MANAGEMENT ADVISORY SERVICES

WORKING CAPITAL FINANCE

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.

. ! frm ollowing an aggressive working capital strategy would

a. Hold substantial amount o f"ed assets.
b. #inimi$e the amount o short-term borrowing.
c. %inance &uctuating assets with long-term fnancing.
&. Mi"i'i(e the a'o!"t o !"&# he)& i" *er+ )i,!i& a##et#.

'. (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 #hortter' &e/t.
d. %luctuating current assets with short-term debt.

. etermining the appropriate level o working capital or a frm reuires

a. /valuating the risks associated with various levels o f"ed assets and the
types o debt used to fnance these assets.
b. Changing the capital structure and dividend policy or the frm.
c. #aintaining short-term debt at the lowest possible level because it is
ordinarily more e"pensive than long term debt.
&. O0#etti"g the 1ro$ta/i)it+ o c!rre"t a##et# a"& c!rre"t )ia/i)itie#
agai"#t the 1ro/a/i)it+ o tech"ica) i"#o)*e"c+.
e. #aintaining a high proportion o liuid assets to total assets in order to
ma"imi$e the return on total investments.

0. tarrs Company has current assets o 2'33,333 and current liabilities o 
233,333. tarrs could increase its working capital by the
a. +repayment o 203,333 o ne"t year4s rent.
 

/. Re$"a"ci"g o 2345444 o #hortter' &e/t -ith )o"gter' &e/t.

c. +urchase o 203,333 o temporary investments or cash.
d. Collection o 203,333 o accounts receivable.

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".

<. =hich o the ollowing is not a ma)or unction in cash management:

a. Cash &ow control c. Ma%i'i(i"g #a)e#
b. Cash surplus investment d. >btaining fnancing services

?. ! precautionary motive or holding e"cess cash is

a. (o enable a company to meet the cash demands rom the normal &ow o 
business activity.
b. (o enable a company to avail itsel o a special inventory purchase beore
prices rise to higher levels.
c. To e"a/)e a co'1a"+ to ha*e ca#h to 'eet e'erge"cie# that 'a+
ari#e 1erio&ica))+.
d. (o avoid having to use the various types o lending arrangements
available to cover pro)ected cash defcits.

13.(he amount o cash that a frm keeps on hand in order to take advantage o any
bargain purchases that may arise is reerred 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. atisy compensating balance reuirements.
 

b. #aintain adeuate cash needed or transactions.

c. #eet uture needs.
&. Ear" 'a%i'!' ret!r"# o" i"*e#t'e"t a##et#.

1.=hich o the ollowing actions would not be consistent with good management:
a. 8ncreased synchroni$ation o cash &ows.
/. Mi"i'i(e the !#e o 6oat.
c. #aintaining an average cash balance eual to that reuired as a
compensating balance or that which minimi$es total cost.
d. @se o checks and drats in disbursing unds.

1'.=hen managing cash and short-term investments, a corporate treasurer is

primarily concerned with
a. #a"imi$ing rate o return.
b. #inimi$ing ta"es.
c. 8nvesting in (reasury bonds since they have no deault risk.
&. Li,!i&it+ a"& #aet+.

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'.

10.(he ollowing are desirable in cash management e"ceptD

a. Cash is collected at the earliest time possible.

b. #ost sales are on cash basis and receivables are aged EcurrentF
c. Po#t&ate& chec7# are "ot &e1o#ite& o" ti'e !1o" 'at!rit+.
d. !ll sales are properly receipted and promptly deposited intact.

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.
 

17.=hich o the ollowing investments is not likely to be a proper investment or

temporary idle cash:
a. I"itia) 1!/)ic o0eri"g o a" e#ta/)i#he& 1ro$ta/)e co"g)o'erate.
b. Commercial paper.
c. (reasury bills.
d. (reasury bonds due within one year.

1<.(he goal o credit policy is to

a. E%te"& cre&it to the 1oi"t -here 'argi"a) 1ro$t# e,!a) 'argi"a)
co#t#.
/. Mi"i'i(e /a& &e/t )o##e#.
c. #inimi$e collection e"penses.
d. #a"imi$e sales.

