Chap 2 TCDN

Chapter 02. Financial Statements, Taxes, and Cash Flow -> A. income statement summarizes a firm’s revenues and expenses over a period of time,
typically a quarter or a year. It shows how much profit (or loss) the company generated during that
1. Which one of the following is the financial statement that shows the accounting value of a period.
firm's equity as of a particular date?
A. income statement 5. Noncash items refer to:
B. creditor's statement A. accrued expenses.
B. inventory items purchased using credit.
C. balance sheet
C. the ownership of intangible assets such as patents.
D. statement of cash flows D. expenses which do not directly affect cash flows.
E. dividend statement E. sales which are made using store credit.
-> C. balance sheet is the financial statement that shows the accounting value of a firm’s equity as -> D. expenses which do not directly affect cash flows. Noncash items are expenses that are
of a particular date. It provides a snapshot of the company’s assets, liabilities, and shareholders’ equity recorded on the income statement but do not involve an actual outflow of cash. Depreciation is a
at a specific point in time. common example of a noncash item.

2. Net working capital is defined as: 6. The percentage of the next dollar you earn that must be paid in taxes is referred to as the
A. total liabilities minus shareholders' equity. tax rate.
B. current liabilities minus shareholders' equity. A. mean
C. fixed assets minus long-term liabilities. B. residual
D. total assets minus total liabilities. C. C. total
E. current assets minus current liabilities. D. average
-> E. current assets minus current liabilities. Net working capital is the difference between a E. marginal
company’s current assets (such as cash, accounts receivable, and inventory) and its current liabilities -> E. marginal tax rate is the percentage of tax paid on the next dollar earned. It is important for
(such as accounts payable and short-term debt). It represents the company’s ability to meet its short- decision-making because it shows the tax impact of earning additional income.
term financial obligations.

7. The tax rate is equal to total taxes divided by total taxable income.
3. The common set of standards and procedures by which audited financial statements are
A. deductible
prepared is known as the:
B. residual
A. matching principle.
C. total
B. cash flow identity.
D. average
C. Generally Accepted Accounting Principles.
E. marginal
D. Financial Accounting Reporting Principles.
-> D. average tax rate is calculated by dividing the total taxes paid by the total taxable income. It represents
E. Standard Accounting Value Guidelines.
-> C. Generally Accepted Accounting Principles. GAAP is a common set of accounting standards the average percentage of income that is paid in taxes.
and procedures used by companies to prepare their financial statements. These principles ensure
consistency and comparability in financial reporting. 8. The cash flow of a firm which is available for distribution to the firm's creditors and
stockholders is called the:
4. Which one of the following is the financial statement that summarizes a firm's revenue and A. operating cash flow.
expenses over a period of time? B. net capital spending.
A. income statement C. net working capital.
B. balance sheet D. cash flow from assets.
C. statement of cash flows E. cash flow to stockholders.
D. tax reconciliation statement -> D. cash flow from assets. Cash flow from assets is the cash flow available for distribution to
E. market value report both creditors (debt holders) and stockholders (equity owners). It is calculated as operating cash
flow minus net capital spending minus the change in net working capital.
 D. trademark
9. Which term relates to the cash flow which results from a firm's ongoing, normal business E. inventory
activities? -> D. trademark is an example of an intangible fixed asset. Intangible assets are non-physical assets
A. operating cash flow that have value to a company, such as patents, copyrights, and trademarks.
B. capital spending
C. net working capital
14. Which of the following are current assets?
D. cash flow from assets
I. patent
E. cash flow to creditors
II. Inventory
-> A. operating cash flow is the cash flow resulting from a firm’s normal business activities. It is
III. accounts payable
calculated as EBIT (earnings before interest and taxes) plus depreciation minus taxes. IV. cash
A. I and III only
10. Cash flow from assets is also known as the firm's: B. II and IV only
A. capital structure. C. I, II, and IV only
B. equity structure. D. I, II and III only
C. hidden cash flow. E. II, III, and IV only
D. free cash flow. -> B. II and IV only Inventory and cash are current assets. Current assets are assets that are
E. historical cash flow. expected to be converted into cash within one year.
-> D. free cash flow. Cash flow from assets is also known as free cash flow. It represents the cash flow
available to the company after all expenses and investments have been made.
15. Which one of the following is included in a firm's market value but yet is excluded from the
firm's accounting value?
11. The cash flow related to interest payments less any net new borrowing is called the: A. real estate investment
A. operating cash flow. B. good reputation of the company
B. capital spending cash flow. C. equipment owned by the firm
C. net working capital. D. money due from a customer
D. cash flow from assets. E. an item held by the firm for future sale
E. cash flow to creditors. -> B. good reputation of the company is included in a firm’s market value but excluded from its
-> E. cash flow to creditors. This is the cash flow related to interest payments less any net new
accounting value. Accounting value is based on historical costs, while market value reflects the
borrowing. It shows the net amount of cash paid to or received from creditors during a period.
current value as perceived by investors.

