2018 Working Capital Management

Test Code: R38 WCAM Q-Bank

Number of questions: 32

Question Q-Code: L1-CF-WCAM-001 LOS a Section 2

1 Which action is least likely considered a secondary source of liquidity?

A) Filing for bankruptcy protection.

B) Increasing the efficiency of cash flow management.
C) Renegotiating current debt contracts to lower interest payments.

Answer B) Increasing the efficiency of cash flow management.

Explanation B is correct. Increasing the efficiency of cash flow management falls under primary sources of liquidity. Section 2.

Question Q-Code: L1-CF-WCAM-002 LOS a Section 2

2 Which of the following is least likely a secondary source of liquidity?

A) Negotiating debt contracts.

B) Filing for bankruptcy protection and reorganization.
C) Cash flow management

Answer C) Cash flow management

Explanation C is correct. Cash flow management is a primary source of liquidity. Section 2.

Question Q-Code: L1-CF-WCAM-003 LOS a Section 2

3 Which of the following is least likely considered a primary source of liquidity?

A) Centralized cash management system.

B) Debt contract.
C) Trade credit.

Answer B) Debt contract.

Explanation B is correct. Debt contract system is a secondary source of liquidity. Section 2.

Question Q-Code: L1-CF-WCAM-004 LOS a Section 2

4 Which of the following is most likely considered a ‘drag’ on liquidity?

A) Obsolete inventory.
B) Reduced credit limits.
C) Making early payments.

Answer A) Obsolete inventory.

Explanation A is correct. Drags on liquidity include uncollected receivables, obsolete inventory and tight credit. Section 2.1.

Question Q-Code: L1-CF-WCAM-005 LOS b Section 2

5 Ahmed Rashid is evaluating companies in the agricultural pesticides industry and has compiled the following information:

Company 2012 2013

Credit Sales Average Credit Sales Average

Receivables Receivables
Balance ($) Balance ($)

Bayer Corp. $6.0 million 2.0 million 7.0 million 2.2 million

Excel Corp. $4.0 million 2.2 million 5.0 million 2.5 million

Insecticides. $3.5 million 1.8 million 4.0 million 2.0 million

Which of the following companies had

Phyto Corp. $1.5 million 1.1 million 1.6 million 1.2 million the highest numbest of days of
receivables for the year 2012?
Industry 26.0 million 6.0 million 29.0 million 6.4 million
A) Bayer Corp.
 B) Insecticides.
C) Phyto Corp.

Answer C) Phyto Corp.

Explanation C is correct.
Number of days of receivables = (Accounts receivable) / [(Credit sales) / 365]
Bayer Corp: ($2 million) / [($6 million) / 365] = 121.67 days
Excel Corp: ($2.2 million) / [($4 million) / 365] = 201 days
Insectisides: ($1.8 million) / [($3.5 million) / 365] = 188 days
Phyto Corp: ($1.1 million) / [($1.5 million) / 365] = 268 days.
Section 2.2.

Question Q-Code: L1-CF-WCAM-006 LOS b Section 2

6 Ahmed Rashid is evaluating companies in the agricultural pesticides industry and has compiled the following information:

Company 2012 2013

Credit Sales Average Credit Sales Average

Receivables Receivables
Balance ($) Balance ($)

Bayer Corp. $6.0 million 2.0 million 7.0 million 2.2 million

Excel Corp. $4.0 million 2.2 million 5.0 million 2.5 million

Insecticides. $3.5 million 1.8 million 4.0 million 2.0 million

Which of the companies has the lowest

Phyto Corp. $1.5 million 1.1 million 1.6 million 1.2 million accounts receivables turnover in the
year 2013?
Industry 26.0 million 6.0 million 29.0 million 6.4 million
A) Insecticides.
B) Excel Corp.
C) Phyto Corp.

Answer C) Phyto Corp.