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
 

a. Has a rela"ed Alenient credit policy.

b. >9ers small discounts.
c. 9#e# a )oc7/o% #+#te'5 #+"chro"i(e# ca#h 6o-#5 a"& ha# #hort
cre&it ter'#.
d. Has an inecient credit and collection department.

'.!ccounts receivable turnover will normally decrease as a result o

a. (he write-o9 o an uncollectible account Aassume the use o the allowance
or doubtul accounts method.
b. ! signifcant sales volume decrease near the end o the accounting period.
c. !n increase in cash sales in proportion to credit sales.
&. A cha"ge i" cre&it 1o)ic+ to )e"gthe" the 1erio& or ca#h
&i#co!"t#.

.(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.
 

7.(he level o accounts receivable will most likely increase as

a. Cash sales increase and number o says sales.
/. Cre&it )i'it# are e%1a"&e&5 cre&it #a)e# i"crea#e5 a"& cre&it ter'#
re'ai" the #a'e.
c. Credit limits are e"panded, cash sales increase, and aging o the
receivables is improving.
d. Cash sales increase, current receivables ratio to past due increases, credit
limits remain the same.

<.! change in credit policy has caused an increase in sales, an increase in

discounts taken, a reduction o the investment in accounts receivable, and a
reduction in the number o doubtul accounts. ;ased on this inormation, we
know thatD
a. Jet proft has increased.
/. The a*erage co))ectio" 1erio& ha# &ecrea#e&.
c. Gross proft has declined.
d. (he si$e o the discount o9ered has decreased.

?.! 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

%ort Co. 1I13, net '3

6iley #anuacturing Co. I10, net 53
had, 8nc. 'I10, net ?3

@sing a '53-day year, the cheapest source o short-term fnancing in this

situation is
a. (he bank. c. 6iley #anuacturing Co.
b. %ort Co. &. Sha&5 I"c. 
 

'1.! company obtaining short-term fnancing with trade credit will pay a higher
percentage fnancing cost, everything else being eual, 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

+reerred euity 0L

Common euity 73L

/nert4s management is planning to build a 270 million acility that will be

fnanced according to this desired capital structure. Currently, 210 million o 
cash is available or capital e"pansion. (he percentage o the 270 million that
will come rom a new issue o common shares is

a. 03.33L. b. 05.0L. c. 73.33L. &. 3;.44<.

''.;obo C4s has an asset base o 21 million. !ter a dividend payment o 23,333,
;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

'0.=ildthing !musement Company*s total assets &uctuate between 2'3,333 and

213,333, while its f"ed assets remain constant at 253,333. 8 the frm ollows
a maturity matching or moderate working capital fnancing policy, what is the
likely level o its long-term fnancing:

a. 2 ?3,333 b. 253,333 d. 213,333 e. 2>?45444

'5.Marrett /nterprises is considering whether to pursue a restricted or rela"ed

current asset investment policy. (he frm*s annual sales are 233,333N its f"ed
 

assets are 2133,333N debt and euity 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:

a. 1.5L b. 5.L c. '.<L &. 3.=<

'7.;ully Corporation purchases raw materials on Muly 1. 8t converts the raw

materials into inventory by eptember '3. However, ;ully pays or the materials
on Muly 3. >n >ctober '1, it sells the fnished goods inventory. (hen, the frm
collects cash rom the sale 1 month later on Jovember '3. 8 this seuence
accurately represents the average working capital cycle, what is the frm4s cash
conversion cycle in days:

a. ? days. /. @>> &a+#.  c. 1' days. d. 10' days.

'<.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:

a. 215,333 b. 2 70,333 c. 2 ',333 &. 2 ?=5444

'?.=hat is the opportunity cost o keeping a cash balance o 2 million, i the daily
interest rate is 3.3L and the average transaction cost o investing money
overnight is 203:

!. 203 . 2>34  C. 233 .

23,333

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 ater the purchase. !ssuming '53
days per year, what is the average collection period.

a. 3 days. b. 10 days. c. 3 days &. ?B &a+#.

Buestions 1 and  are based on the ollowing inormation.

! company has a 13L cost o borrowing and incurs f"ed costs o 2033 or obtaining

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

hold saety stocks o cash.

