Question 1

An increase in the effort put into collection of accounts receivable will result in in the investment in accounts receivable, in bad debts expense, and in collections expenditure.
A) a decrease; an increase; a decrease
B) a decrease; an increase; an increase
C) an increase; a decrease; an increase
D) a decrease; a decrease; an increase

Accepted Answer

An increase in the effort put into the collection of accounts receivable typically results in a decrease in the investment in accounts receivable because more efficient collection processes reduce the amount of outstanding receivables. This effort can also lead to a decrease in bad debts expense, as more rigorous collection efforts reduce the likelihood of accounts becoming uncollectible. However, the costs associated with these increased collection efforts, such as additional staff or technology, mean that collections expenditure will increase.

Question 2

Which statement concerning working capital is not true?
A) It is possible to have too much working capital.
B) The greater the working capital, the better.
C) It is possible to have too little working capital.
D) There is an 'ideal' level of working capital.

Accepted Answer

The statement "The greater the working capital, the better" is not true. While having enough working capital to cover expenses and investments is important, holding too much working capital can be inefficient and lead to lower returns on investment. It is important to strike a balance and maintain an appropriate level of working capital for the size and needs of the business.

Question 3

The statement concerning trade credit that is true is:
A) In most businesses an extra charge is made to those who choose to pay on credit.
B) One business' trade creditor is the other's trade debtor.
C) In a period of inflation it is better to pay off goods bought on credit faster.
D) All of the statements are true.

Accepted Answer

Trade credit involves one business providing goods or services on credit to another business, making the provider a trade creditor and the recipient a trade debtor. Option A is false as not all businesses charge extra for payment on credit, and Option C is false as inflation may actually decrease the real value of the debt, making it better to pay off the debt more slowly. Option D is incorrect as only Option B is true.

Question 4

Which statement concerning trade credit is not true?
A) Credit can be a more convenient method of paying for goods than cash.
B) Trade credit is an important source of finance for most businesses.
C) Trade credit is generally regarded as a 'free' source of finance.
D) A discount of 1% offered for prompt payment of amounts owning to creditors is hardly worth taking.

Accepted Answer

This statement is not true because a discount of 1% may seem small, but it can add up to significant savings over time. It is always beneficial to take advantage of any discounts offered for prompt payment of trade credit.

Question 5

Which of the following is not necessarily true? Increasing the cash discount which a firm offers to its debtors for prompt payment will:
A) increase the net profit of the firm.
B) reduce the average collection period.
C) reduce average debtors.
D) All of the statements are true.

Accepted Answer

Increasing the cash discount may or may not increase the net profit of the firm, depending on the balance between the cost of the discount and the benefit of prompt payment.

Question 6

Use the information below to answer the following questions
Aqua Ltd has forecast the yearly demand for its product as 5,000 units. 100 units of material must be used to produce the product. The cost of placing a single order for raw materials is $20, and the cost of holding one unit of material is $0.40 a year.
-Refer to the information above. The economic order quantity for raw materials is:
A) 10,000 units.
B) 1,000 units.
C) 100 units.
D) 7,071 units.

Accepted Answer

The Economic Order Quantity (EOQ) formula is:
EOQ = √ [(2DS)/(H)]
Where D = yearly demand, S = cost of placing one order, and H = holding cost per unit per year.
Plugging in the values given in the question, we get:
EOQ = √ [(2x5000x100)/(0.40)] = 7,071 units
Therefore, the economic order quantity for raw materials is 7,071 units. The best choice for Aqua Ltd would be to order 7,071 units of raw materials at a time to minimize the total cost of ordering and holding.

Question 7

The most important reason for holding cash is:
A) to obtain tax benefits.
B) to avoid changes in interest rates.
C) to earn interest.
D) for liquidity.

Accepted Answer

The most important reason for holding cash is for liquidity, meaning having access to funds that can be easily and quickly converted to cash in case of emergencies or unexpected expenses. While earning interest and avoiding changes in interest rates may be secondary benefits, they are not the primary reason for holding cash. Obtaining tax benefits is not a reason for holding cash.

Question 8

Which statement concerning the economic order quantity (EOQ) model is not correct?
A) A decrease in the number of orders increases the overall cost of ordering inventory.
B) The lower the level of inventory held, the greater the number of orders required.
C) The more inventory that is held, the higher the cost of holding inventory.
D) None of the above, i.e. all are correct statements.

Accepted Answer

A decrease in the number of orders actually decreases the overall cost of ordering inventory, as there are fewer setup costs and reduced administrative costs associated with placing fewer orders.

Question 9

Credit should be granted to customers in which circumstance?
A) if sales can be increased
B) if bad debts can be minimised
C) if others in the industry grant credit
D) if the benefits exceed the costs

Accepted Answer

Credit should only be granted to customers if the benefits exceed the costs, which means the company's potential increase in sales and profits from granting credit should outweigh the potential costs of bad debts and other risks associated with credit. The fact that others in the industry grant credit or the desire to minimize bad debts are not sufficient reasons in themselves to grant credit.

Question 10

Extending the credit period granted, with all other components of the credit policy remaining unchanged, will most likely cause:
A) a decrease in bad debts.
B) a decrease in debtors.
C) a decrease in sales.
D) none of the above.

Accepted Answer

Extending the credit period typically leads to an increase in sales because more customers may find the terms attractive, potentially increasing debtors as more customers take advantage of the credit terms. It may also lead to an increase in bad debts if customers are unable to pay within the extended period. Therefore, none of the provided options accurately describe the likely outcome of extending the credit period.

Question 11

All of these are assumptions of the economic order quantity model, except:
A) demand does not fluctuate seasonally.
B) no buffer inventory is required.
C) the amount of inventory held is constant over the period.
D) there are no discounts for bulk purchases.