Explanation C is correct.
Receivables turnover = Credit sales / Average receivables
Bayer Corp: $7.0 million / $2.2 million = 3.182.
Excel Corp: $5.0 million) / $2.5 million = 2.0.
Insectisides: $4.0 million / $2.0 million = 2.0.
Phyto Corp: $1.6 million / $1.2 million = 1.33.
Section 2.2.

Question Q-Code: L1-CF-WCAM-007 LOS b Section 2

7 Ahmed Rashid is evaluating companies in the agricultural pesticides industry and has compiled the following information:

Company 2012 2013

Credit Sales Average Credit Sales Average

Receivables Receivables
Balance ($) Balance ($)

Bayer Corp. $6.0 million 2.0 million 7.0 million 2.2 million

Excel Corp. $4.0 million 2.2 million 5.0 million 2.5 million

Insecticides. $3.5 million 1.8 million 4.0 million 2.0 million

The industry average receivables

Phyto Corp. $1.5 million 1.1 million 1.6 million 1.2 million collection period:

A) increased from 2012 to 2013.

Industry 26.0 million 6.0 million 29.0 million 6.4 million
B) decreased from 2012 to 2013.
C) did not change from 2012 to 2013.

Answer B) decreased from 2012 to 2013.

Explanation B is correct.
Industry average in 2012: 84.23 days.
 Industry average in 2013: 80.55 days.
Section 2.2.

Question Q-Code: L1-CF-WCAM-008 LOS c Section 2

8 The following information is available for a company and the industry in which it operates:

Company Industry

Accounts receivable turnover 4.7 times 5.4 times

Inventory turnover 3.3 times 3.2 times

Number of days of payables 21 days 29 days

Relative to the industry, the company’s operating cycle:

A) and cash conversion cycle are both longer.

B) is longer, but its cash conversion cycle is shorter.
C) is shorter, but its cash conversion cycle is longer.

Answer A) and cash conversion cycle are both longer.

Explanation A is correct.
Operating cycle = Number of days of inventory + Number of days of receivables.
Cash conversion cycle = Operating cycle – Number of days of payables.

Company Industry

Number of days receivables 365 / 4.7 = 78 days 365 / 5.4 = 68 days

Number of days inventory 365 / 3.3 = 111 days 365 / 3.2 = 114 days

Operating cycles 78 + 111 = 189 Longer 68 + 114 = 182

Cash conversion cycle 189 - 21 = 168 Longer 182 - 29 = 153

Therefore, the operating cycle and cash conversion cycle are both longer for the company. Section 2.2.

Question Q-Code: L1-CF-WCAM-009 LOS c Section 2

9 The following information is available for a company:

In Millions (€)

Credit sales 20,000

Cost of goods sold 15,000

Accounts receivable 2,000

Inventory 1,800

Accounts payable 2,600

Purchases 15,300

The net operating cycle of this company is closest to:

A) 18.3 days.
B) 22.4 days.
C) 9.8 days.

Answer A) 18.3 days.

Explanation A is correct. Number of days of inventory = €1,800 / (€15,000/365) = 43.80 days.

Number of days of receivables = €2,000 / (€20,000/365) = 36.50 days.
Purchases = €15,300
Number of days of payables = €2,600 / (€15,300/365) = 62.03 days.
Net operating cycle is 43.80 + 36.50 – 62.03 = 18.27 days.
Section 2.2.
Question Q-Code: L1-CF-WCAM-010 LOS c Section 2

10 Given the following financial statement data, calculate the operating cycle for Alpha Corporation.

Account In Millions ($)

Credit sales 60,000

Cost of goods sold 48,000

Account receivable 6,000

Inventory 5,500

Account payable 4,000

The operating cycle for this company is closest to:

A) 45.20 days.
B) 49.75 days.
C) 78.32 days.

Answer C) 78.32 days.

Explanation C is correct.
Number of days of inventory = $5,500 / ($48,000/365) = 41.82 days
Number of days of receivables = $6,000 / ($60,000/365) = 36.50 days
Operating cycle = Average days in inventory + Average days in receivables = 41.82 + 36.50 = 78.32 days.
Section 2.2.