1.=hen the average cash balance o the company is higher, the Oist !P the cash
balance is Oist ;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 23,?15.03, the
opportunity cost o holding cash or the year will be

a. 2?54@.;3 b. 2,1<'.'3 c. 2<,703.33 d. 217,033.33

'.C#6 is a retail mail order frm that currently uses a central collection system that
reuires all checks to be sent to its ;oston headuarters. !n average o 0 days is
reuired 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. 203,333. b. 233,333. 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:

a. 203,333 b. 21,333 c. 25,333 &. 2@35444

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

!verage si$e o payments 21,03

aily interest rate 3.31L

aving in mailing time 1.' days

aving in processing time 3.? days

;ank charges 23.'3

/stimate the annual savings. !ssume 03 processing days per year.

a. 2',7' /. 2??5;B3  c. 2',033 d. 27,333

7.B6 makes large cash payments averaging +17,333 daily. (he company
changed rom using checks to sight drats which will permit it to hold unto its
cash or one e"tra day. 8 B6 can use the e"tra cash to earn 1L annually,
what annual peso return will it earn:
a. +50.13 b. +5,01.33 c. +5.0 &. P?5>4

<.i"ty percent o ;aco4s annual sales o 2?33,333 is on credit. 8 its year-end

receivables turnover is .0, what is the average collection period and the year-
end receivables, respectively Aassume a '50-day year:

a. @ &a+# a"& 2@?45444.   c. 7' days and 213<,333.

b. 7' days and 213,333. d. <1 days and 233,333.

?.;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 20,333,333, and the reuired rate o return is 5L. (o )ustiy changes in
collection procedures, the minimum annual reduction o costs Ausing a '53-day
year and ignoring ta"es must be

a. 2'70,333 b. 2'7,033 c. 210,333 &. 2??5344

Buestions 03 and 01 are based on the ollowing inormation.

 

nobi$, 8nc. has 2 million invested in (reasury bills yielding <L per annumN this
investment will satisy 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:

A. 2345444  ;. 2133,333 C. 203,333 .

2033,333

01.8 nobi$, 8nc. needs 2157,333 a month, how reuently should the C%> sell o9 
 (reasury bills:

a. !bout every ' days. c. !bout every 10 days.

b. A/o!t e*er+  &a+#.   d. !bout every 1< days.

0.(en B*s 8nc. has an inventory conversion period o 53 days, a receivable

conversion period o '0 days, and a payment cycle o 5 days. 8 its sales or the
period )ust ended amounted to +?7,333, what is the investment in accounts
receivable: A!ssume '53 days a year.

a. +<0,33 b. +7,03 c. P=5344 d. +7?,533

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 ater the purchase. 8 management would toughen
on its collection policy and reuire that all non-discount customers pay on the
'3th day, how much would be the receivables balance:

a. +53,333 /. P45444 c. +73,333 d. Rero

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;5445444

05.+hillips Glass Company buys on terms o I10, net '3. 8t does not take discounts,
and it typically pays '3 days ater the invoice date. Jet purchases amount to
273,333 per year. >n average, how much EreeF trade credit does +hillips
receive during the year: A!ssume a '53-day year.

a. 2>45444 b. 23,333 c. 203,333 d. 253,333

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

a. +,73. /. P;35444. c. +731,07' d. +?,703.

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 inormationD
>ld Credit +olicy Jew Credit +olicy

ales +1,<33,333 +1,?<3,333

!verage collection period '3 days '5 days
 

 (he company reuires 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

a. +,<33 /. P?54 c. +',333 d. +,3<3

53.(he ales irector o Can Can Co. suggests that certain credit terms be modifed.
He estimates the ollowing e9ectsD

 ales will increase by at least 3L.

 !ccounts receivable turnover will be reduced to < times rom the present
turnover o 13 times.
 ;ad debts, now at 1L o sales will increase to 1.0L. ales beore the
proposed changes is at +?33,333. Sariable cost ratio is 00L and desired rate
o return is 3L. %i"ed e"penses amount to +103,333.
hould the company allow the revision o its credit terms:

a. Ye#5 /eca!#e i"co'e -i)) i"crea#e /+ P;534.

b. Kes, because losses will be reduced by +7<,<33.
c. Jo, because income will be reduced by +1',333.

d. Jo, because losses will increase by +<,333.