12. Cash flow to stockholders is defined as:

16. Which of the following are included in current liabilities?
A. the total amount of interest and dividends paid during the past year.
I. note payable to a supplier in eight months
B. the change in total equity over the past year.
II. amount due from a customer next month
C. cash flow from assets plus the cash flow to creditors.
III. account payable to a supplier that is due next week
D. operating cash flow minus the cash flow to creditors.
IV. loan payable to the bank in fourteen months
E. dividend payments less net new equity raised.
A. I and III only
-> E. dividend payments less net new equity raised. Cash flow to stockholders represents the net
B. II and III only
amount of cash paid to or received from stockholders. It is calculated as dividend payments minus net C. I, II, and III only
new equity raised. D. I, III, and IV only
E. I, II, III, and IV
-> A. I and III only A note payable to a supplier in eight months and an account payable to a
13. Which one of the following is classified as an intangible fixed asset?
A. accounts receivable supplier due next week are current liabilities. Current liabilities are obligations that are due within one
B. production equipment year.
C. building
17. Which one of the following will increase the value of a firm's net working capital? -> C. accounts receivable represent funds owed to a company by its customers for goods or
A. using cash to pay a supplier services provided on credit. They are typically converted into cash relatively quickly, making them
B. depreciating an asset
the most liquid asset among the options listed.
C. collecting an accounts receivable
D. purchasing inventory on credit
E. selling inventory at a profit 21. Which one of the following represents the most liquid asset?
-> E. Selling inventory at a profit increases a firm’s cash (current asset) while potentially reducing A. $100 account receivable that is discounted and collected for $96 today
B. $100 of inventory which is sold today on credit for $103
inventory (another current asset). As a result, this action increases the firm’s net working capital
C. $100 of inventory which is discounted and sold for $97 cash today
because it raises the numerator (current assets) while potentially keeping the denominator (current D. $100 of inventory that is sold today for $100 cash
liabilities) unchanged. This increase in net working capital reflects positively on the firm’s financial E. $100 accounts receivable that will be collected in full next week
position. -> D. $100 of inventory that is sold today for $100 cash represents the most liquid asset. It is immediately
converted into cash with no discount or delay.
18. Which one of the following statements concerning net working capital is correct?
A. Net working capital increases when inventory is purchased with cash. 22. Which one of the following statements related to liquidity is correct?
B. Net working capital must be a positive value. A. Liquid assets tend to earn a high rate of return.
C. Total assets must increase if net working capital increases. B. Liquid assets are valuable to a firm.
D. A decrease in the cash balance also decreases net working capital. C. Liquid assets are defined as assets that can be sold quickly regardless of the price obtained.
E. Net working capital is the amount of cash a firm currently has available for spending. D. Inventory is more liquid than accounts receivable because inventory is tangible.
-> D. A decrease in the cash balance also decreases net working capital. This statement is E. Any asset that can be sold within the next year is considered liquid.
correct. Cash is a current asset, and a decrease in cash will decrease net working capital (current -> B. Liquid assets are valuable to a firm. This statement is correct. Liquid assets are valuable
assets minus current liabilities). because they provide a buffer against unexpected expenses and allow a firm to meet its short-term
obligations.
19. Which one of the following statements concerning net working capital is correct?
A. The lower the value of net working capital the greater the ability of a firm to meet its current 23. Shareholders' equity:
obligations. A. increases in value anytime total assets increases.
B. An increase in net working capital must also increase current assets. B. is equal to total assets plus total liabilities.
C. Net working capital increases when inventory is sold for cash at a profit. C. decreases whenever new shares of stock are issued.
D. Firms with equal amounts of net working capital are also equally liquid. D. includes long-term debt, preferred stock, and common stock.
E. Net working capital is a part of the operating cash flow. E. represents the residual value of a firm.
-> C. Net working capital increases when inventory is sold for cash at a profit. When inventory -> E. represents the residual value of a firm. Shareholders’ equity is the residual value of a firm
is sold for cash at a profit, it increases the cash balance (a current asset) and decreases the inventory after all liabilities have been paid. It represents the owners’ claim on the company’s assets.
balance (also a current asset). However, the increase in cash is greater than the decrease in inventory
24. The higher the degree of financial leverage employed by a firm, the:
due to the profit, resulting in a net increase in net working capital. A. higher the probability that the firm will encounter financial distress.
B. lower the amount of debt incurred.
20. Which one of the following accounts is the most liquid? C. less debt a firm has per dollar of total assets.
A. inventory D. higher the number of outstanding shares of stock.
B. building E. lower the balance in accounts payable.
C. accounts receivable -> A. higher the probability that the firm will encounter financial distress. Financial leverage
D. equipment refers to the use of debt to finance a firm’s operations. Higher leverage means more debt, which
E. land
increases the risk of financial distress if the firm cannot meet its debt obligations.