Question Q-Code: L1-CF-WCAM-011 LOS c Section 2

11 Given the following financial statement data, calculate the net operating cycle for Beta Electronics Ltd.

Account In Millions ($)

Credit sales 100,000

Cost of goods sold 75,000

Account receivable 7,500

Inventory – Ending balance 5,000

Days of payables 49.50

The net operating cycle for this company is closest to:

A) 2.2 days.
B) 25.0 days.
C) 51.7 days.

Answer A) 2.2 days.

Explanation A is correct.
Number of days of inventory = $5,000 / ($75,000/365) = 24.33 days
Number of days of receivables = $7,500 / ($100,000/365) = 27.38 days
Number of days of payables = 49.50
Net operating cycle/ Cash conversion cycle = 24.33 + 27.38 - 49.50 = 2.21 days.
Section 2.2.

Question Q-Code: L1-CF-WCAM-012 LOS c Section 2

12 A company’s largest supplier has decided to tighten credit terms. Earlier the company could make payments within 20 days of
purchase. Now the company is being asked to pay within 10 days of purchase. The most likely effect of this change is a (an):

A) decrease in the company’s operating cycle.

B) increase in the company’s net operating cycle.
C) decrease in the company’s operating cycle.

Answer B) increase in the company’s net operating cycle.

Explanation B is correct. The operating cycle is equal to the number of days of inventory plus the number of days of receivables. Hence the
operating cycle is not impacted by a change in the number of days of payables. The net operating cycle is equal to the operating
cycle minus the number of days of payables. If the number of days of payables decreases the net operating cycle will increase.
Section 2.2.

Question Q-Code: L1-CF-WCAM-013 LOS d Section 3

13 Paragon, a shoe manufacturer, wants to maintain an adequate net daily cash position. Which of the following actions will the
company least likely take?

A) Monitor access to borrowing facilitates.

B) Predict the business cycles and seasonal effects.
C) Forecast depreciation and accruals.

Answer C) Forecast depreciation and accruals.

Explanation C is correct. Accruals are paid at a later date, and depreciation is a noncash expense. Section 3.2.

Question Q-Code: L1-CF-WCAM-014 LOS d Section 3

14 A company manages its treasury function to exactly maintain its minimum daily balance requirement. The following events occurred
for the company on the same day:

$millions

Funds transfer to subsidiaries 100

Maturing investments 75

Issues a stock dividend 15

Debt repayments 50

Minimum daily cash balance 25

The Treasurer would most likely need to increase borrowing for the day by:

A) $50 million.
B) $75 million.
C) $100 million

Answer B) $75 million.

Explanation B is correct. The change in the net daily cash position (in millions) is calculated as below and would require additional borrowing of
$75 million:

Opening cash balance $25

Fund transfer to subsidiaries (100)

Maturing investments 75

Debt repayments (50)

Change is cash for the day (75)

Borrowing required 75

Closing cash balance $25

Section 3.1.

Question Q-Code: L1-CF-WCAM-015 LOS e Section 4

15 For a 90-day U.S. Treasury bill selling at a discount, which of the following methods most likely results in the highest yield?

A) Bond equivalent yield.

B) Discount-basis yield.
C) Money market yield.

Answer A) Bond equivalent yield.

Explanation A is correct. Note that the face value is greater than the purchase price because the T-bill sells at a discount:
DBY = [(Face value - Purchase price) / (Face value)] * (360 / Days to maturity)
MMY = [(Face value - Purchase price) / (Purchase price)] * (360 / Days to maturity)
BEY = [(Face value - Purchase price) / (Purchase price)] * (365 / Days to maturity)
BEY >MMY > DBY.
Section 4.1.

Question Q-Code: L1-CF-WCAM-016 LOS e Section 4

16 For a 90-day U.S. Treasury bill selling at a discount, which of the following most likely results in the lowest yield?

A) Bond equivalent yield.

B) Discount-basis yield.
C) Money market yield.

Answer B) Discount-basis yield.

