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Multiple Choice Questions on Working Capital

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Question 1
1. Which of the following statements is true?
b. Cash is decreased when new debt is issued to purchase holiday merchandise.
a. Accepting the credit offered by a supplier is a source of cash.
c. Increasing the use of trade credit offered by a supplier is a use of cash.
d. Collecting an accounts receivable is a use of cash.

Question 2
2. Which one of the following will increase the operating cycle?
e. increasing the inventory period
c. decreasing the cash cycle
b. decreasing the accounts payable period
a. increasing the accounts payable period
d. increasing the accounts receivable turnover rate

Question 3
3. Which one of the following actions should a manager take if he or she wants to decrease the operating cycle?
d. decrease the period of time for which credit is granted to customers
c. decrease the rate at which the average inventory is sold
a. delay payments to suppliers to decrease the cash cycle
b. increase the inventory level while maintaining constant sales
e. purchase all inventory with cash

Question 4
4. All else equal, which one of the following will decrease the cash cycle?
c. increasing the operating cycle
e. decreasing the accounts receivable turnover rate
d. decreasing the accounts payable period
b. increasing the inventory turnover rate
a. increasing the credit period granted to a customer

Question 5
5. Which one of the following credit terms is most apt to produce the shortest accounts receivable period?
b. net 10
c. 2/10, net 30
a. net 45
e. 2/20, net 45
d. 3/5, net 10

Question 6
6. Baker Industries offers credit terms of 2/20, net 60 to Charlie Co. Charlie Co. has an inventory period of 15 days and an operating cycle of 45 days. Given this, which of the following statements are correct? (I. The credit terms of Baker Industries are too restrictive; II. If Charlie Co. forgoes the discount on its purchases, it will have a negative cash cycle; III. Baker Industries is financing the accounts receivable of Charlie Co; IV. If Charlie Co. is delinquent in its payment, Baker Industries should be concerned)
b. III and IV only
a. I and II only
d. I, III, and IV only
c. II, III, and IV only
e. I, II, III, and IV

Question 7
7. Which one of the following statements is correct concerning the accounts payable period?
c. Managers generally prefer a shorter accounts payable period than a longer one.
a. The accounts payable period is equal to the cost of goods sold divided by the average accounts payable.
d. Extending the accounts payable period effectively decreases the cash needs of a firm.
e. Increasing the accounts payable turnover rate increases the accounts payable period.
b. An increase in the accounts payable period will increase the operating cycle, all else equal.

Question 8
8. A flexible short-term financial policy:
b. tends to cause more production interruptions than does a restrictive policy due to inventory shortages.
d. tends to lower the selling prices that can be charged versus the prices under a restrictive policy.
c. lowers the costs of maintaining current assets.
e. tends to indicate that the carrying costs of a firm are relatively high as compared to the shortage costs.
a. tends to increase the cash inflows of a firm in the future more so than a restrictive policy does.

Question 9
9. A firm which adopts a compromise short-term financial policy:
a. borrows sufficient long-term money so that short-term financing can be avoided.
c. relies primarily on short-term debt to meet all of its financing needs.
d. will sometimes have cash surpluses and sometimes have cash shortfalls.
b. finances its long-term assets with a combination of short-term and long-term debt.
e. will maintain a constant level of long-term debt as the firm increases in size.

Question 10
10. A negative net cash inflow on a cash budget indicates that a firm:
a. has cash outflows other than those related to accounts payable.
d. is facing bankruptcy.
e. has projected cash disbursements that exceed the projected cash collections.
c. has funds available for short-term investing.
b. utilizes both short and long-term debt.

Question 11
11. Nelson's Mulch has the following current account values for the year.

Account Beginning Balance Ending Balance

Accounts receivable $1,300 $1,450

Inventory 2,100 1,900

Accounts payable 1,500 1,250

These accounts represent a net _____ of cash for the year of:

e. use; $250.
a. source; $100.
b. source; $150.
d. use; $200.
c. use; $100.

Question 12
12. Wayne's Wells has sales for the year of $48,900 and an average inventory of $8,800. The cost of goods sold is equal to 60 percent of sales and the profit margin is 5 percent. How many days on average does it take the firm to sell an inventory item?
a. 95 days
e. 109 days
d. 104 days
b. 99 days
c. 101 days

Question 13
13. The accounts receivable turnover rate for the Bedford Bedding Co. has gone from an average of 6.7 times to 7.2 times per year. The days in receivables has:
a. decreased by 7 days.
b. decreased by 4 days.
e. increased by 7 days.
d. increased by 5 days.
c. increased by 4 days.

