COGS are 80% of Sales. You collect 40% of sales in the month of sale and the remaining 60% in the month following the sale. You purchase 50% of your COGS in the month of sale and 50% in the month prior to the sale. You pay for 30% of purchases in the month that it is purchased and the remaining 70% in the month after it is purchased.

	Dec	Jan	Feb	March	April	May
Sales	10000	7000	6000	5000	6000	7000
Cost of goods sold	8000	5600	4800	4000	4800	5600
Cash Received
Purchases
Cash Used
Cash Generated by operations
cash	1000
Accounts Rec	6000
INV	2800
Acounts Payable	4760

How much was Purchases in April?

4400 b) 4800 c) 5200 d) 5600

How much was Cash Generated by Operations in February?

1640 b) 1760 c) 1820 d) 1880

What is the Accounts Payable balance for the end of February?

3080 b) 3220 c) 3480 d) 3820

4. Suppose that Sales for the entire year were $100,000 and Cost of Goods Sold was 80% of Sales. The Inventory Conversion period is 40 days, the Accounts Payable Balance is $2,000, and the Operating Cycle is 60 days. 6. What is the Accounts Receivable balance?

4780 b) 5479 c) 6238 d) 7979

5. What is the Accounts Payable Deferral Period?

9 days b) 12 days c) 15 days d) 21 days

6. Which of the following statement is CORRECT?

a. It is always better to have a relatively short than a relatively long cash conversion cycle.

b. The length of the cash conversion cycle represents a tradeoff between risk and return.

c. The length of the cash conversion cycle has no effect on a firm's profitability.

d. The length of the cash conversion cycle might have an effect on a firm's profitability, but it is impossible to state if that effect is positive or negative.

7. All other things being equal, a policy of financing assets with a relatively ______ proportion of long-term debt will tend to ______ the variability (or risk) of the after-tax earnings of the firm.

a. large, decrease

b. small, decrease

c. large, increase

8. For the Cook County Company, the average age of accounts receivable is 60 days, the average age of accounts payable is 45 days, and the average age of inventory is 72 days. Assuming a 365-day year, what is the length of the firm's cash conversion cycle?

a.	87 days
b.	90 days c. 92 days d. 108 days

9. Jordan Air Inc. has average inventory of $1,000,000. Its estimated annual sales are $10 million and COGS are $8 million. It believes that it can reduce its average inventory to $800,000 and that sales will not change. By how much would this reduce its inventory conversion cycle?

a.	7 days
b.	9 days c. 11 days d. 15 days

10. A lockbox plan is most beneficial to firms that

a. Make payments to vendors who are dispersed over a wide geographic area.

b. Have widely dispersed manufacturing facilities.

c. Have a lot of marketable securities or cash to protect.

d. Have customers who are dispersed over a wide geographic area.

11. Which of the following statements is TRUE?

a. Short term debt tends to be more expensive than long term debt

b. Low levels of inventory lead to higher profit margins.

c. Maturity matching is generally considered to be an aggressive financing policy.

d. Some firms choose to hold highly liquid, short-term securities as a substitute for demand deposits because securities earn interest and can be quickly converted to cash should cash be needed.

12. Which of the following would cause a firm to hold more cash today?

a. The firm must make a known future payment, such as paying interest on a bond next month

b. The firm is going from its peak sales season to its slack season and will start collecting on its receivables

c. The firm is going from its slack season to its peak sales season and is increasing inventory in anticipation.

d. The firm plans to issue long-term securities and has not yet invested the proceeds in operating assets

13. Which of the following statements is CORRECT?

a. Under normal conditions, a firm's expected ROE would probably be higher if it financed with short-term rather than with long-term debt, but using short-term debt would probably increase the firm's risk.

b. Conservative firms generally use no short-term debt and thus have zero current liabilities.

c. A short-term loan can usually be obtained more quickly than a long-term loan, but the interest rate on short-term debt is normally higher than that of long-term debt.

d. If a firm that can borrow from its bank at a 6% interest rate buys materials on terms of 2/10, net 30, and if it must pay by Day 30 or else be cut off, then we would expect to see zero accounts payable on its balance sheet.

14. What is the Nominal cost of trade credit if the terms are 3/10, net 40 assuming that customers forego the discount and pay on the 40^th day?

35.9% b) 36.4% c) 37.6% d) 38.2%

15. A firm has decided to borrow $500,000 on a 10% add-on basis, payable in 10 end-of-month installments. What would the effective annual rate on the loan be?

a)18.7% b) 19.3% c) 20.5% d) 22.3%

16. What is the effective cost of a six-month discount loan with a stated rate of 8%?

a) 7.86% b) 8.33% c) 8.51% d) 9.23%

17. DuBois Cosmetics buys materials on terms of 4/10, net 60, and it currently pays on the 10th day and takes discounts. If DuBois decides to forego discounts, what would the effective percentage cost of its trade credit be, based on a 365 day year?

a. 33.99% b. 34.72% c. 36.38% d. 38.24%

18. Which of the following statements is most consistent with efficient inventory management? The firm has a

a. low inventory turnover ratio.

b. low incidence of production schedule disruptions.

c. below-average total assets turnover ratio.

d. high current ratio.

19. Firms often finance temporary assets with short-term debt because

a. Matching the maturities of assets and liabilities means, generally, that cash will be coming in at about the same time that it is needed to service the debt.

b. Short-term interest rates have traditionally been more stable than long-term interest rates.

c. Firms that borrow heavily on a long-term basis are more likely to be unable to repay their debts than firms that borrow on a short-term basis.

d. The yield curve has traditionally been downward sloping.

20. Which of the following statements is CORRECT?

a. Suppose a firm changes its credit terms from net 30 days (no discounts) to 3/10, net 40, and this change leads to a 5% increase in total sales. This will also cause the firm's accounts receivable balance to increase.

b. If a firm offers lenient credit terms to financially weak customers, this might enable it to report high sales and profits. However, some customers might not pay their bills, end up as bad debts, and thus cause the firm to report lower profits in subsequent periods.

c. A firm with excess capacity and relatively low variable costs would be less inclined to extend liberal credit terms than the same firm if it were operating at close to capacity.

d. A revolving credit agreement is a particular type of line of credit that firms with surplus cash use in order to obtain a higher rate of return on their cash balances.

21. Which is NOT one of the Five Cs of Credit?

Cash

Capital

Collateral

Character

22. Which Statement is correct?

a. If a firm factors their accounts receivable with recourse, then they are still liable if their customer doesnt pay

b. If a firm has a Floating Lien, then they are prohibited from selling their inventory

c. If a firm pledges their Accounts Receivables, then they must remove the accounts from their Balance Sheet

d. A Trust Receipt is used for loans in which there is no collateral

23. _______________ are inventory loans that are often used by retail stores with a high degree of inventory turnover.

Factors

Trust Receipts

Pledges

Floating Liens

24. _________________ is short-term debt issued by large corporations.

Bankers Acceptances

Negotiable Certificates of Deposits

Commercial Paper

Repurchase Agreements

25. Other things held constant, which of the following would lead to a decrease in working capital?

a. Missing inventory is written off against retained earnings.

b. A stock split is declared.

c. Cash is used to buy marketable securities.

d. Merchandise is sold on credit, but at a profit.