Explanation B is correct. Note that the face value is greater than the purchase price because the T-bill sells at a discount:
DBY = [(Face value - Purchase price) / (Face value)] * (360 / Days to maturity)
MMY = [(Face value - Purchase price) / (Purchase price)] * (360 / Days to maturity)
BEY = [(Face value - Purchase price) / (Purchase price)] * (365 / Days to maturity)
BEY > MMY > DBY.
Section 4.1.

Question Q-Code: L1-CF-WCAM-017 LOS e Section 4

17 A 30-day $1,000 U.S. Treasury bill sells for $984.10. The discount-basis yield (%) is closest to:

A) 12.57%.
B) 16.45%.
C) 19.08%.

Answer C) 19.08%.

Explanation C is correct. The face value is greater than the purchase price because the T-bill sells at a discount.
DBY = [(Face value - Purchase price) / (Face value)] * (360 / Days to maturity)
DBY = [(1000 – 984.10) / 1000] * (360 / 30) = 19.08%.
Section 4.1.

Question Q-Code: L1-CF-WCAM-018 LOS e Section 4

18 The bond equivalent yield for a 180-day U.S. Treasury Bill that has a price of 9,875 per $10,000 face value is closest to:

A) 2.57%.
B) 2.77%.
C) 2.34%.

Answer A) 2.57%.

Explanation A is correct.
Bond Equivalent Yield = [(Face value – Purchase price) / (Purchase price)] * (365 / Number of days to maturity) = [(10000 - 9875) /
9875] * (365 / 180) = 2.57%.
Section 4.1.

Question Q-Code: L1-CF-WCAM-019 LOS e Section 4

19 For a 91-day $100,000 T-bill which is being sold at a discounted rate of 6.79%, the money market yield is closest to:

A) 6.79%.
B) 6.88%.
C) 6.91%.

Answer C) 6.91%.

Explanation C is correct. Money- market yield = [(Face value – Purchase price) / (Purchase price)] * (360 / days to maturity)
Purchase price = 100,000 – [0.0679 * (91 / 360) * 100,000] = $98,283.639
Therefore,
Money market yield = [(100,000 – 98,283.639) / 98,283.639] * (360 / 91) = 6.91%.
Section 4.1.

Question Q-Code: L1-CF-WCAM-020 LOS e Section 4

20 The Money market yield for a 182-days U.S treasury bill that has a price $8,500 per $10,000 face value is closest to:

A) 34.91%.
B) 35.55%.
C) 45.50%.
Answer A) 34.91%.

Explanation A is correct.
Money market yield = [($10,000 - $8,500) / $8,500] * (360 / 182) = 34.91%.
Section 4.1.

Question Q-Code: L1-CF-WCAM-021 LOS e Section 4

21 A 270-day $1,000,000 security is currently selling for $987,025. The discount basis yield of the security is closest to:

A) 1.73%.
B) 1.75%.
C) 1.77%.

Answer A) 1.73%.

Explanation A is correct.
Discount basis yield = [(Face value - Price) / (Face value)] * (360 / days)
Discount basis yield = [(1,000,000 - 987,025) / 1,000,000] * (360 / 270) = 1.73%.
Section 4.1.

Question Q-Code: L1-CF-WCAM-022 LOS f Section 2

22 Assume a 365-day year and the following information for a company:

Current Previous
year year

Sales $18,000 $20,000

Cost of goods sold $9,000 $9,500

Inventory $1,500 $1,600

Accounts payable $700 $700

The firm’s days in payables for the current year is closest to :

A) 28.08.
B) 28.71.
C) 29.21.

Answer B) 28.71.

Explanation B is correct. Days in payables = (Accounts payable) / [(Purchases / 365)]

= (Accounts payable) / [(Change in inventory+ (Cost of goods sold) / 365]
= 700 / [(1,500 – 1,600 + 9,000) / 365]
= 28.71.
Section 2.2.