Question 14
14. The Winters Co. has annual sales of $918,700. Cost of goods sold is equal to 55 percent of sales. The firm has an average accounts payable balance of $72,400. How many days on average does it take The Winters Co. to pay its suppliers?
c. 38 days
d. 46 days
e. 52 days
b. 34 days
a. 29 days

Question 15
15. The Sun Lee Co. has a receivables turnover rate of 11.5, a payables turnover rate of 9.8, and an inventory turnover rate of 13.6. What is the length of the firm's operating cycle?
c. 37 days
a. 15 days
b. 22 days
d. 59 days
e. 67 days

Question 16
16. Robert's International currently has an inventory turnover of 15, a receivables turnover of 18, and a payables turnover of 10. How many days are in the cash cycle?
a. 8 days
c. 45 days
e. 81 days
b. 22 days
d. 74 days

Question 17
17. Die Cast, Inc., has these projected sales estimates:

April May June July

Sales $1,200 $1,300 $1,700 $1,900

The company collects 15 percent of its sales in the month of sale, 70 percent in the following month, and another 12 percent in the second month following the month of sale. Die Cast never collects 3 percent of its sales. What is the amount of the June collections?

b. $1,406
c. $1,423
e. $1,631
d. $1,447
a. $1,309

Question 18
18. The Thomas-Davis Co. has the following estimated sales:

Q1 Q2 Q3 Q4

Sales $3,800 $3,300 $2,800 $4,400

Purchases are equal to 67 percent of the following quarter's sales. The accounts receivable period is 45 days and the accounts payable period is 60 days. Assume that there are 30 days in each month. Thomas-Davis will purchase _____ of goods in quarter 3 and pay their suppliers _____ during quarter 3.

a. $1,876; $2,099
b. $1,876; $2,233
d. $2,948; $2099
c. $2,948; $1,876
e. $2,948; $2,233

Question 19
19. The Co-Co Co. purchases are equal to 55 percent of the following month's sales. The accounts payable period for the purchases is 60 days while all other expenditures are paid in the month during which they are incurred. Assume that each month has 30 days. The company has compiled this information:

April May June July

Sales $4,500 $5,200 $5,700 $6,100

Payroll expenses 400 500 550 575

Rent and other expenses 900 940 980 1,020

Taxes and insurance 2,500 100 2,500 0

What is the total amount of Co-Co's disbursements for the month of June?

d. $7,165
c. $6,890
b. $5,352
a. $4,360
e. $8,048

Question 20
20. The Complete Co. has projected their first quarter sales at $7,500, second quarter sales at $8,000, and third quarter sales at $8,400. The firm's cost of goods sold is equal to 55 percent of the next quarter's sales. The accounts receivable period is 45 days and the accounts payable period is 60 days. At the beginning of the first quarter, the firm has an accounts receivable balance of $3,600 and an accounts payable balance of $2,750. The firm pays $1,200 a month in cash expenses and $200 a month in taxes. At the beginning of the first quarter, the cash balance is $300 and the short-term loan balance is zero. During the first quarter, the firm is planning on spending $2,500 for some new equipment. The firm maintains a minimum cash balance of $25. Assume that each month has 30 days. The net cash flow for the first quarter is _____ and the cumulative cash surplus (deficit) at the end of the first quarter, prior to any short-term borrowing, is:
b. -$767; -$492.
a. -$767; -$518.
c. -$767; -$467.
d. $1,733; -$518.
e. $1,733; -$492.

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Solution Preview

The answers are in the attached file
Question 1  1 points    Save    
  1. Which of the following statements is true?  
    b. Cash is decreased when new debt is issued to purchase holiday merchandise.  
   a. Accepting the credit offered by a supplier is a source of cash.  
   c. Increasing the use of trade credit offered by a supplier is a use of cash.  
   d. Collecting an accounts receivable is a use of cash.  

Answer:    a. Accepting the credit offered by a supplier is a source of cash.  

Debt provides cash which is used to purchase holiday merchandise- no change in cash
Trade credit means not paying immediately for purchases-source of cash
Collecting an accounts receivable provides cash-source of cash

   Question 2  1 points    Save    
  2. Which one of the following will increase the operating cycle?  
    e. increasing the inventory period  
   c. decreasing the cash cycle  
   b. decreasing the accounts payable period  
   a. increasing the accounts payable period  
   d. increasing the accounts receivable turnover rate  

Answer:     e. increasing the inventory period  

Operating cycle = Inventory period + Accounts Receivable period
Cash cycle= Operating cycle - Accounts payable period

Accounts payable period does not affect operating cycle
Increasing the accounts receivable turnover rate reduces the accounts receivable period and hence decreases the operating cycle

