Operating Cycle, Working Capital, Market Efficiency

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1. The length of time between the payment for inventory and the collection of cash from receivables is called the:
operating cycle.
inventory period.
accounts receivable period.
accounts payable period.
cash cycle.

Answer: Cash cycle

2. A firm has sales of $720,000. The cost of goods sold is equal to 70% of sales. The firm has an average inventory of $6,500. How many days on average does it take the firm to sell its inventory?
3.30 days
4.71 days
67.29 days
77.54 days
110.77 days

Answer: 4.71 days
Cost of goods sold= 70% x $ 720,000 = $504,000
Daily cost of goods sold= $504,000 / 365= $1380.82
Average days in inventory= Average inventory / Daily Cost of goods sold= $6,500/ $1380.82 = 4.71 days

3. Dallas and More (D&M) sells its inventory in 82 days on average. Its average customer charges his purchase on a credit card whereby payment is received in ten days. On the other hand, D&M takes 56 days on average to pay for its purchases. Given this information, what is the length of D&M's operating cycle?
26 days
36 days
66 days
92 days
128 days

Answer:
Operating cycle = Average days in inventory + Collection period= 82 days + 10 days = 92 days

4. Which one of the following statements concerning the cash cycle is correct?
The cash cycle is equal to the operating cycle minus the inventory period.
A negative cash cycle is actually preferable to a positive cash cycle.
Granting credit to slower paying customers tends to decrease the cash cycle.
The cash cycle plus the accounts receivable period is equal to the operating cycle.
The most desirable cash cycle is the one that equals zero days.

Answer: A negative cash cycle is actually preferable to a positive cash cycle.

Cash cycle = Inventory period (Average days in inventory) + Receivable Period - Payable period = Operating cycle - Payable period

Granting credit to slower paying customers tends to increase the cash cycle.

5. Which of the following are uses of cash?
(I.) marketable securities are sold
(II.) the amount of inventory on hand is increased
(III.) the firm takes out a long-term bank loan
(IV.) payments are paid on accounts payable
I and III only
II and IV only
I and IV only
II and III only
II, III and IV only

Answer: II and IV only

marketable securities are sold - source of cash
the firm takes out a long-term bank loan - source of cash

6. Which one of the following will not affect the operating cycle?
decreasing the payables turnover from 7 times to 6 times
increasing the days sales in receivables
decreasing the inventory turnover rate
increasing the average receivables balance
decreasing the credit repayment times for the firm's customers

Answer: decreasing the payables turnover from 7 times to 6 times

Operating cycle =Inventory period (Average days in inventory) + Receivable Period
Payable period is not included in the operating cycle

7. Which of the following is not included in current ...