Accepted Answer

The economic order quantity model assumes that demand is constant, buffer inventory is required, and there may be discounts for bulk purchases. However, it does not assume that the amount of inventory held is constant over the period. In fact, the purpose of the economic order quantity model is to determine the optimal amount of inventory to order, which may vary depending on demand and other factors.

Question 12

Which statement concerning the operating cash cycle (OCC) is true?
A) It is possible to have a negative OCC.
B) Reducing the time period for which inventory is held shortens the OCC.
C) The longer the OCC, the greater the amount of working capital required.
D) All of the statements are true.

Accepted Answer

A) It is possible to have a negative OCC - this refers to situations where the company is able to collect cash from customers faster than it pays suppliers for inventory, resulting in a negative OCC.
B) Reducing the time period for which inventory is held shortens the OCC - this is true as a shorter inventory holding period means that cash is tied up in inventory for a shorter period, thereby reducing the OCC.
C) The longer the OCC, the greater the amount of working capital required - this is also true as a longer OCC means that cash is tied up in the operating cycle for a longer period, requiring more working capital to finance the cycle. Therefore, all the statements are true.

Question 13

Pink Company expects demand for a product to be 12,005 units annually. It costs $5 per unit to carry inventory for one year. Order costs are $50 per order. The economic order quantity is:
A) 600 units.
B) 240 units.
C) 1,200 units.
D) 490 units.

Accepted Answer

The answer of Pink Company expects demand for a product...

Question 14

Which of these is not a cost of holding insufficient levels of inventory?
A) lost production because of shortages of raw materials
B) loss of sales
C) high transportation costs on rush deliveries of inventory
D) extra inventory storage costs

Accepted Answer

Extra inventory storage costs are a cost of holding excess levels of inventory, not insufficient levels.

Question 15

If inventory turnover changes from 4 times a year to 5 times a year, this means:
A) inventory turnover is too slow.
B) inventory turnover is faster than the industry average.
C) on average, inventory is being sold faster.
D) on average, it is taking longer to sell inventory.

Accepted Answer

The answer of If inventory turnover changes from 4 times...

Question 16

A decline in the level of working capital will:
A) working capital is not related to risk.
B) reduce risk.
C) increase risk.
D) leave risk unchanged.

Accepted Answer

Working capital is the difference between current assets and current liabilities. If there is a decline in working capital, it means that current assets have decreased, or current liabilities have increased. This situation increases the risk of the company not being able to meet its short-term obligations, such as paying bills or loans. Therefore, a decline in working capital increases the risk.

Question 17

Calculate the operating cash cycle if the inventory turnover period is 21 days, the debtor's turnover period is 32 days and the creditor turnover period is 40 days.
A) 13 days
B) 53 days
C) -13 days
D) 93 days

Accepted Answer

The operating cash cycle is calculated as the sum of the inventory turnover period and the debtor's turnover period, minus the creditor turnover period: 21 + 32 - 40 = 13 days.

Question 18

A firm has annual credit sales of $2 million, an average debtor's balance of $300,000 and works 365 days a year. The average settlement period for debtors is:
A) 150 days.
B) 15 days.
C) 66.7 days.
D) 54.7 days.

Accepted Answer

Average collection period or settlement period = (Average debtor's balance / Annual credit sales) x Number of days in the year
= ($300,000 / $2,000,000) x 365
= 54.7 days

Question 19

Flash Enterprises usually takes 60 days to pay its suppliers. In order to encourage prompt payment, supplier Y offers Flash Enterprises a 1.5% discount for payment within 10 days. What is the annual percentage discount forgone if Flash Enterprises does not take up the discount offer?
A) 18.25%
B) 1.5%
C) 11%
D) 9.1%

Accepted Answer

The answer of Flash Enterprises usually takes 60 days to...

Question 20

Items which comprise inventory are:
A) finished goods.
B) raw materials.
C) work-in-process.
D) all of the above.

Accepted Answer

Inventory includes all three categories - finished goods, raw materials, and work-in-process. Finished goods refer to products that are completed and ready for sale, raw materials are the basic components used in production, and work-in-process items are partially completed products that are in the process of being manufactured.

Quiz 12: The Management of Working Capital

An increase in the effort put into collection of accounts receivable will result in in the investment in accounts receivable, in bad debts expense, and in collections expenditure.

Which statement concerning working capital is not true?

The statement concerning trade credit that is true is:

Which statement concerning trade credit is not true?

Which of the following is not necessarily true? Increasing the cash discount which a firm offers to its debtors for prompt payment will:

The most important reason for holding cash is:

Which statement concerning the economic order quantity (EOQ) model is not correct?

Credit should be granted to customers in which circumstance?

Extending the credit period granted, with all other components of the credit policy remaining unchanged, will most likely cause:

All of these are assumptions of the economic order quantity model, except:

Which statement concerning the operating cash cycle (OCC) is true?

Pink Company expects demand for a product to be 12,005 units annually. It costs $5 per unit to carry inventory for one year. Order costs are $50 per order. The economic order quantity is:

Which of these is not a cost of holding insufficient levels of inventory?

If inventory turnover changes from 4 times a year to 5 times a year, this means:

A decline in the level of working capital will:

Calculate the operating cash cycle if the inventory turnover period is 21 days, the debtor's turnover period is 32 days and the creditor turnover period is 40 days.

A firm has annual credit sales of $2 million, an average debtor's balance of $300,000 and works 365 days a year. The average settlement period for debtors is:

Flash Enterprises usually takes 60 days to pay its suppliers. In order to encourage prompt payment, supplier Y offers Flash Enterprises a 1.5% discount for payment within 10 days. What is the annual percentage discount forgone if Flash Enterprises does not take up the discount offer?

Items which comprise inventory are: