a. $2,600b. $ 800c. $ 776d. $ 740e. $ 728ROE and working capital policy Answer: c Diff: M. Jarrett Enterprises is considering whether to pursue a restricted or relaxed
current asset investment policy. The firm’s annual sales are $400,000; its fixed assets are
$100,000; debt and equity are each 50 percent of total assets. EBIT is $36,000, the
interest rate on the firm’s debt is 10 percent, and the firm’
s tax rate is 40 percent. With arestricted policy, current assets will be 15 percent of sales. Under a relaxed policy,current assets will be 25 percent of sales. What is the difference in the projected ROEsbetween the restricted and relaxed policies?a. 0.0%b. 6.2%c. 5.4%d. 1.6%e. 3.8%Inventory conversion period Answer: d Diff: M R. On average, a firm sells $2,000,000 in merchandise a month. It keepsinventory equal to one-half of its monthly sales on hand at all times. If the firm analyzesits accounts using a 365-
day year, what is the firm’s inventory conversion period?
a. 365.0 daysb. 182.5 daysc. 30.3 daysd. 15.2 dayse. 10.5 daysCash conversion cycle Answer: e Diff: M N. Biondi Manufacturing Company (BMC) has an average accounts receivablebalance of $1,250,000, an average inventory balance of $1,750,000, and an averageaccounts payable balance of $800,000. Its annual sales are $12,000,000 and its cost of goods sold represents 80 percent of annual sales. Assume there are 365 days in a year.
What is BMC’s cash conversion cycle?
a. 84.15 daysb. 53.23 daysc. 72.28 daysd. 100.55 dayse. 60.83 daysCash conversion cycle Answer: d Diff: M R. Porta Stadium Inc. has annual sales of $80,000,000 and keeps averageinventory of $20,000,000. On average, the firm has accounts receivable of $16,000,000.The firm buys all raw materials on credit, its trade credit terms are net 35 days, and it
pays on time. The firm’s managers a
re searching for ways to shorten the cash conversioncycle. If sales can be maintained at existing levels but inventory can be lowered by$4,000,000 and accounts receivable lowered by $2,000,000, what will be the net changein the cash conversion cycle? Use a 365-day year. Round to the closest whole day.a. +105 daysb. -105 daysc. +27 daysd. -27 dayse. -3 daysCash conversion cycle Answer: e Diff: M R. You have recently been hired to improve the performance of MultiplexCorporation, which has been experiencing a severe cash shortage. 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 your estimate of the firm’s current cash
Current inventory = $120,000.
Annual sales = $600,000.
Accounts receivable = $157,808.
Accounts payable = $25,000.
Total annual purchases = $365,000.
Purchases credit terms: net 30 days.
Receivables credit terms: net 50 days.a. 49 daysb. 193 daysc. 100 daysd. 168 dayse. 144 daysCash conversion cycle Answer: b Diff: M. Kolan Inc. has annual sales of $36,500,000 ($100,000 a day on a 365-daybasis). On average, the company has $12,000,000 in inventory and $8,000,000 inaccounts receivable. The company is looking for ways to shorten its cash conversioncycle, which is calculated on a 365-day basis. Its CFO has proposed new policies thatwould result in a 20 percent reduction in both average inventories and accountsreceivables. The company anticipates that these policies will also reduce sales by 10percent. Accounts payable will remain unchanged. What effect would these policies have
on the company’s cash conversion cycle?
a. -40 daysb. -22 daysc. -13 daysd. +22 dayse. +40 daysCash conversion cycle Answer: e Diff: M R. Gaston Piston Corp. has annual sales of $50,735,000 and maintains anaverage inventory level of $15,012,000. The average accounts receivable balanceoutstanding is $10,008,000. The company makes all purchases on credit and has alwayspaid on the 30th day. The company is now going to take full advantage of trade creditand pay its suppliers on the 40th day. If sales can be maintained at existing levels butinventory can be lowered by $1,946,000 and accounts receivable lowered by $1,946,000,what will be the net change in the cash conversion cycle? (Assume there are 365 days inthe year.)a. -14.0 daysb. -18.8 daysc. -28.0 daysd. -25.6 dayse. -38.0 daysLockbox Answer: e Diff: M. Cross Collectibles currently fills mail orders from all over the U.S. and
receipts come in to headquarters in Little Rock, Arkansas. The firm’s average accounts
receivable (A/R) is $2.5 million and is financed by a bank loan with 11 percent annualinterest. Cross is considering a regional lockbox system to speed up collections that itbelieves will reduce A/R by 20 percent. The annual cost of the system is $15,000. Whatis the estimated net annual savings to the firm from implementing the lockbox system?a. $500,000b. $ 30,000c. $ 60,000d. $ 55,000e. $ 40,000Changes in working capital and free cash flow Answer: b Diff: M N. Allen Brothers is interested in increasing its free cash flow (which it hopes
will result in a higher EVA and stock price). The company’s
goal is to generate $180
million of free cash flow over the upcoming year. Allen’s CFO has made the following
projections for the upcoming year:
EBIT is projected to be $850 million.
Gross capital expenditures are expected to total $360 million, and itsdepreciation expense is expected to be $120 million. Thus, its net capital expendituresare expected to total $240 million.
The firm’s tax rate is 40 percent.
The company forecasts that there will be no change in its cash and marketable securities,nor will there be any changes in notes payable or accrued liabilities. Which of thefollowing will enable the company to achieve its goal of generating $180 million in freecash flow?a. Accounts receivable increase $470 million, inventory increases $230million, and accounts payable increase $790 million.b. Accounts receivable increase $470 million, inventory increases $230million, and accounts payable increase $610 million.c. Accounts receivable decrease by $500 million, inventory increases by $480million, and accounts payable decline by $80 million.d. Accounts receivable decrease by $400 million, inventory increases by $480million, and accounts payable increase by $80 million.e. Accounts receivable increase by $500 million, inventory increases by $100million, and accounts payable decline by $480 million.Aging schedule Answer: b Diff: M N.
Short Construction offers its customer’s credit terms of 2/10, net 30 days,while Fryman Construction offers its customer’s credit terms of 2/10, net 45 d
aging schedules for each of the two companies’ accounts receivable are reported below:
Short Construction Fryman ConstructionAge of Value of Percentage of Value of Percentage of Account (Days) Account Total Value Account Total Value0-10 $58,800 60% $ 73,500 50%11-30 19,600 20 29,4002031-45 14,700 15 29,4002046-60 2,940 3 10,2907Over 60 1,960 2 4,4103Total Receivables $98,000 $147,000Which company has the greatest percentage of overdue accounts and what is theirpercentage of overdue accounts?a. Fryman; 50% overdue.b. Short; 20% overdue.c. Fryman; 30% overdue.