Question Q-Code: L1-CF-WCAM-023 LOS f Section 7

23 A company uses trade credit terms of 3/10 net 40. If the account is paid on the 30th day, the cost of trade credit is closest to:

A) 27.9.
B) 44.6.
C) 74.3.

Answer C) 74.3.

Explanation C is correct. Cost of trade credit =

365
((1 + Discount Days beyond discount period
1−Discount) )− 1
365
0.03
= ((1 + ( 1−0.03)) ) − 1 = 74.3%
30−10

Section 7.1.

Question Q-Code: L1-CF-WCAM-024 LOS f Section 2

24 Elixir Ltd. has a current ratio of 5 times and quick ratio of 3 times. If the company’s current liabilities are $50 million, the amount of
inventories is closest to:

A) $100 million.
B) $200 million.
C) $150 million.
Answer A) $100 million.

Explanation A is correct.
Current ratio = Current assets / Current Liabilities = Current assets / $50 = 5
Therefore, current assets = $250 million
Quick ratio = (Current assets – Inventory) / Current Liabilities = 3
Quick ratio = ($250 – Inv) / $50 =3; therefore Inventory = $100 million.
Section 2.2.

Question Q-Code: L1-CF-WCAM-025 LOS f Section 5

25 Galaxy Chemicals Ltd. is increasing its credit terms for customers from 1/12, net 20 to 1/12, net 50. The company will most likely
experience:

A) an increase in cash on hand.

B) an increase in the average collection period.
C) a higher level of uncollectible accounts.

Answer B) an increase in the average collection period.

Explanation B is correct. A higher level of uncollectible accounts may occur, but a longer average collection period will certainly occur. Section 5.

Question Q-Code: L1-CF-WCAM-026 LOS f Section 7

26 Suppose Casio Electronics uses trade credit with terms of 1/10, net 60. If the company pays its account on the 60th day, the
effective borrowing cost of skipping the discount on day 10 is closest to:

A) 15.5%.
B) 7.61%.
C) 21.3%.

Answer B) 7.61%.

Explanation B is correct. Cost = [1+ (0.01/0.99)] ^ (365 / 50) - 1 = 7.61%.

Section 7.1.

Question Q-Code: L1-CF-WCAM-027 LOS f Section 7

27 A company uses trade credit terms of 1/10 net 30. If the account is paid on the 30th day, the effective borrowing cost of failing to
take the discount is closest to:

A) 22%.
B) 20%.
C) 24%.

Answer B) 20%.

Explanation B is correct. Cost of trade credit =

= [1 + (Discount / (1 – Discount)) ^ (365 / (Days beyond discount period))] – 1
= [1 + (0.01 / (1 – 0.01)) ^ (365 / (30 - 10))] – 1 = 20.13%.
Section 7.1.

Question Q-Code: L1-CF-WCAM-028 LOS g Section 8

28 Which of the following is most likely the best offer for borrowing $1,000,000 for one month?

A) Drawing down on a line of credit at 6% with a ½ % commitment fee on the full amount with no compensating balances.
B) A banker’s acceptance at 6.25%, an all-inclusive rate.
C) Commercial paper at 5.65% with a dealer’s commission of 1/4% and a backup line cost of 1/3%, both of which would be assessed
on the $1 million of commercial paper issued.

Answer C) Commercial paper at 5.65% with a dealer’s commission of 1/4% and a backup line cost of 1/3%, both of which would be assessed
on the $1 million of commercial paper issued.

Explanation C is correct. Evaluate the choices of short-term funding available to a company and recommend a financing method.
Line of credit cost = [(Interest + Commitment fee) / (Usable loan amount)] * 12
Line cost = ((0.06 * $1,000,000 * 1/12) + (0.005 * $1,000,000 * 1/12) * 12 / 1,000,000 = 6.5%
Banker’s acceptance cost = (Interest / Net proceeds) * 12
BA Cost = (0.0625 * $1,000,000 * 1/12) / [$1,000,000 – (0.0625 x $1,000,000 x 1/12)] * 12 = 6.28%
Commercial paper cost = [(Interest + dealer’s commissions + backup costs) / (Net proceeds)] * 12
CP Cost = [(0.0565 * 1,000,000 * 1/12) + (0.0025 * 1000,000 * 1/12) + (0.0033 * 1,000,000 * 1/12)] / [$1,000,000 – (0.0565 *
1,000,000 * 1/12)] * 12 = 6.26%.
Section 8.4.

