Chapter 18 Practice Problems

Costs that increase as a firm acquires additional current assets are called _____ costs. A. carrying B. shortage C. order D. safety E. trading

a

Money deposited by a borrower with the bank in a low or non-interest-bearing account as a condition of a loan agreement is called a: A. compensating balance. B. secured credit deposit. C. letter of credit. D. line of credit. E. pledge.

a

The length of time between the purchase of inventory and the receipt of cash from the sale of that inventory is called the: A. operating cycle. B. inventory period. C. accounts receivable period. D. accounts payable period. E. cash cycle.

a

Which one of the following is indicative of a short-term restrictive financial policy? A. purchasing inventory on an as-needed basis B. granting credit to all customers C. investing heavily in marketable securities D. maintaining a large accounts receivable balance E. keeping inventory levels high

a

HG Livery Supply had a beginning accounts payable balance of $57,300 and an ending accounts payable balance of $55,100. Sales for the period were $610,000 and costs of goods sold were $442,000. What is the payables turnover rate? A. 7.86 times B. 8.39 times C. 9.02 times D. 9.86 times E. 10.85 times

a (Payables turnover = $442,000/[($57,300 + $55,100)/2)] = 7.86 times)

An increase in which one of the following is an indicator that an accounts receivable policy is becoming more restrictive? A. bad debts B. accounts receivable turnover rate C. accounts receivable period D. credit sales E. operating cycle

b

Which of the following are uses of cash? I. collecting a receivable II. increasing inventory III. obtaining a bank loan IV. paying a supplier for previous purchases A. I and III only B. II and IV only C. I and II only D. I, II, and IV only E. II, III, and IV only

b

Which of the following will increase the operating cycle? I. increasing the inventory turnover rate II. increasing the payables period III. decreasing the receivable turnover rate IV. decreasing the inventory level A. I only B. III only C. II and IV only D. I and IV only E. II and III only

b

West Chester Automation has an inventory turnover of 16 and an accounts payable turnover of 11. The accounts receivable period is 36 days. What is the length of the cash cycle? A. 5.67 days B. 25.63 days C. 41.00 days D. 52.00 days E. 58.81 days

b (Cash cycle = (365/16) + 36 - (365/11) = 25.63 days)

The length of time between the sale of inventory and the collection of the payment for that sale is called the: A. operating cycle. B. inventory period. C. accounts receivable period. D. accounts payable period. E. cash cycle.

c

Which of the following statements are correct? I. An increase in the accounts payable period shortens the cash cycle. II. The cash cycle is equal to the operating cycle minus the inventory period. III. A negative cash cycle is preferable to a positive cash cycle. IV. The cash cycle plus the accounts receivable period is equal to the operating cycle. A. I only B. III and IV only C. I and III only D. I and IV only E. I, II, and III only

c

Which one of the following will decrease the net working capital of a firm? Assume the current ratio is greater than 1.0. A. selling inventory at cost B. collecting payment from a customer C. paying a payment on a long-term debt D. selling a fixed asset for book value E. paying a supplier for the purchase of an inventory item

c

Which one of the following will decrease the operating cycle? A. decreasing the inventory turnover rate B. decreasing the accounts payable period C. increasing the accounts receivable turnover rate D. increasing the accounts payable period E. increasing the accounts receivable period

c

A company currently has a 48 day cash cycle. Assume the firm changes its operations such that it decreases its receivables period by 2 days, increases its inventory period by 3 days, and increases its payables period by 4 days. What will the length of the cash cycle be after these changes? A. 42 days B. 43 days C. 45 days D. 47 days E. 49 days

c (Cash cycle = 48 - 2 + 3 - 4 = 45 days)

Denver Interiors, Inc., has sales of $836,000 and cost of goods sold of $601,000. The firm had a beginning inventory of $41,000 and an ending inventory of $47,000. What is the length of the inventory period? A. 19.21 days B. 20.89 days C. 26.72 days D. 30.53 days E. 33.69 days

c (Inventory turnover = $601,000/[($41,000 + $47,000)/2] = 13.65909 Inventory period = 365/13.65909 = 26.72 days)

Merryl Enterprises currently has an operating cycle of 62 days. The firm is analyzing some operational changes, which are expected to increase the accounts receivable period by 2 days and decrease the inventory period by 5 days. The accounts payable turnover rate is expected to increase from 42 to 46 times per year. If all of these changes are adopted, what will the firm's new operating cycle be? A. 51 days B. 57 days C. 59 days D. 60 days E. 65 days

c (Operating cycle = 62 + 2 - 5 = 59 days)

The Blue Star has sales of $387,000, costs of goods sold of $259,000, average accounts receivable of $9,800, and average accounts payable of $12,600. How long does it take for the firm's credit customers to pay for their purchases? A. 7.67 days B. 8.78 days C. 9.24 days D. 11.88 days E. 13.81 days

c (Receivables turnover = $387,000/$9,800 = 39.4898 Receivables period = 365/39.4898 = 9.24 days)

A flexible short-term financial policy: I. increases shortage costs due to frequent cash-outs. II. tends to increase sales as compared to a restrictive policy. III. requires a sizeable investment in current assets. IV. incurs more carrying costs than a restrictive policy. A. I and IV only B. II and III only C. I, II, and III only D. II, III, and IV only E. I, III, and IV only

d

An increase in which one of the following will decrease the cash cycle, all else equal? A. payables turnover B. days sales in inventory C. operating cycle D. inventory turnover rate E. accounts receivable period

d

The Lumber Mart recently replaced its management team. As a result, the firm is implementing a restrictive short-term policy in place of the flexible policy under which the firm had been operating. Which of the following should the employees expect as a result of this policy change? I. reduction in sales due to stock outs II. greater inventory selection III. decreased sales due to the new accounts receivable credit policy IV. decreased investment in marketable securities A. I and II only B. II and IV only C. I, II, and IV only D. I, III, and IV only E. I, II, III, and IV

d

Interior Designs has an inventory period of 46 days, an accounts payable period of 38 days, and an accounts receivable period of 32 days. Management is considering an offer from their suppliers to pay within 10 days and receive a 2 percent discount. If the new discount is taken, the accounts payable period is expected to decline by 26 days. If the new discount is taken, the operating cycle will be _____ days. A. 52 B. 62 C. 71 D. 78 E. 91

d (Original operating cycle = 46 + 32 = 78 days; The operating cycle will not change as the accounts payable period does not affect the operating cycle, only the cash cycle.)

The optimal investment in current assets for an operating firm occurs at the point where: A. both shortage costs and carrying costs equal zero. B. shortage costs are equal to zero. C. carrying costs are equal to zero. D. carrying costs exceed shortage costs. E. the total costs of holding current assets is minimized.

e