Professional Documents
Culture Documents
THEORY
1. Compared to other frms in the industry, a company that maintains a
conservative working capital policy will tend to have a
a. Greater percentage o short-term fnancing.
b. Greater risk o needing to sell current assets to repay debt.
c. Higher ratio o c!rre"t a##et# to $%e& a##et#.
d. Higher total asset turnover.
'. (he working capital fnancing policy that sub)ects the frm to the greatest risk o
being unable to meet the frm*s maturing obligations is the policy that fnances
a. %luctuating current assets with long-term debt.
b. +ermanent current assets with long-term debt.
c. Per'a"e"t c!rre"t a##et# -ith #hortter' &e/t.
d. %luctuating current assets with short-term debt.
0. tarrs Company has current assets o 2'33,333 and current liabilities o
233,333. tarrs could increase its working capital by the
a. +repayment o 203,333 o ne"t year4s rent.
5. ! lock-bo" system
a. 6educes the need or compensating balances.
b. +rovides security or late night deposits.
c. 6educes the risk o having checks lost in the mail.
&. Acce)erate# the i"6o- o !"&#.
7. 8gnoring cost and other e9ects on the frm, which o the ollowing measures
would tend to reduce the cash conversion cycle:
a. #aintain the level o receivables as sales decrease.
b. ;uy more raw materials to take advantage o price breaks.
c. (ake discounts when o9ered.
&. Forgo &i#co!"t# that are c!rre"t)+ /ei"g ta7e".
13.(he amount o cash that a frm keeps on hand in order to take advantage o any
bargain purchases that may arise is reerred to as its
a. (ransactions balance. c. +recautionary balance.
/. Compensating balance. d. S1ec!)ati*e /a)a"ce.
11.!ll o the ollowing are valid reasons or a business to hold cash and marketable
securities e"cept to
a. atisy compensating balance reuirements.
1.=hich o the ollowing actions would not be consistent with good management:
a. 8ncreased synchroni$ation o cash &ows.
/. Mi"i'i(e the !#e o 6oat.
c. #aintaining an average cash balance eual to that reuired as a
compensating balance or that which minimi$es total cost.
d. @se o checks and drats in disbursing unds.
1.(he economic order uantity A/>B ormula can be adapted in order or a frm to
determine the optimal mi" between cash and marketable securities. (he />B
model assumes all o the ollowing e"cept
a. (he cost o a transaction is independent o the dollar amount o the
transaction and interest rates are constant over the short run.
b. !n opportunity cost is associated with holding cash, beginning with the
frst dollar.
c. (he total demand or cash is known with certainty.
&. Ca#h 6o- re,!ire'e"t# are ra"&o'.
15.(he one item listed below that would warrant the least amount o consideration
in credit and collection policy decisions is the
a. Buality o accounts accepted. c. Cash discount given.
b. 8!a"tit+ &i#co!"t gi*e". d. evel o collection e"penditures.
1?.8t is held that the level o accounts receivable that the frm has or holds re&ects
both the volume o a frm*s sales on account and a frm*s credit policies. =hich
one o the ollowing items is not considered as part o the frm*s credit policies:
a. (he minimum risk group to which credit should be e"tended.
b. (he e"tent Ain terms o money to which a frm will go to collect an
account.
c. (he length o time or which credit is e"tended.
&. The #i(e o the &i#co!"t that -i)) /e o0ere&.
3.8n assessing the loan value o inventory, a banker will normally be concerned
about the portion o inventory that is work-in-process because
a. =8+ inventory is relatively easy to sell because it does not represent a raw
material or a fnished product.
b. =8+ inventory usually has the highest loan value o the di9erent inventory
types.
c. WIP ge"era))+ ha# the )o-e#t 'ar7eta/i)it+ o the *ario!# t+1e# o
i"*e"torie#.
d. =8+ represents a lower investment by a corporation as opposed to other
types o inventories.
1.=hen a company analy$es credit applicants and increases the uality o the
accounts re)ected, the company is attempting to
a. #a"imi$e sales. c. 8ncrease the average collection period.
/. 8ncrease bad-debt losses. &. Ma%i'i(e 1ro$t#.
