Question 1

Companies that are mostly influenced by seasonal sales have to make a choice between

Accepted Answer

Companies influenced by seasonal sales must choose between level production with inventory buildup, seasonal production with an uneven workforce, or maintaining a stable or fluctuating workforce, making all options relevant.

Question 2

Massa Machine Tool expects total sales of $60,000. The price per unit is $10. The firm estimates an ordering cost of $25 per order, with an inventory cost of $0.70 per unit. What is the optimum order size?

Accepted Answer

The answer of Massa Machine Tool expects total sales of...

Question 3

A Just-In-Time (JIT) inventory management program has all but which of the following requirements?

Accepted Answer

A JIT inventory management program aims to minimize inventory levels, which means that large safety stocks are not needed. Instead, close ties between suppliers, manufacturers, and customers are necessary to ensure timely delivery of materials and products. Quality production is also important to ensure that the products meet customer demand and minimize waste.

Question 4

Which of the following is generally considered to be the least liquid of current assets?

Accepted Answer

Inventory is generally considered to be the least liquid of current assets because it takes time to sell and convert into cash, and it may also lose value over time. Accounts receivable, marketable securities, and cash equivalents are all more easily convertible into cash.

Question 5

Cost savings from JIT inventory management include(s)

Accepted Answer

JIT inventory management can lead to reduced overhead expenses, lower inventory financing costs, and greater productivity. By having inventory arrive exactly when needed and in the precise amount required, there is less need for storage space, handling, and tracking. This can reduce overhead costs. Additionally, since less inventory is being stored, there are lower inventory financing costs. Finally, by streamlining processes and reducing waste, productivity can be improved, leading to cost savings. Therefore, all of the options are correct.

Question 6

The economic order quantity

Accepted Answer

The economic order quantity (EOQ) assumes that delivery times of each order are consistent, but it does not assume that inventory usage is seasonal or consider stock-outs. The EOQ is simply a formula used to calculate the optimal quantity of inventory to order to minimize total inventory costs, taking into account the ordering cost and carrying cost of inventory. Therefore, the best choice is B, which is the only option that accurately reflects the assumptions made in the EOQ formula.

Question 7

Waldron Inc. is considering selling to a group of new customers that will bring in credit sales of $24,000 with a return on sales of 5%. The only new investment will be in accounts receivable. Waldron has a turnover ratio of 6 to 1 between sales and accounts receivable. What is their expected return on investment?

Accepted Answer

The expected return on investment (ROI) is calculated by dividing the return on sales by the turnover ratio. Here, ROI = 5% / (1/6) = 30%.

Question 8

Modos Company has deposited $3,500 in checks received from customers. It has written $1,400 in checks to its suppliers. The initial bank and book balance was $600. If $1,600 of its customers' checks have cleared, but only $600 of its own, calculate its float.

Accepted Answer

Bank balance = $600 + $1.600 − $600 = $1,600
Book balance = $600 + $3,500 − $1,400 = $2,700
Float = $1,100

Question 9

Inventory is usually divided into three basic categories except

Accepted Answer

Projected sales is not a category of inventory, rather it is a forecast of future demand. The three basic categories of inventory are raw materials, work in process, and finished goods.

Question 10

Use of the economic order quantity

Accepted Answer

The economic order quantity provides the lowest overall inventory costs by balancing ordering costs and holding costs. While it can be used to determine the reorder point and safety stock, its primary purpose is to minimize total inventory costs.

Question 11

Variables important to credit scoring models include

Accepted Answer

Credit scoring models consider various factors, including the age of the company, negative public records, and facility ownership, as they can all impact the creditworthiness of a business.

Question 12

When developing a credit scoring report, many variables would be considered. Which of the following best represents the major factors Dun & Bradstreet would examine?

Accepted Answer

Dun & Bradstreet would consider financial statements, payment experiences, and negative public records when developing a credit scoring report. Choices A, B, and D include some relevant factors, but they are not the major ones considered by Dun & Bradstreet.