   Question 3  1 points    Save    
  3. Which one of the following actions should a manager take if he or she wants to decrease the operating cycle?  
    d. decrease the period of time for which credit is granted to customers  
   c. decrease the rate at which the average inventory is sold  
   a. delay payments to suppliers to decrease the cash cycle  
   b. increase the inventory level while maintaining constant sales  
   e. purchase all inventory with cash  

Answer:     d. decrease the period of time for which credit is granted to customers  

Operating cycle = Inventory period + Accounts Receivable period

Decreasing the period of time for which credit is granted to customers, reduces the accounts receivable period and hence decreases the operating cycle

   Question 4  1 points    Save    
  4. All else equal, which one of the following will decrease the cash cycle?  
    c. increasing the operating cycle  
   e. decreasing the accounts receivable turnover rate  
   d. decreasing the accounts payable period  
   b. increasing the inventory turnover rate  
   a. increasing the credit period granted to a customer  

Answer:    b. increasing the inventory turnover rate  

Cash cycle= Operating cycle - Accounts payable period
Or Cash cycle= Inventory period + Accounts Receivable period - Accounts payable period

Increasing the inventory turnover rate reduces the inventory period and therefore reduces the cash cycle

   Question 5  1 points    Save    
  5. Which one of the following credit terms is most apt to produce the shortest accounts receivable period?  
    b. net 10  
   c. 2/10, net 30  
   a. net 45  
   e. 2/20, net 45  
   d. 3/5, net 10  

Answer:    d. 3/5, net 10  

Because the 3% discount is not available after the 5th day and you only have an additional 5 days to pay the entire amount

   Question 6  1 points    Save    
  6. Baker Industries offers credit terms of 2/20, net 60 to Charlie Co. Charlie Co. has an inventory period of 15 days and an operating cycle of 45 days. Given this, which of the following statements are correct? (I. The credit terms of Baker Industries are too restrictive; II. If Charlie Co. forgoes the discount on its purchases, it will have a negative cash cycle; III. Baker Industries is financing the accounts receivable of Charlie Co; IV. If Charlie Co. is delinquent in its payment, Baker Industries should be concerned)  
    b. III and IV only  
   a. I and II only  
   d. I, III, and IV only  
   c. II, III, and IV only  
   e. I, II, III, and IV  

Answer:     b. III and IV only  

I is not true: credits terms of Baker are very liberal - 60 days are available to make payments
II cannot be inferred: Charlie may have othe suppliers than Baker

   Question 7  1 points    Save    
  7. Which one of the following statements is correct concerning the accounts payable period?  
    c. Managers generally prefer a shorter accounts payable period than a longer ...

Solution Summary

20 Multiple Choice Questions on Working Capital have been answered.

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Multiple Choice Questions: Working Capital, Dividends, treasury stock, issuance of shares, income statement,

13-2. Assume a company's current ratio is less than one. If the company pays current liabilities with cash, the new current ratio will:
b. decrease.
c. remain the same.
d. cannot be determined with the information given

12-3. Stockton-Meadows Incorporated reports an increase in Accounts Payable of $9,200 and an increase in inventory of $45,000 for the current year. Accounts Payable relates solely to the purchase of merchandise. Sales on account were $532,100 and cost of goods sold was $358,000. The total purchases of merchandise for the period were:
a. $174,100.
d. $403,000.

12-4. Coker's Appliance Shop reported interest revenue of $9,500 and its Interest Receivable account decreased $1,200 during the same period. Interest received for the period amounted to:
a. $1,200.
b. $10,700.
d. $8,300.

12-5. Berlin & Snider enterprises Inventory account decreased $37,500 and its Accounts Payable account (which relates solely to the purchase of merchandise) decreased $13,760 during the year. Berlin & Snider also reported sales of $856,000 and cost of goods sold of $597,600 during the same period. Berlin & Snider's payments to suppliers for inventory during the year were:
a. $621,340.
b. $573,860.
d. $648,860.

12-6. Tri-Square Company reported plant assets, net of accumulated depreciation, on January 1, 2004, at $645,000 and $732,500 on December 31, 2004. The income statement showed depreciation of $48,300 and a $5,600 loss on sale of plant assets. Tri-Square Company acquired $213,000 of plant assets during the year. The proceeds from the sale of plant assets were:
a. $125,500.
b. $89,900.
c. $71,600.

9-8. The payment of a cash dividend previously recorded:
a. reduces stockholders' equity and reduces assets.
b. increases liabilities and increases assets.
c. reduces liabilities and reduces assets.

9-9. The B. Disraeli Corporation has 10,000 shares of 10%, $100 par value, cumulative preferred stock outstanding and 50,000 shares of $5 par value common stock outstanding. As of the beginning of this fiscal year, there were 2 years' dividends in arrears on the preferred stock. The board of directors wants to give the common stockholders a $1.50 dividend per share at the end of this fiscal year. The total dividends to be declared by the B. Disraeli Corporation are:
a. $105,000.
b. $120,000.
d. $375,000.