.! high turnover o accounts receivable, which implies a very short days-sales
outstanding, could indicate that the frm
.(he credit and collection policy o !margo Co. provides or the imposition o
credit block when the credit line is e"ceeded andIor the account is past due.
uring the month, because o the campaign to achieve volume targets, the
general manager has waived the credit block policy in a number o instances
involving big volume accounts. (he likely e9ect o this move is
a. eterioration o aging o receivables only.
b. 8ncrease in the level o receivables only.
c. Deterioratio" o agi"g a"& i"crea#e i" the )e*e) o recei*a/)e#.
d. ecrease in collections during the month the move was done.
0.!n increase in sales resulting rom an increased cash discount or prompt
payment would be e"pected to cause
a. !n increase in the operating cycle.
b. !n increase in the average collection period.
c. A &ecrea#e i" the ca#h co"*er#io" c+c)e.
d. ! decrease in purchase discounts taken.
5.8 a frm had been e"tending trade credit on a I13, netI'3 basis, what change
would be e"pected on the balance sheet o its customer i the frm went to a net
cash '3 policy:
a. I"crea#e& 1a+a/)e# a"& i"crea#e& /a"7 )oa".
b. 8ncreased receivables.
c. ecreased receivables.
d. ecrease in cash.
?.! strict credit and collection policy is in place in tar Co. !s %inance irector you
are asked to advise on the propriety o rela"ing the credit standards in view o
sti9 competition in the market. Kour advise will be avorable i
a. (he competitor will do the same thing to prevent lost sales.
b. (here is a decrease in the distribution level o your product, and a more
aggressive stance in necessary to retain market share.
c. The 1ro:ecte& 'argi" ro' i"crea#e& #a)e# -i)) e%cee& the co#t o
carr+i"g the i"cre'e"ta) recei*a/)e#.
d. (he account receivable level is improving, so the company can a9ord the
carrying cost o receivables.
'3.#erkle, 8nc. has a temporary need or unds. #anagement is trying to decide
between not taking discounts rom one o their three biggest suppliers, or a
1.70L per annum renewable discount loan rom its bank or ' months. (he
suppliers4 terms are as ollowsD
'1.! company obtaining short-term fnancing with trade credit will pay a higher
percentage fnancing cost, everything else being eual, when
a. (he discount percentage is lower.
b. (he items purchased have a higher price.
c. (he items purchased have a lower price.
&. The #!11)ier o0er# a )o"ger &i#co!"t 1erio&.
'./nert, 8nc.4s current capital structure is shown below. (his structure is optimal,
and the company wishes to maintain it.
ebt 0L
+reerred euity 0L
''.;obo C4s has an asset base o 21 million. !ter a dividend payment o 23,333,
;obo added 203,333 to retained earnings. =hat is ;obo4s internal growth rate:
a. 1L b. L c. 3< d. ?L
'.8t is the policy o %ran$ Corp. that the current ratio cannot all below 1.0 to 1.3.
8ts current liabilities are +33,333 and the present current ratio is to 1. How
much is the ma"imum level o new short-term loans it can secure without
violating the policy:
a. P=445444 b. +'33,333 c. +55,557 d. +<33,333
assets are 2133,333N debt and euity are each 03 percent o total assets. /;8( is
2'5,333, the interest rate on the frm*s debt is 13 percent, and the frm*s ta"
rate is 3 percent. =ith a restricted policy, current assets will be 10 percent o
sales. @nder a rela"ed policy, current assets will be 0 percent o sales. =hat is
the diference in the pro)ected 6>/s between the restricted and rela"ed policies:
'<.Mumpdisk Company writes checks averaging 210,333 a day, and it takes fve
days or these checks to clear. (he frm also receives checks in the amount o
217,333 per day, but the frm loses three days while its receipts are being
deposited and cleared. =hat is the frm*s net &oat in dollars:
'?.=hat is the opportunity cost o keeping a cash balance o 2 million, i the daily
interest rate is 3.3L and the average transaction cost o investing money
overnight is 203:
3.Hakuna 8nc. sells on terms o 'I13, net '3 days. Gross sales or the year are
+,33,333 and the collections department estimates that '3L o the customers
pay on the 13th day and take discountsN 3L pay on the '3th dayN and the
remaining '3L pay, on the average, 3 days ater the purchase. !ssuming '53
days per year, what is the average collection period.
a loan. 8t has stable, predictable cash &ows, and the estimated total amount o net
new cash needed or transactions or the year is 2170,333. (he company does not
1.=hen the average cash balance o the company is higher, the Oist !P the cash
balance is Oist ;P.
