Question 1

If a supplier is offering trade credit of 1/10 net 30, and a buyer chooses not to take the discount, when should they pay, assuming that they wish to stay on good terms with the supplier?

Accepted Answer

The buyer should pay on day 30 to stay on good terms with the supplier, as that is the end of the credit period. Choosing not to take the discount means that they forfeit the opportunity to save money, but they still have the obligation to pay within the agreed-upon credit terms. Paying before day 10 (option A) would result in the buyer not maximizing their working capital, and paying after day 30 (option C) would likely result in strained relations with the supplier. Paying on day 10 (option D) would be taking the discount and therefore not applicable to the scenario.

Question 2

What is the effective annual cost of credit terms of 2/20 net 60, if the firm stretches the accounts payable to 80 days?

Accepted Answer

The effective annual cost of credit terms of 2/20 net 60, if the firm stretches the accounts payable to 80 days, is 13.1%. This is because the firm is taking an additional 20 days to pay its bills, which means that it is essentially borrowing money from the supplier at an interest rate of 2% per month. Over the course of a year, this interest rate would amount to 13.1%.

Question 3

What is the effective annual cost of credit terms of 3/15 net 30, if the firm stretches the accounts payable to 60 days?

Accepted Answer

The credit terms 3/15 net 30 means a 3% discount is available if payment is made within 15 days, and the net amount is due in 30 days. 
If the firm stretches the accounts payable to 60 days, they will not be able to take the 3% discount and will have to pay the full amount. 
The effective annual cost of credit can be calculated as [(1+Discount %)/(1-Discount %)^(360/Net Days)]-1. 
So, the effective annual cost of credit for this scenario would be [(1+0.03)/(1-0.03)^(360/60)]-1 = 0.2803 or 28.03%. 
Therefore, the best choice is B.

Question 4

Your firm purchases goods from its supplier on terms of 2/10, net 40. The effective annual cost to your firm if it chooses not to take advantage of the trade discount offered and stretches the accounts payable to 60 days is closest to:

Accepted Answer

To calculate the effective annual cost, we need to find the effective interest rate for not taking the discount and stretching the accounts payable to 60 days.

First, we need to find the cost of not taking the discount. The cost of not taking the discount can be found using the following formula:

(Discount % ÷ (100% - Discount %)) x (365 ÷ (Number of days credit - Discount period))

Plugging in the numbers, we get:

(2% ÷ (100% - 2%)) x (365 ÷ (60 - 10)) = 14.08%

So, the cost of not taking the discount is 14.08%.

Next, we need to find the effective interest rate. The effective interest rate can be found using the following formula:

((1 + Cost of not taking discount)^(365 ÷ Number of days in period)) - 1

Plugging in the numbers, we get:

((1 + 0.1408)^(365 ÷ 60)) - 1 = 15.88%

So, the effective annual cost to the firm if it chooses not to take advantage of the trade discount offered and stretches the accounts payable to 60 days is closest to 15.9%.

Therefore, the best choice is B.

Question 5

Which of the following statements is FALSE?

Accepted Answer

The answer of Which of the following statements is FALSE?
...

Question 6

What is the effective cost of credit terms of 3/5 net 45 if the firm stretches the accounts payable to 60 days?

Accepted Answer

The answer of What is the effective cost of credit...

Question 7

What is the effective annual cost of credit terms of 1/10 net 30, if the firm stretches the accounts payable to 45 days?

Accepted Answer

To find the effective annual cost of credit terms, we need to find the annual percentage rate (APR).

Here's the calculation:

Discounted price = Full price - Discount 
Discounted price = Full price - (Full price x Discount rate)

Since the terms are 1/10 net 30, the discount rate is 1%.

Discounted price = Full price - (Full price x 0.01)

The firm stretches the accounts payable to 45 days, which is equal to 1.5 months.

APR = (Discounted price/Full price) x (360 days/1.5 months)

Now we can substitute the Discounted price formula from above:

APR = [(Full price - (Full price x 0.01))/Full price] x (360/1.5)

APR = (1 - 0.01) x (360/1.5) = 24.48%

Since the firm is stretching the accounts payable to 45 days, the effective annual cost of credit terms is higher than the APR.

Effective annual cost = [(1 + (Discount rate/(1-Discount rate)))^365/Number of days payable -1] x 100%

Effective annual cost = [(1 + (0.01/(1-0.01)))^365/45 - 1] x 100% = 11.05%

Therefore, the best choice is C, 11.05%.

Question 8

Effective inventory management builds up assets through increases in inventory and thus increases a firm's value.

Accepted Answer

Effective inventory management aims to minimize holding costs and reduce excess inventory, thereby optimizing the balance between inventory levels and customer demand, not necessarily increasing assets through higher inventory levels.

Question 9

LeokLee Industries has an average accounts payable balance of $720 000. Its average annual cost of goods sold is $8 760 000. It receives terms of 1/10 net 30 from its suppliers. Is LeokLee managing its accounts payables well?

Accepted Answer

LeokLee Industries is managing its accounts payables well by choosing not to take the discount but paying when payment is due, which can be a strategic decision to maximize cash flow while adhering to payment terms.

Question 10

Evertz Metals buys and stockpiles dolomite to use in its smelting processes. Before all this dolomite is used, however, it alters the smelting process so that calcite limestone is used instead. How is the inventory cost of the unused dolomite best categorised?

Accepted Answer

The cost of holding the dolomite as inventory that is not being used in the smelting process is a carrying cost. This includes costs such as storage, insurance, and depreciation.

Question 11

Which of the following is NOT a benefit of holding inventory?