Question 13

Price Corp. is considering selling to a group of new customers and creating new annual sales of $90,000. Five percent will be uncollectible. The collection cost on these accounts is 3% of new sales, the cost of producing and selling is 80% of sales, and the firm is in the 30% tax bracket. What is the profit on new sales?

Accepted Answer

The profit on new sales is $7,560. This is calculated as follows:Sales: $90,000Uncollectible accounts: $4,500 (5% of $90,000)Collection cost: $2,700 (3% of $90,000)Cost of goods sold: $72,000 (80% of $90,000)Gross profit: $10,800 ($90,000 - $72,000 - $2,700)Taxes: $3,240 (30% of $10,800)Net profit: $7,560 ($10,800 - $3,240)

Question 14

All of the following are benefits of just-in-time inventory ordering systems except that JIT

Accepted Answer

JIT does not prevent stock outs as it relies on timely ordering and delivery of goods to maintain inventory levels, leaving little room for error or unexpected demand. A delay or disruption in the supply chain can lead to stock outs and lost sales.

Question 15

For a given firm, holding other factors constant, ordering costs per unit generally

Accepted Answer

Ordering costs are the expenses associated with the placement of an order for inventory. They include activities such as preparing purchase orders, receiving orders, inspecting goods, and storing them. Holding other factors constant, ordering costs per unit generally decline as average inventory increases because there are fewer orders to place and process. This is known as the economic order quantity (EOQ) model, which seeks to find the optimal order quantity that minimizes the total cost of ordering and holding inventory. Therefore, option A is the correct answer.

Question 16

The costs of carrying inventory do not include

Accepted Answer

The costs of carrying inventory include interest on funds tied up in inventory, cost of warehouse space, insurance and handling costs, but do not include ordering costs. Ordering costs are the expenses incurred in the process of placing and receiving orders from suppliers.

Question 17

If average daily remittances are $6 million, and "extended disbursement float" adds two days to the disbursement schedule, how much should the firm be willing to pay for a cash management system if the firm earns 7% on excess funds?

Accepted Answer

The extended disbursement float adds two days to the disbursement schedule, which means that the firm's average daily remittance is being held for two extra days before being credited to their account.

Thus, the amount of cash that the firm has on hand is on average $6 million multiplied by 2 days, which equals $12 million.

If the firm earns 7% on excess funds, they would earn $840,000 ($12 million x 7%) if they invest the funds during those two extra days.

Therefore, the firm should be willing to pay up to $840,000 for a cash management system that can help them take advantage of the extended disbursement float.

Question 18

The amount of safety stock that a firm carries depends upon

Accepted Answer

The amount of safety stock a firm carries depends on the predictability of inventory usage and the time period necessary to fill inventory orders. This is because safety stock is used to buffer against uncertain demand and lead time variability, both of which are affected by these two factors. The riskiness of the storage facility may affect the need for safety stock in terms of protecting against loss or damage, but it is not directly related to the amount of safety stock needed for inventory management purposes.

Question 19

Which of the following is not a valid quantitative measure for accounts receivable collection policies?

Accepted Answer

Ratio of debt to equity is a measure of a company's overall financial leverage and has no direct relation to accounts receivable collection policies. The other three options are all valid quantitative measures for accounts receivable collection policies.

Question 20

When using the economic order quantity model

Accepted Answer

The economic order quantity model is designed to minimize the total cost of inventory management, which includes both ordering costs and carrying costs. The optimal order quantity occurs where the total holding cost is equal to the total ordering cost. Therefore, the correct answer is C: costs are minimized when total carrying costs and total ordering costs are equal. Choice A is incorrect because ordering costs actually decrease as the level of inventory increases, since fewer orders are needed. Choice B is incorrect because carrying costs increase as the level of inventory increases, due to increased storage and handling costs.

Quiz 7: Current Asset Management