ist ! ist ;
a. O11ort!"it+ co#t o ho)&i"g Higher
b. (otal transactions costs associated with Higher
obtaining
c. >pportunity cost o holding ower
d. (otal costs o holding ower
.8 the average cash balance or the company during the year is 23,?15.03, the
opportunity cost o holding cash or the year will be
'.C#6 is a retail mail order frm that currently uses a central collection system that
reuires all checks to be sent to its ;oston headuarters. !n average o 0 days is
reuired or mailed checks to be received, days or C#6 to process them and
1Q days or the checks to clear through its bank. ! proposed lockbo" system
would reduce the mail and process time to ' days and the check clearing time to
1 day. C#6 has an average daily collection o 2133,333. 8 C#6 should adopt the
lockbo" system, its average cash balance would increase by
a. 203,333. b. 233,333. c. 2;345444. d. 2<33,333.
.=hat are the e"pected annual savings rom a lockbo" system that collects 33
checks per day averaging 2033 each, and reduces mailing and processing times
by .3 and 3.0 days, respectively, i the annual interest rate is 5L:
0.! company has daily cash receipts o 2103,333. (he treasurer o the company
has investigated a lock bo" service whereby the bank that o9ers this service will
reduce the company*s collection time by our days at a monthly ee o 2,033. 8
money market rates average L during the year, the additional annual income
Aloss rom using the lock bo" service would be
a. 25,333. /. 2;5444. c. 21,333. d. 2A1,333.
5.! banker has o9ered to set up and operate a lock bo" system or your company.
etails are given below.
!verage number o daily payments '0
/stimate the annual savings. !ssume 03 processing days per year.
7.B6 makes large cash payments averaging +17,333 daily. (he company
changed rom using checks to sight drats which will permit it to hold unto its
cash or one e"tra day. 8 B6 can use the e"tra cash to earn 1L annually,
what annual peso return will it earn:
a. +50.13 b. +5,01.33 c. +5.0 &. P?5>4
?.;est Computers believes that its collection costs could be reduced through
modifcation o collection procedures. (his action is e"pected to result in a
lengthening o the average collection period rom '3 to '0 daysN however, there
will be no change in uncollectible accounts, or in total credit sales. %urthermore,
the variable cost ratio is 53L, the opportunity cost o a longer collection period
is assumed to be negligible, the company4s budgeted credit sales or the coming
year are 20,333,333, and the reuired rate o return is 5L. (o )ustiy changes in
collection procedures, the minimum annual reduction o costs Ausing a '53-day
year and ignoring ta"es must be
nobi$, 8nc. has 2 million invested in (reasury bills yielding <L per annumN this
investment will satisy the frm4s need or unds during the coming year.
03.8 it costs 203 to sell these bills, regardless o the amount, how much should be
withdrawn at a time:
01.8 nobi$, 8nc. needs 2157,333 a month, how reuently should the C%> sell o9
(reasury bills:
0'.imba Corp., whose gross sales amounted to +1,33,333 sold on terms o 'I13,
net '3. (he collections manager estimated that '3L o the customers pay on
the 13th day and take discountsN 3L on the '3th dayN and the remaining '3L
pay, on the average, 3 days ater the purchase. 8 management would toughen
on its collection policy and reuire that all non-discount customers pay on the
'3th day, how much would be the receivables balance:
0.+rest Corp. plans to tighten its credit policy. ;elow is the summary o changesD
>ld Jew
!verage number o days 70 03
collection
6atio o credit sales to total 73L 53L
sales
+ro)ected sales or the coming year is +133 million and it is estimated that the
new policy will result in a 0L loss i the new policy is implemented. !ssuming a
'53-day year, what is the e9ect o the new policy on accounts receivable:
a. ecrease o +1' million. c. ecrease o +0 million.
b. Jo change. &. Decrea#e o P ;.;B 'i))io".
00.Jumero 1 Co.*s budgeted sales or the coming year are +?5 million, o which
<3L are e"pected to be credit sales at terms o nI'3. (he company estimates
that a proposed rela"ation o credit standards would increase credit sales by
'3L and increase the average collection period orm '3 days to 0 days. ;ased
on a '53-day year, the proposed rela"ation o credit standards would result to an
increase in accounts receivable balance o
a. +5,<<3,333 b. +1,?3,333 c. +,<<3,333 &. P;5445444
05.+hillips Glass Company buys on terms o I10, net '3. 8t does not take discounts,
and it typically pays '3 days ater the invoice date. Jet purchases amount to
273,333 per year. >n average, how much EreeF trade credit does +hillips
receive during the year: A!ssume a '53-day year.