Question Q-Code: L1-CF-WCAM-029 LOS g Section 8

29 The cost of borrowing $3,000,000 for one month through a banker’s acceptance at a rate of 6.5%, an all-inclusive rate is closest to:

A) 5.65%.
B) 6.34%.
C) 6.54%.

Answer C) 6.54%.

Explanation C is correct.
BA cost = [(3000,000 * 0.065 * 1/12) / (3,000,000 – (3,000,000 * 0.065 * 1/12))] * 12 = 6.535%.
Section 8.4.

Question Q-Code: L1-CF-WCAM-030 LOS g Section 8

30 The effective annualized cost (%) of a banker’s acceptance that has an all-inclusive annual rate of 10.5% for a one-month loan of
$4,000,000 is closest to:

A) 10.59.
B) 10.76.
C) 11.08

Answer A) 10.59.

Explanation A is correct. Interest for the month = 4,000,000 * 0.105 * 1 / 12 = 35,000

Effective annualized cost = (Interest / Net Proceeds) * 12 = [35,000 / (4,000,000 – 35,000)] * 12 = 0.1059 = 10.59%.
Section 8.4.

Question Q-Code: L1-CF-WCAM-031 LOS g Section 8

31 A treasury manager in a company has to borrow $8,000,000 for a month to meet an unforeseen short-term expense. Which of the
following borrowing alternatives available to him will have the lowest effective annual cost?

A) Line of credit at 6.8% with a 0.5% annual commitment fee.

B) A banker’s acceptance at 7.25%, an all-inclusive rate.
C) Commercial paper at 7% with an annual dealer’s commission of $2,500 and an annual backup line cost of $4,200.

Answer C) Commercial paper at 7% with an annual dealer’s commission of $2,500 and an annual backup line cost of $4,200.

Explanation C is correct.
Line of credit cost = [(Interest + Commitment fee) / (Usable loan amount)] * 12
Interest = (0.068 / 12) * 8,000,000 = 45,333.33
Commitment fee = (0.005 / 12) * 8,000,000 = 3,333.33
Line of credit cost = [(45,333.33 + 3,333.33) / 8,000,000] * 12 = 7.30%
Banker’s acceptance cost = (Interest / Net proceeds) * 12
Interest = (0.0725 / 12) * 8,000,000 = 48,333.33
Net proceeds = 8,000,000 – 48,333.33 = 7,951,666.67
Banker’s acceptance cost = (48,333.33 / 7,951,666.67) * 12 = 7.29%
Commercial paper cost = [(Interest + dealer’s commissions + backup costs) / (Net proceeds)] * 12
Interest = (0.07 / 12) * 8,000,000 = 46,666.67
Dealer’s commissions = 2500 / 12 = 208.33
Backup costs = 4200 / 12 = 350
Net proceeds = 8,000,000 – 46,666.67 = 7,953,333.33
Commercial paper cost = [(46,666.67 + 208.33 + 350) / 7,953,333.33] * 12 = 7.13%
Hence, commercial paper is the least expensive source of funding as it has the lowest effective annual cost amongst the three
alternatives. Section 8.4.

Question Q-Code: L1-CF-WCAM-032 LOS a Section 2

32 Which of the following is most likely considered as a ‘pull’ on liquidity?​

A) Uncollected receivables.
B) Reduced credit limits.
C) Obsolete inventory.

Answer B) Reduced credit limits.

Explanation B is correct. Pull on liquidity accelerates cash outflows. This includes making early payments, reduced credit limits etc. Whereas,
uncollected receivables and obsolete inventory are drags on liquidity because they delay or reduce cash inflows. Section 2.1.