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
1L. !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

a. Rero as the positive and negative e9ects o9set each other.

b. ! reduction in net income by +73,333.
c. A re&!ctio" i" "et i"co'e /+ P>5>34.
d. ! reduction in net income by +'0,33.

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.

a. 2B5@@@.?4 b. 2',555.73 c. 20,.03 d. 20,55.57

 

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 manuacturing and selling costs are 73L o 
sales and corporate ta" is '0L. 8 it pursues this opportunity, the ater ta" proft
will

a. 8ncrease by +'0,333. c. I"crea#e /+ P;35444.

b. 8ncrease by +?7,033. d. 6emain the same.

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 213,333 over +olicy ! and bad debt losses on the additional
213,333 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:

a. #ake no policy change.

b. Change to only +olicy !.
c. Cha"ge to Po)ic+  'ea"# a)#o ta7i"g Po)ic+ A $r#t.
d. !ll policies lead to the same total frm proft, thus all policies are eual.

50.! frm that oten actors its accounts receivable has an agreement with its
fnance company that reuires 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:

a. 2?',333 b. 2?3,333 c. 2<',733 &. 245;B3

Buestions 55 through 57 are based on the ollowing inormation.

%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 subseuently deaulted. (he company has ',333
accounts on its books, none o which has yet deaulted.

55.Calculate the total number o e"pected deaults, assuming no repeat business is

on the hori$on.

a. 7?0 /. ?4@  c. 1'0 d. 55

 

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:

a. 2133 proft. /. 2@;= )o##. c. 23 loss. d. 25 loss.

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:

a. 21,'5.33 b. 21,'<?.7 c. 2@5=@4.?; d. 21,013.5

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:

a. 21,',333 b. 250,333 c. 2B345444 d. 2107,033

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 ater
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:

a. '5.7L b. '.5L c. @4;.< d. 7'.L

7.=hat is the e9ective annual interest rate on a ?L annual percentage rate

automobile loan that has monthly payments:

a. ?L /. .><  c. ?.<1L d. 13.?L

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

a. <.<L. /. .;;<.  c. <.33L. d. .33L.

 

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 AI10 net '3. 8t can borrow unds rom a bank at an annual
rate o 1L, 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 ater 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 1L, what will be the net dollar savings over the year
by borrowing and then taking the discount on the materials:

a. 2>5;?=  b. 21,175 c. 2,<33 d. 21,

77. =hich o the ollowing statements is true:

a. Cash is decreased when new debt is issued to purchase holiday merchandise.

/. Acce1ti"g the cre&it o0ere& /+ a #!11)ier i# a #o!rce o ca#h.
c. 8ncreasing the use o trade credit o9ered by a supplier is a use o cash.
d. Collecting an accounts receivable is a use o cash.

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:

a. &ecrea#e the 1erio& o ti'e or -hich cre&it i# gra"te& to c!#to'er#

a. b.. decrease the rate at which the average inventory is sold
b. delay payments to suppliers to decrease the cash cycle
c. increase the inventory level while maintaining constant sales
 

<3. !ll else eual, which one o the ollowing will decrease the cash cycle:

a. increasing the operating cycle

b. decreasing the accounts receivable turnover rate
c. decreasing the accounts payable period
&. i"crea#i"g the i"*e"tor+ t!r"o*er rate

<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. I3, net 0
e. >35 "et @4

<. ;aker 8ndustries o9ers credit terms o I3, 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 delinuent in its payment,
;aker 8ndustries should be concerned

a. III a"& IV o")+

b. 8 and 88 only
c. 8, 888, and 8S only
d. 88, 888, and 8S only

<'. =hich one o the ollowing statements is correct concerning the accounts
payable period:

a. Ma"ager# ge"era))+ 1reer a #horter acco!"t# 1a+a/)e 1erio& tha" a

)o"ger o"e.
b. (he accounts payable period is eual to the cost o goods sold divided by the
average accounts payable.
c. /"tending the accounts payable period e9ectively decreases the cash needs
o a frm.
d. 8ncreasing the accounts payable turnover rate increases 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 oce.