07.lippers #art has sales o +' million. 8ts credit period and average collection
period are both '3 days and 1L o its sales end as bad debts. (he general
manager intends to e"tend the credit period to 0 days which will increase sales
by +'33,333. However, bad debts losses on the incremental sales would be 'L.
Costs o products and related e"penses amount to 3L e"clusive o the cost o
carrying receivables o 10L and bad debts e"penses. !ssuming '53 days a
year, the change in policy would result to incremental investment in receivables
o
0<.(he iberal ales Co. budgeted sales or the coming year are +'3 million o
which <3L are e"pected to be on credit. (he company wants to change its
credit terms rom nI'3 to I13, nI'3. 8 the new credit terms are adopted, the
company estimates that cash discounts would be taken on 3L o the credit
sales and the new uncollectible amount would be unchanged. (he adoption o
the new credit terms would result in e"pected discount availed o in the coming
year o
a. +533,333 b. +<<,333 c. +<3,333 &. P@?5444
0?.#r. . #art assumed the presidency o 6iches Corp. He instituted new policies
and with respect to credit policy, below is a summary o relevant inormationD
>ld Credit +olicy Jew Credit +olicy
(he company reuires a rate o return o 13L and a variable cost ratio o 53L.
@sing a '53-day year, the pre-ta" cost o carrying the additional investment in
receivables under the new policy would be
53.(he ales irector o Can Can Co. suggests that certain credit terms be modifed.
He estimates the ollowing e9ectsD
51.=asting 6esource Co. has annual credit sales o + million. 8ts average collection
period is 3 days and bad debts are 0L o sales. (he credit and collection
manager is considering instituting a stricter collection policy, whereby bad debts
would be reduced to L o total sales, and the average collection period would
all to '3 days. However, sales would also all by an estimated +033,333
annually. Sariable costs are 53L o sales and the cost o carrying receivables is
1L. !ssuming a ta" rate o '0L and '53 days a year, the incremental change
in the proftability o the company i stricter policy would be implemented would
be
5.+hranklin +harms 8nc. purchases merchandise rom a company that gives sales
terms o I10, net 3. +hranklin +harms has gross purchases o 2<33,333 per
year. =hat is the maximum amount o costly trade credit +hranklin could get,
assuming they abide by the suppliers credit terms: A!ssume a '53-day year.
5'.Crest Co. has the opportunity to increase annual sales by +1 million by selling to
new riskier customers. 8t has been estimated that uncollectible e"penses would
be 10L and collection costs 0L. (he manuacturing and selling costs are 73L o
sales and corporate ta" is '0L. 8 it pursues this opportunity, the ater ta" proft
will
5.! frm currently sells 2033,333 annually with 'L bad debt losses. (wo alternative
policies are available. +olicy ! would increase sales by 2033,333, but bad debt
losses on additional sales would be <L. +olicy ; would increase sales by an
additional 213,333 over +olicy ! and bad debt losses on the additional
213,333 o sales would be 10L. (he average collection period will remain at 53
days A5 turns per year no matter the decision made. (he proft margin will be
3L o sales and no other e"penses will increase. !ssume an opportunity cost o
3L. =hat should the frm do:
50.! frm that oten actors its accounts receivable has an agreement with its
fnance company that reuires the frm to maintain a 5L reserve and charges
1L commission on the amount o receivables. (he net proceeds would be urther
reduced by an annual interest charge o 13L on the monies advanced. !ssuming
a '53-day year, what amount o cash Arounded to the nearest dollar will the frm
receive rom the fnance company at the time a 2133,333 account that is due in
?3 days is turned over to the fnance company:
%lesher, 8nc.4s credit manager studied the bill-paying habits o its customers and
ound that ?3L o them were prompt. he also discovered that L o the slow
payers and 0L o the prompt ones subseuently deaulted. (he company has ',333
accounts on its books, none o which has yet deaulted.