9-10. The entry to record the distribution of a stock dividend includes a:
a. credit to Common Stock.
b. debit to Retained Earnings.
c. credit to Retained Earnings.

9-11. Dividends in arrears on preferred stock are reported as a:
b. footnote to the financial statements.
c. reduction in retained earnings.
d. current asset on the balance sheet.

9-12. The declaration of a cash dividend:
a. increases stockholders' equity and reduces liabilities.
b. increases liabilities and increases stockholders' equity.
c. increases liabilities and decreases stockholders' equity.

9-13. A large stock dividend will:
b. have no effect on total assets.
c. have no effect on total assets or total owners' equity.
d. increase total owners' equity.

9-15. The purchase of treasury stock:
b. decreases assets and decreases stockholders' equity.
c. decreases assets and increases liabilities.
d. increases assets and decreases stockholders' equity.

9-16. The number of shares of treasury stock plus the number of shares outstanding equals:
a. the number of shares authorized.
b. the number of shares issued.
c. the number of shares authorized that have not been issued.

9-17. Assets received in exchange for the issuance of stock should be recorded at:
a. historical cost.
c. fair market value as determined by a good-faith estimate from independent appraisers. d. none of these answers

9-19. A dividend becomes a legal liability of the corporation on the:
a. date of payment.
b. date of declaration.
c. date of record.

9-21. The entry to record the issuance of 12,500 shares no-par value common stock at $2.50 per share includes a:
b. credit to Retained Earnings for $31,250.
c. credit to Common Stock for $31,250.
d. credit to Paid-in Capital in Excess of Par Value-Common for $31,250.

9-23. The entry to record the issuance of 8,000 shares of $5 par value common stock at $9 per share includes a:
a. credit to Common Stock for $72,000.
b. credit to Common Stock for $40,000.
d. debit to Paid-in Capital in Excess of Par Value-Common for $32,000.

9-24. The payment of a cash dividend previously recorded:
b. increases liabilities and increases assets.
c. reduces liabilities and reduces assets.
d. increases stockholders' equity and reduces liabilities.

9-25. The entry to record the payment of a cash dividend previously declared includes a:
a. debit to Retained Earnings.
c. credit to Dividends Payable.
d. debit to Dividends Payable.

6-26. If ending inventory for the year ended December 31, 2004, is overstated by $25,000:
a. net income for 2005 will be understated by $25,000.
b. net income for 2005 will be overstated by $25,000.
c. ending inventory for 2005 will be understated by $25,000.

6-27. If ending inventory on December 31, 2004, is overstated, then:
b. cost of goods sold for the year ended December 31, 2004, will be overstated.
c. gross profit for the year ended December 31, 2004, will be understated.
d. gross profit for the year ended December 31, 2005, will be understated.

6-29. Which inventory method presents accurate ending inventory on the balance sheet but fails to match cost of goods sold with revenue on the income statement?
a. FIFO
c. weighted-average
d. specific identification

6-30. An item is considered material if:
a. its dollar value is greater than 1.5% of total assets.
b. its exclusion from the financial statements would affect the decisions of a user of the financial statements.

6-31. Which of the following statements is generally true when prices are rising?
a. LIFO produces taxable income that exceeds taxable income under FIFO.
b. The use of LIFO will result in paying less in taxes than under FIFO.
d. FIFO results in paying less in taxes than under LIFO.

6-32. When the FIFO method is used, cost of goods sold is assumed to consist of:
b. the units with the lowest per unit cost.
c. the units with the highest per unit cost.
d. the oldest units.

6-33. Which of the following would be included in the Cost of Goods Sold account on a merchandising company's income statement?
a. shipping costs from the manufacturer to the merchandiser
b. sales commissions
d. sales taxes

6-34. If ending inventory is overstated, then:
a. cost of goods sold and ending inventory will both be overstated.
b. cost of goods sold and ending inventory will both be understated.
d. cost of goods sold will be understated and ending inventory will be overstated.

6-35. An error in the ending inventory for the year ended December 31, 2004:
a. automatically creates errors in cost of goods in the 2004 and 2005 financial statements. b. has no effect on the 2004 financial statements but will create an error in the 2005 financial statements.
d. affects only the 2004 financial statements.

6-37. All of the following are reasons for choosing the LIFO versus the FIFO costing method except:
a. it reports the most up-to-date inventory values on the balance sheet.
c. LIFO uses more current costs in calculating cost of goods sold.
d. it is generally more conservative.

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