Question 1

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 payables well?

Accepted Answer

Ally takes the discount and pays at the end of the discount period, which is the optimal way to manage accounts payable.

Question 2

What of the following best describes just-in-time inventory management?

Accepted Answer

Just-in-time inventory management (JIT) involves acquiring inventory precisely when needed so that inventory balance is always at or close to zero. This approach reduces carrying costs associated with inventory, eliminates waste associated with obsolescence or spoilage, and minimizes the risk of inventory obsolescence. The aim is to produce goods just-in-time to fulfill customer demand, rather than in advance, which reduces lead times and transportation costs, enhances production efficiencies, and allows companies to be more responsive to changes in demand.

Question 3

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

B) 2 / 98 = 1.0204%; 60 days - 10 days = 50 days; Number of 50 days in a year = 365 days / 50 days = 7.3; Effective Annual cost = (1.0204)^7.3 - 1 = 15.9%

Question 4

Which of the following statements is FALSE?

Accepted Answer

B) Some firms ignore the payment due period and pay later, in a practice referred to as stretching the accounts payable.

Question 5

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, on average, does not take advantage of the discount period and pays well before payment is due. By not taking the discount, Bercraft is losing out on potential savings and paying its suppliers earlier than necessary, which could negatively impact its own cash flow.

Question 6

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

Accepted Answer

Option D is not a benefit of holding inventory; rather, it represents a risk or disadvantage associated with holding inventory. Inventory holding can lead to spoilage and obsolescence, especially for perishable goods or products with a limited lifecycle, which is a cost to the firm, not a benefit.

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

C) 1 / 99 = 1.01%; 45 days - 10 days = 35 days; No. of 35 days in a year = 365 / 35 = 10.4286; Effective Annual cost = (1.01)^10.4286 - 1 = 11.05%

Question 8

Which of the following is NOT a reason why a firm may typically choose not to stretch its accounts payable?

Accepted Answer

Delaying payment can sometimes increase the cost of credit due to potential additional fees, higher interest rates, or other penalties, which is a reason a firm might choose to avoid stretching its accounts payable, not a reason for choosing to do so.

Question 9

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

D) 3 / 97 = 1.031%; 60 days - 5 days = 55 days; Number of 55 days in a year = 365 days / 55 days = 6.636; Effective Annual cost = (1.0309)^6.636 - 1 = 22.40%

Question 10

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

C) Average number of days = $180,000 / $12,000 = 15 days

Question 11

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

B) 1 / 99 = 1.0101%; 45 days -10 days = 35 days; Number of 35 days in a year = 365 / 35 = 10.4285; Effective Annual cost = (1.0101)^10.4285 - 1 = 11.1%

Question 12

Which of the following statements is FALSE?

Accepted Answer

A) The higher the discount percentage offered, the greater the cost of forgoing the discount and using trade credit.

Question 13

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

To determine if LeokLee Industries is managing its accounts payables well, we need to calculate the Payables Turnover Ratio and the Average Payment Period. The Payables Turnover Ratio is calculated as Cost of Goods Sold / Average Accounts Payable, which is $8,760,000 / $720,000 = 12.17 times per year. The Average Payment Period is then 365 days / Payables Turnover Ratio, which is 365 / 12.17 ≈ 30 days. Since the terms are 1/10 net 30, paying on average in 30 days means LeokLee is not taking the discount but is paying when the payment is due, indicating they are managing their payables well by not incurring late fees or damaging supplier relationships.

Question 14

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

Accepted Answer

The answer of Evertz Metals buys and stockpiles dolomite to...

Question 15

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

D) 3 / 97 = 1.030928%; 60 days - 15 days = 45 days; Number of 45 days in a year = 365 / 45 = 8.11; Effective Annual cost = (1.030928)^8.11 - 1 = 28.03%

Question 16

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

C) 2 / 98 = 1.0204%; 45 days - 10 days = 35 days; Number of 35 days in a year = 365 days / 35 days = 10.4285; Effective Annual cost = (1.0204)^10.4285 - 1 = 23.45%

Question 17

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

Accepted Answer

The answer of Which of the following is/are direct costs...

Question 18

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 merely increasing inventory to build up assets.

Question 19

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

B) 2 / 98 = 1.0204%; 80 days - 20 days = 60 days; Number of 60 days in a year = 365 / 60 = 6.083; Effective Annual cost = (1.0204)⁶^.083 - 1 = 13.1%

Question 20

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

Accepted Answer

The cost of purchasing and stockpiling dolomite is an acquisition cost, as it represents the initial expense incurred to obtain the inventory.

Quiz 19: Working Capital Management

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 payables well?

What of the following best describes just-in-time inventory management?

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?

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?

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

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

Which of the following is NOT a reason why a firm may typically choose not to stretch its accounts payable?

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

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 ________.

Which of the following statements is FALSE?

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, they alter their smelting process so that calcite limestone is used instead. How is the inventory cost of the unused dolomite best categorized?

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

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 is/are direct costs associated with inventory? I. Acquisition costs

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

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

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