57.Given average revenues rom sales o 21,33 and the cost o sales o 21,133,
what is the average e"pected proft or loss rom e"tending credit to slow payers:
5<.Given revenues rom sales o 21,33 and the cost o sales o 21,133, what would
the average level o revenues that makes it worthwhile to e"tend credit to slow
payers:
5?.>n cash discounts, all o the ollowing statements do not apply e"cept
a. 8 a frm buys +13,333 o goods on terms o 1I13, net '3 and pays within the
discount period, the amount paid would be +?,333.
b. (he cost o not taking a cash discount is always higher than the cost o a
bank loan.
c. With tra&e ter'# o ?@35 "et ;45 i the &i#co!"t i# ta7e" the /!+er
recei*e =3 &a+# o cre&it .
d. (he cost o not taking the discount is higher or terms o I13, net 53 than or
I13, net '3.
73.Kour frm buys on credit terms o I13, net 0, and it always pays on ay 0. 8
you calculate that this policy e9ectively costs your frm 2107,033 each year,
what is the frm*s average accounts payable balance:
71.uppose the credit terms o9ered to your frm by your suppliers are I13, net '3
days. >ut o convenience, your frm is not taking discounts, but is paying ater
3 days, instead o waiting until ay '3. Kou point out that the nominal cost o
not taking the discount and paying on ay '3 is around '7 percent. ;ut since
your frm is not taking discounts and is paying on ay 3, what is the efective
annual cost o your frm*s current practice, using a '53-day year:
7'.Corbin, 8nc. can issue '-month commercial paper with a ace value o 21,333,333
or 2?<3,333. (ransaction costs will be 21,33. (he e9ective annuali$ed
percentage cost o the fnancing, based on a '53-day year, will be
7.!;C Company fnances all o its seasonal inventory needs rom the local bank at
an e9ective interest cost o ?L. (he frm*s supplier promises to e"tend trade
credit on terms that will match the ?L bank credit rate. =hat terms would the
supplier have to o9er Aappro"imately:
a. I13, nI53. b. I13, nI133. c. ?@45 "4. d. 'I13, nI53.
70.! company has accounts payable o 20 million with terms o L discount within
10 days, net '3 days AI10 net '3. 8t can borrow unds rom a bank at an annual
rate o 1L, or it can wait until the '3th day when it will receive revenues to
cover the payment. 8 it borrows unds on the last day o the discount period in
order to obtain the discount, its total cost will be
!. 201,333 less. . 2B35344 )e##. C. 2133,333 less. . 2,033 more.
75./very 10 days a company receives 213,333 worth o raw materials rom its
suppliers. (he credit terms or these purchases are I13, net '3, and payment is
made on the '3th day ater each delivery. (hus, the company is considering a 1-
year bank loan or 2?,<33 A?<L o the invoice amount. 8 the e9ective annual
interest rate on this loan is 1L, what will be the net dollar savings over the year
by borrowing and then taking the discount on the materials:
7<. =hich one o the ollowing will increase the operating cycle:
a. i"crea#i"g the i"*e"tor+ 1erio&
b. decreasing the cash cycle
c. decreasing the accounts payable period
d. increasing the accounts payable period
7?. =hich one o the ollowing actions should a manager take i he or she wants to
decrease the operating cycle:
<3. !ll else eual, which one o the ollowing will decrease the cash cycle:
<1. =hich one o the ollowing credit terms is most apt to produce the shortest
accounts receivable period:
a. net 13
b. I13, net '3
c. net 0
d. I3, net 0
e. >35 "et @4
<. ;aker 8ndustries o9ers credit terms o I3, net 53 to Charlie Co. Charlie Co. has
an inventory period o 10 days and an operating cycle o 0 days. Given this,
which o the ollowing statements are correct: A8. (he credit terms o ;aker
8ndustries are too restrictiveN 88. 8 Charlie Co. orgoes the discount on its
purchases, it will have a negative cash cycleN 888. ;aker 8ndustries is fnancing the
accounts receivable o Charlie CoN 8S. 8 Charlie Co. is delinuent in its payment,
;aker 8ndustries should be concerned
<'. =hich one o the ollowing statements is correct concerning the accounts
payable period:
<. =hich o the ollowing would not be fnanced rom working capital:
a. Cash &oat.
b. !ccounts receivable.
c. Credit sales.
&. A "e- 1er#o"a) co'1!ter or the oce.