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[i]. Which of the following statements is most

a. A firm that makes 90 percent of its sales on
credit and 10 percent for cash is growing at a rate of 10 percent annually. If
the firm maintains stable growth it will also be able to maintain its accounts
receivable at its current level, since the 10 percent cash sales can be used to
manage the 10 percent growth rate.
b. In managing a firm’s accounts receivable it is
possible to increase credit sales per day yet still keep accounts receivable
fairly steady if the firm can shorten the length of its collection period.
c. If a firm has a large percentage of accounts
over 30 days old, it is a sign that the firm’s receivables management needs to
be reviewed and improved.
d. Since receivables and payables both result from
sales transactions, a firm with a high receivables-to-sales ratio should also
have a high payables-to-sales ratio.
e. None of the statements above is correct.

[ii]. Which of the following statements is most

a. If credit sales as a percentage of a firm’s
total sales increases, and the volume of credit sales also increases, then the
firm’s accounts receivable will automatically increase.
b. It is possible for a firm to overstate profits
by offering very lenient credit terms that encourage additional sales to
financially “weak” firms. A major disadvantage of such a policy is that it is
likely to increase uncollectible accounts.
c. A firm with excess production capacity and
relatively low variable costs would not be inclined to extend more liberal
credit terms to its customers than a firm with similar costs that is operating
close to capacity.
d. Firms use seasonal dating primarily to decrease
their DSO.
e. Seasonal dating with terms 2/15, net 30 days,
with April 1 dating, means that if the original sale took place on February
1st, the customer can take the discount up until March 15th, but must pay the
net invoice amount by April 1st.

[iii]. Which of the following statements is most

a. If a firm’s volume of credit sales declines
then its DSO will also decline.
b. If a firm changes its credit terms from 1/20,
net 40 days, to 2/10, net 60 days, the impact on sales can’t be determined
because the increase in the discount is offset by the longer net terms, which
tends to reduce sales.
c. The DSO of a firm with seasonal sales can vary.
While the sales per day figure is usually based on the total annual sales, the
accounts receivable balance will be high or low depending on the season.
d. An aging schedule is used to determine what
portion of customers pay cash and what portion buy on credit.
e. Aging schedules can be constructed from the
summary data provided in the firm’s financial statements.


[iv]. Which of the following statements is most

a. Other things held constant, the higher a firm’s
days sales outstanding (DSO), the better its credit department.
b. If a firm that sells on terms of net 30 changes
its policy and begins offering all customers terms of 2/10, net 30, and if no
change in sales volume occurs, then the firm’s DSO will probably increase.
c. If a firm sells on terms of 2/10, net 30, and
its DSO is 30 days, then its aging schedule would probably show some past due
d. Statements a and c are correct.
e. None of the statements above is correct.

[v]. Which of the following statements is
incorrect about working capital policy?

a. A company may hold a relatively large amount of
cash if it anticipates uncertain sales levels in the coming year.
b. Credit policy has an impact on working capital
since it has the potential to influence sales levels and the speed with which
cash is collected.
c. The cash budget is useful in determining future
financing needs.
d. Holding minimal levels of inventory can reduce
inventory carrying costs and cannot lead to any adverse effects on
e. Managing working capital levels is important to
the financial staff since it influences financing decisions and overall
profitability of the firm.

[vi]. Which of the following statements is most

a. Depreciation is included in the estimate of
cash flows (Cash flow = Net income + Depreciation), so depreciation is set
forth on a separate line in the cash budget.
b. If cash inflows and cash outflows occur on a
regular basis, such as the situation where inflows from collections occur in
equal amounts each day and most payments are made regularly on the 10th of each
month, then it is not necessary to use a daily cash budget. A cash budget prepared at the end of the
month will suffice.
c. Lockboxes are more important for fast food
retailers such as McDonald’s, which deal primarily with cash, than for
manufacturers such as Xerox, which are generally paid by check.
d. Statements b and c are correct.
e. None of the statements above is correct.

Multiple Choice:


[vii]. The Danser Company expects to have sales of
$30,000 in January, $33,000 in February, and $38,000 in March. If 20 percent of
sales are for cash, 40 percent are credit sales paid in the month following the
sale, and 40 percent are credit sales paid 2 months following the sale, what
are the cash receipts from sales in March?

a. $55,000
b. $47,400
c. $38,000
d. $32,800
e. $30,000

[viii]. Jumpdisk Company writes checks averaging
$15,000 a day, and it takes five days for these checks to clear. The firm also
receives checks in the amount of $17,000 per day, but the firm loses three days
while its receipts are being deposited and cleared. What is the firm’s net
float in dollars?

a. $126,000
b. $ 75,000
c. $ 32,000
d. $ 24,000
e. $ 16,000

[ix]. If Hot Tubs Inc. had sales of $2,027,773 per
year (all credit) and its days sales outstanding was equal to 35 days, what was
its average amount of accounts receivable outstanding? (Assume a 365-day year.)

a. $194,444
b. $ 57,143
c. $ 5,556
d. $ 97,222
e. $212,541

[x]. A
firm has $5,000,000 of inventory on average and annual sales of
$30,000,000. Assume there are 365 days
per year. What is the firm’s inventory conversion

a. 30.25 days
b. 60.83 days
c. 45.00 days
d. 72.44 days
e. 55.25 days

[xi]. Ammer
Products has an average accounts payable balance of $850,000 and its annual
cost of goods sold is $8,750,000. Assume
there are 365 days per year. What is
Ammer’s payables deferral period?

a. 25.50 days
b. 30.50 days
c. 35.46 days
d. 42.33 days
e. 50.00 days

[xii]. Spartan
Sporting Goods has $5 million in inventory and $2 million in accounts
receivable. Its average daily sales are $100,000. The company’s payables
deferral period (accounts payable divided by daily purchases) is 30 days. What
is the length of the company’s cash conversion cycle?

a. 100 days
b. 60 days
c. 50 days
d. 40 days
e. 33 days

[xiii]. For the Cook County Company, the average age of
accounts receivable is 60 days, the average age of accounts payable is 45 days,
and the average age of inventory is 72 days.
Assuming a 365-day year, what is the length of the firm’s cash
conversion cycle?

a. 87 days
b. 90 days
c. 65 days
d. 48 days
e. 66 days

[xiv]. Bowa
Construction’s days sales outstanding is 50 days (on a 365-day basis). 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. 5.84
b. 4.25
c. 3.33
d. 2.75
e. 7.25


[xv]. 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. $2,600
b. $ 800
c. $ 776
d. $ 740
e. $ 728




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