Accepted Answer

Holding inventory can provide benefits such as minimising order costs, capitalising on seasonality, and minimising the risk of not being able to obtain inputs. However, holding inventory also comes with costs such as storage and handling costs and the risk of spoilage and obsolescence. Therefore, option B is not a benefit, but a potential drawback of holding inventory.

Question 12

The primary advantage of holding inventory is to minimise the risk of stock-outs and seasonality in demand.

Accepted Answer

Holding inventory ensures that there is always a supply of goods to meet customer demand, which reduces the risk of stock-outs. It also helps to manage seasonality in demand by having a buffer of stock to handle fluctuations in sales.

Question 13

A firm has an average accounts payable balance of $180 000. Its average daily cost of goods sold is $12 000. What is the average number of days that the firm takes to pay its debt?

Accepted Answer

The average number of days to pay its debt is calculated by dividing the average accounts payable by the average daily cost of goods sold: $180,000 / $12,000 = 15 days.

Question 14

Your firm purchases goods from its supplier on terms of 1/10 net 30. The effective annual cost to your firm if it chooses not to take advantage of the trade discount offered and stretches the accounts payable to 45 days is closest to:

Accepted Answer

The effective annual cost is 11.1% because the firm is not taking advantage of the 1% trade discount and is stretching the accounts payable to 45 days. This means that the firm is paying 1% more for the goods and is also paying interest on the accounts payable for an additional 15 days. The effective annual cost is calculated as follows:Effective annual cost = (1 + (1/10)) * (360 / (30 + 15)) - 1 = 11.1%

Question 15

Evertz Metals buys and stockpiles $4 000 000 worth of dolomite to use in its smelting processes. How is this inventory cost best categorised?

Accepted Answer

The cost of acquiring the dolomite is an acquisition cost.

Question 16

Bercraft Industries has an average accounts payable balance of $280 000. Its average annual cost of goods sold is $4 780 000. It receives terms of 1/20 net 40 from its suppliers. Is Bercraft managing its accounts payables well?

Accepted Answer

Bercraft Industries is not managing its accounts payables well because it does not take advantage of the discount period and pays well before payment is due, which results in the opportunity cost of not earning interest on the cash they paid early.

Question 17

Ally Manufacturing has an average accounts payable balance of $420 000. Its average annual cost of goods sold is $10 220 000. It receives terms of 2/15 net 30 from its suppliers. Is Ally managing its accounts payable well?

Accepted Answer

Ally is taking advantage of the discount period and paying at the end of the discount period, which is the optimal way to manage accounts payable.

Question 18

What is the effective cost of credit terms of 2/10, net 30 if the firm stretches the accounts payable to 45 days?

Accepted Answer

The answer of What is the effective cost of credit...

Question 19

Which of the following statements is FALSE?

Accepted Answer

The answer of Which of the following statements is FALSE?
...

Question 20

Which of the following is/are direct costs associated with inventory? I. Acquisition costs
II. Carrying costs
III. Order costs

Accepted Answer

Acquisition costs, carrying costs, and order costs are all direct costs associated with inventory. Acquisition costs are the costs of purchasing inventory, carrying costs are the costs of holding inventory, and order costs are the costs related to ordering and receiving inventory.

Quiz 19: Working Capital Management

If a supplier is offering trade credit of 1/10 net 30, and a buyer chooses not to take the discount, when should they pay, assuming that they wish to stay on good terms with the supplier?

What is the effective annual cost of credit terms of 2/20 net 60, if the firm stretches the accounts payable to 80 days?

What is the effective annual cost of credit terms of 3/15 net 30, if the firm stretches the accounts payable to 60 days?

Your firm purchases goods from its supplier on terms of 2/10, net 40. The effective annual cost to your firm if it chooses not to take advantage of the trade discount offered and stretches the accounts payable to 60 days is closest to:

Which of the following statements is FALSE?

What is the effective cost of credit terms of 3/5 net 45 if the firm stretches the accounts payable to 60 days?

What is the effective annual cost of credit terms of 1/10 net 30, if the firm stretches the accounts payable to 45 days?

Effective inventory management builds up assets through increases in inventory and thus increases a firm's value.

LeokLee Industries has an average accounts payable balance of $720 000. Its average annual cost of goods sold is $8 760 000. It receives terms of 1/10 net 30 from its suppliers. Is LeokLee managing its accounts payables well?

Evertz Metals buys and stockpiles dolomite to use in its smelting processes. Before all this dolomite is used, however, it alters the smelting process so that calcite limestone is used instead. How is the inventory cost of the unused dolomite best categorised?

Which of the following is NOT a benefit of holding inventory?

The primary advantage of holding inventory is to minimise the risk of stock-outs and seasonality in demand.

A firm has an average accounts payable balance of $180 000. Its average daily cost of goods sold is $12 000. What is the average number of days that the firm takes to pay its debt?

Your firm purchases goods from its supplier on terms of 1/10 net 30. The effective annual cost to your firm if it chooses not to take advantage of the trade discount offered and stretches the accounts payable to 45 days is closest to:

Evertz Metals buys and stockpiles $4 000 000 worth of dolomite to use in its smelting processes. How is this inventory cost best categorised?

Bercraft Industries has an average accounts payable balance of $280 000. Its average annual cost of goods sold is $4 780 000. It receives terms of 1/20 net 40 from its suppliers. Is Bercraft managing its accounts payables well?

Ally Manufacturing has an average accounts payable balance of $420 000. Its average annual cost of goods sold is $10 220 000. It receives terms of 2/15 net 30 from its suppliers. Is Ally managing its accounts payable well?

What is the effective cost of credit terms of 2/10, net 30 if the firm stretches the accounts payable to 45 days?

Which of the following statements is FALSE?

Which of the following is/are direct costs associated with inventory? I. Acquisition costs II. Carrying costs III. Order costs