Accounting Working Capital Questions

1.Which of the following assets are not included as part of a company's working capital?
a. Cash b. Inventory c. Plant building d. Accounts Receivable

Q2.Patti's Prunes net working capital in 2010 was $56,000. This means
a. current assets were $56,000 b. current assets were more than $56,000 because current liabilities were subtracted c. current assets were less than $56,000 because current liabilities were added

Q3.If Patti's Prunes had a loan agreement with its bank specifying that its quick ratio be kept above 1.2, during which years would it have been in violation of the minimum liquidity ratio requirements? (Reminder Quick ratio =[(current assets-inventory)/current liabilities], Current ratio = current assets/current liabilities)
a. 2010 only b. 2011 only c. Both 2010 and 2011 d. Neither 2010 nor 2011

Q4.If a company takes out a mortgage of interest only payments with a balloon payment in 6 years, when does the balloon payment become a current liability?
a. When the mortgage balloon payment is paid b. When the mortgage balloon payment is within one year from payment c. When the company signs the mortgage agreement d. It never becomes a current liability. It is a mortgage

Q5.Patti's Prunes receives an order for 15,000 10-pound boxes of prunes. She needs four weeks to process the order (because of drying time), and total labor costs of $22,500 paid in 2 bi-weekly installments of $11,250. She needs $30,000 worth of prunes to fill the order. Her supplier grants her 4 weeks trade credit. She must also extend 4 weeks trade credit to Health Clubs of Arizona. How much working capital would she need to handle the order and how long would it take her from order to payment?

a. $11,250 and 4 weeks b. $41,250 and 8 weeks c. $52,500 and 4 weeks d. $52,500 and 8 weeks

Q6.What was the cash conversion cycle for Patti's Prunes in FYE11 if its payables deferral period was 19 days? (Reminder Cash Conversion cycle = Inventory conversion period (= 360 days /[sales/inventory]) + Receivables Conversion period(= Receivable/[Sales/360]) - Payables Deferral period)
a. 101.8 days b. 114.5 days c. 122.3 days d. 134.0 days

Q7.Patti's Prunes had a cash conversion cycle of 108 days at FYE10. If Patti wants to expand production by $300,000 next year and she must pay her bank 9% for short-term credit, what would be the interest cost for the additional production? (Reminder Additional working capital cost = (additional production) x (cash conversion cycle/360) x rate of interest)
a. $3,106 b. $7,450 c. $8,100 d. $11,142

Q8.If a small business tries to cut its cash conversion cycle by reducing its inventory conversion period, what is a likely result?
a. The cash conversion cycle will not be affected b. The company's credit rating will be affected c. The reduced inventory conversion period will reduce the cash conversion cycle d. None of the above is a likely result

Q9.When is a business more likely to choose a "tight" or restricted working capital policy?
a. When interest rates are high b. When the company needs flexibility and good will c. When interest rates are low d. When the cost of financing working capital are low

Q10.If a company pays its suppliers very late, the suppliers are not likely to be sympathetic because
a. They don't believe in special orders b. They don't follow D&B ratings c. They have their own working capital needs

PATTI'S PRUNES, INC. Income Statement ($ thousands) PATTI'S PRUNES, INC. Balance Sheet at December 31, 2011 ($ thousands) Fiscal year ending 12/31/11 12/31/10 Assets Sales Cash 8 6 Marketable securities 5 4 Accounts receivable 75 56 Inventory 23 18 3 2 114 86 Plant and equipment 35 35 Less accumulated depreciation 10 5 Net plant and equipment 25 30 5 4 144 120 Total current assets Other assets Total Assets Liabilities and Stockholders' Equity Current liabilities: Accounts payable 34 25 5 5 Accrued expenses 16 8 Current long-term debt 10 10 4 0 Total current liabilities 69 48 Long-term liabilities 60 60 129 108 1 1 Retained earnings 14 11 Total stockholders' equity 15 12 144 120 Notes payable Income taxes Total liabilities Stockholders' equity Common stock Total liabilities and stockholders' equity 12/31/11 12/31/10 $292 $201 97 67 = Gross profit 195 134 -Selling and administrative expense 125 115 -Depreciation expense 5 5 +Non-operating income 7 2 =Earnings before interest & taxes 72 16 -Interest expense 10 10 =Earnings before taxes 62 6 -Taxes 17 0 =Earnings after taxes 45 6 Shares outstanding Current assets: Other current assets Fiscal year ending 100,000 100,000 Earnings per share $0.45 $0.06 -Cost of goods sold