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Exam 16: Working Capital Management

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Question 41

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Dewey Corporation has the following data, in thousands. Assuming a 365-day year, what is the firm's cash conversion cycle? Annual sales = $45,000 Annual cost of goods sold = $31,500 Inventory = $4,000 Accounts receivable = $2,000 Accounts payable = $2,400

A) 25 days
B) 28 days
C) 31 days
D) 35 days
E) 38 days

F) B) and C)
G) C) and E)

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Question 42

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Which of the following statements is most consistent with efficient inventory management? The firm has a

A) below average inventory turnover ratio.
B) low incidence of production schedule disruptions.
C) below average total assets turnover ratio.
D) relatively high current ratio.
E) relatively low DSO.

F) A) and B)
G) D) and E)

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Question 43

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Ingram Office Supplies, Inc., buys on terms of 2/15, net 50 days. It does not take discounts, and it typically pays on time, 50 days after the invoice date. Net purchases amount to $450,000 per year. On average, what is the dollar amount of costly trade credit (total credit - free credit) the firm receives during the year? (Assume a 365-day year, and note that purchases are net of discounts.)

Whittington Inc. has the following data. What is the firm's cash conversion cycle? Inventory conversion period = 41 days Receivables collection period = 31 days Payables deferral period = 38 days

A firm buys on terms of 2/8, net 45 days, it does not take discounts, and it actually pays after 58 days. What is the effective annual percentage cost of its non-free trade credit? (Use a 365-day year.)

If a profitable firm finds that it simply must "stretch" its accounts payable, then this suggests that it is undercapitalized, i.e., that it needs more working capital to support its operations.

Your consulting firm was recently hired to improve the performance of Shin-Soenen Inc, which is highly profitable but has been experiencing cash shortages due to its high growth rate. As one part of your analysis, you want to determine the firm's cash conversion cycle. Using the following information and a 365-day year, what is the firm's present cash conversion cycle? Average inventory = $75,000 Annual sales = $600,000 Annual cost of goods sold = $360,000 Average accounts receivable = $160,000 Average accounts payable = $25,000

The cash conversion cycle (CCC) combines three factors: The inventory conversion period, the receivables collection period, and the payables deferral period, and its purpose is to show how long a firm must finance its working capital. Other things held constant, the shorter the CCC, the more effective the firm's working capital management.

Data on Shick Inc. for 2008 are shown below, along with the days sales outstanding of the firms against which it benchmarks. The firm's new CFO believes that the company could reduce its receivables enough to reduce its DSO to the benchmarks' average. If this were done, by how much would receivables decline? Use a 365-day year. Sales $110,000 Accounts receivable $16,000 Days sales outstanding (DSO) Benchmarks' days sales outstanding (DSO) 20.00

Synchronization of cash flows is an important cash management technique, as proper synchronization can reduce the required cash balance and increase a firm's profitability.

Trade credit can be separated into two components: free trade credit, which is credit received after the discount period ends, and costly trade credit, which is the cost of discounts not taken.

A conservative financing approach to working capital will result in permanent current assets and some seasonal current assets being financed using long-term securities.

Atlanta Cement, Inc. buys on terms of 2/15, net 30. It does not take discounts, and it typically pays 60 days after the invoice date. Net purchases amount to $720,000 per year. What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?

Accruals are "free" capital in the sense that no explicit interest must normally be paid on accrued liabilities.

Which of the following statements is CORRECT?

Inventory management is largely self-contained in the sense that little coordination among the sales, purchasing, and production personnel is required for successful inventory management.

Net working capital, defined as current assets minus the sum of payables and accruals, is equal to the current ratio minus the quick ratio.

The maturity of most bank loans is short term. Bank loans to businesses are frequently made as 90-day notes which are often rolled over, or renewed, rather than repaid when they mature. However, if the borrower's financial situation deteriorates, then the bank may refuse to roll over the loan.

Which of the following statements is CORRECT?