Test banks Working Capital

Question 1

Working capital management involves investment and financing decisions related to:
A. plant and equipment and current liabilities.
B. current assets and capital structure.
C. current assets and current liabilities.
D. sales and

Answer 1

C. current assets and current liabilities.

Question 2

The goal of managing working capital, such as inventory, should be to minimize the:
A. costs of carrying inventory
B. opportunity cost of capital
C. aggregate of carrying and shortage costs D. amount of spoilage or pilferage

Answer 2

C. aggregate of carrying and shortage costs

Question 3

2. As a company becomes more conservative with respect to working capital policy, it would
   tend to have a(n)
   A. Increase in the ratio of current liabilities to noncurrent liabilities.
   B. Increase in the operating cycle.
   C. Decrease in the operating cycle.
   D. Increase in the ratio of current assets to current liabilities

Answer 3

D. Increase in the ratio of current assets to current liabilities

Question 4

Short-term financing plans with high liquidity have:
A. high return and high risk
B. moderate return and moderate risk
C. low profit and low risk
D. none of the above

Answer 4

B. moderate return and moderate risk

Question 4

Temporary working capital supports
A. the cash needs of the company.
C. acquisition of capital equipment.
B. payment of long-term debt.
D. seasonal peaks.

Answer 4

D. seasonal peaks.

Question 4

The length of time between payment for inventory and the collection of cash is referred to as
A. payables deferral period
C. operating cycle
B. receivables conversion period
D. cash conversion cycle

Answer 4

D. cash conversion cycle

Question 5

As a firm’s cash conversion cycle increases, the firm:
A. becomes less profitable
B. increases its investment in working capital
C. reduces its accounts payable period

Answer 5

B. increases its investment in working capital

Question 6

Casie Company turns out 200 calculators a day at a cost of P250 per calculator for material and variable conversion cost. It takes the firm 18 days to convert raw materials in calculator. Casie’s usual credit terms extended to its customers is 30 days, and then generally pays its suppliers in 20 days.
If the foregoing cycles are constant, what amount of working capital must Casie Company finance?
A. P1,400,000 C. P 900,000
B. P2,400,000 D. P1,800,000

Answer 6

A. P1,400,000
Answer: A

Question 7

Luke Company has an inventory conversion period of 60 days, a receivables conversion period of 45 days, and a payments cycle of 30 days. What is the length of the firm’s ca
conversion cycle?
A. 90 days
C. 54 days
B. 75 days
D. 105 days

Answer 7

B. 75 days

Question 8

The Spades Company has an inventory conversion period of 75 days, a receivables
conversion period of 38 days, and a payable payment period of 30 days. What is the length of the firm’s cash conversion cycle?
A. 83 days
B. 113 days
C. 67 days
D. 45 days

Answer 8

A. 83 days

Question 9

Samaritan Supplies, Inc. has P5 million in inventory and P2 million in accounts receivable. Its average daily sales are P100,000. The company has P1.5 million in accounts payable. Its average daily purchases are P50,000. What is the length of the company’s cash conversion
period?
A. 50 days C. 30 days B. 20 days D. 40 days

Answer 9

D. 40 days

Question 10

Bank term loans represent .
a. long-term loans that looks like short-term debt.
b. loans for specified amounts that require borrowers to repay them according to
specified schedules.
c. the pledge of receivables.
d. the difference between the available or collected balance at the bank and the
firm’s book (or ledger) balance

Answer 10

b. loans for specified amounts that require borrowers to repay them according to
specified schedules.

Question 11

Assume you skip the discount and pay at the end of the net period for the
following credit terms: 1/10, net 22. Calculate the APR for the trade credit.
a. about 30.72%
b. about 31.42%
c. about 31.72%
d. about 35.76%.

Answer 11

a. about 30.72%
[ANSWER: The APR for trade credit is: APR =
(Discount% / [100% – Discount%])(365 / [Total period – Discount period]) =
(1% / [100% – 1%])(365 days / [22 days – 10 days]) = (1 / 99) (365 / 12) = 365 / [(99)(12)] =
365 / 1188 = 0.307239 or about 30.72%.]

Question 12

Assume you skip the discount and pay at the end of the net period for the
following credit terms: 1/10, net 22. Calculate the APY for the trade credit.
a. about 30.72%
b. about 31.42%
c. about 35.46%
d. about 35.76%

Answer 12

d. about 35.76%
[ANSWER: The APY for trade credit is: APY =
(1 + [Discount% / {100% – Discount%}])(365 / [Total period – Discount period]) – 1 =
(1 + [1% / {100% – 1%}])(365 days / [22 days – 10 days]) – 1 = (1.010101)(30.416667) – 1 =
1.3575715 – 1 = 0.3575715 or about 35.76%.]

Question 13

What is the effective annual cost of skipping the discount and paying at the end
of the net period for the following credit terms: 6/10, net 70?
a. about 38.83%
b. about 45.70%
c. about 48.83%
d. none of these

Answer 13

b. about 45.70%
[ANSWER: The APY for trade credit is: APY =
(1 + [Discount% / {100% – Discount%}])(365 / [Total period – Discount period]) – 1 =
(1 + [6% / {100% – 6%}])(365 days / [70 days – 10 days]) – 1 = (1.0638298)(6.0833333) – 1 = 1.4570425 – 1 =
0.4570425 or about 45.70%.]