25. The book value of a firm is:

A. equivalent to the firm's market value provided that the firm has some fixed assets. -> E. Costs of goods sold are recorded based on the matching principle. The matching principle
B. based on historical cost. is an accounting principle that requires expenses to be recognized in the same period as the revenues
C. generally greater than the market value when fixed assets are included.
they helped generate. The cost of goods sold (COGS) includes all the costs directly involved in
D. more of a financial than an accounting valuation.
E. adjusted to the market value whenever the market value exceeds the stated book value. producing the goods a company sells. By recognizing COGS in the same period as the sales revenue
-> B. based on historical cost. The book value of a firm is based on the historical cost of its assets they relate to, the matching principle ensures that a company’s income statement accurately reflects
minus accumulated depreciation. It does not necessarily reflect the current market value of the firm. its profitability for that period.
26. Which of the following are included in the market value of a firm but are excluded from the 29. Which one of these is most apt to be a fixed cost?
firm's book value? I. value of management skills A. raw materials
II. value of a copyright B. manufacturing wages
III. value of the firm's reputation C. management bonuses
IV. value of employee's experience D. office salaries
A. I only E. shipping and freight
B. II only -> D. office salaries are most likely to be a fixed cost. Fixed costs are expenses that do not change with
C. III and IV only the level of production or sales. Office salaries are generally consistent from month to month,
D. I, II, and III only
regardless of how much the company produces or sells.
E. I, III, and IV only
-> E. I, III, and IV only The value of management skills, the firm’s reputation, and employee
30. Which one of the following costs is most apt to be a fixed cost?
experience are included in the market value of a firm but are excluded from its book value. These are
A. production labor cost
intangible assets that are difficult to quantify and are not typically recorded on the balance sheet. B. depreciation
C. raw materials
27. You recently purchased a grocery store. At the time of the purchase, the store's market value D. utilities
equaled its book value. The purchase included the building, the fixtures, and the inventory. Which one E. sales commissions
of the following is most apt to cause the market value of this store to be lower than the book value? -> B. depreciation is a fixed cost. Depreciation is the allocation of the cost of a tangible asset over its
A. a sudden and unexpected increase in inflation useful life. It is a non-cash expense and does not vary with the level of production.
B. the replacement of old inventory items with more desirable products
C. improvements to the surrounding area by other store owners
31. Which of the following are expenses for accounting purposes but are not operating cash flows for
D. construction of a new restricted access highway located between the store and the
financial purposes?
surrounding residential areas
I. interest expense
E. addition of a stop light at the main entrance to the store's parking lot
II. taxes
-> D. construction of a new restricted access highway located between the store and the
III. costs of goods sold
surrounding residential areas This is most likely to cause the market value of the store to be lower IV. depreciation
than the book value. The new highway would reduce accessibility to the store, potentially leading to A. IV only
lower customer traffic and sales. B. II and IV only
C. I and III only
D. I and IV only
28. Which one of the following is true according to Generally Accepted Accounting Principles?
E. I, II, and IV only
A. Depreciation may or may not be recorded at management's discretion.
-> D. I and IV only Interest expense and depreciation are expenses for accounting purposes but are
B. Income is recorded based on the matching principle.
C. Costs are recorded based on the realization principle. not operating cash flows for financial purposes. Interest is a financing expense, and depreciation is a
D. Depreciation is recorded based on the recognition principle. non-cash expense.
E. Costs of goods sold are recorded based on the matching principle.
32. Which one of the following statements related to an income statement is correct? Assume
accrual accounting is used.
A. The addition to retained earnings is equal to net income plus dividends paid. A. Interest expense increases the amount of tax due.
B. Credit sales are recorded on the income statement when the cash from the sale is collected. B. Depreciation does not affect taxes since it is a non-cash expense.
C. The labor costs for producing a product are expensed when the product is sold. C. Net income is distributed to dividends and paid-in surplus.
D. Interest is a non-cash expense. D. Taxes reduce both net income and operating cash flow.
E. Depreciation increases the marginal tax rate. E. Interest expense is included in operating cash flow.
-> C. The labor costs for producing a product are expensed when the product is sold. This is in -> D. Taxes reduce both net income and operating cash flow. Taxes are a cash outflow and
accordance with the matching principle, which requires expenses to be recognized in the same period reduce the company’s operating cash flow. They are also subtracted from earnings before taxes to
as the revenues they helped generate.
arrive at net income.
33. Which one of the following statements related to taxes is correct?
A. The marginal tax rate must be equal to or lower than the average tax rate for a firm. 37. Which one of the following statements is correct concerning a corporation with taxable
B. The tax for a firm is computed by multiplying the firm's current marginal tax rate times the income of $125,000?
taxable income. A. Net income minus dividends paid will equal the ending retained earnings for the year.
C. Additional income is taxed at a firm's average tax rate. B. An increase in depreciation will increase the operating cash flow.
D. The marginal tax rate is higher than the average tax rate in a flat-rate tax system C. Net income divided by the number of shares outstanding will equal the dividends per share.
E. The marginal tax rate for a firm can be either higher or lower than the average tax rate. D. Interest paid will be included in both net income and operating cash flow.
-> E. The marginal tax rate for a firm can be either higher or lower than the average tax rate. E. An increase in the tax rate will increase both net income and operating cash flow.
-> B. An increase in depreciation will increase the operating cash flow. Depreciation is a non- cash
This statement is correct. The marginal tax rate is the rate applied to the last dollar of income, while the
expense, so an increase in depreciation will not affect net income directly. However, it is tax-
average tax rate is the total tax paid divided by total taxable income. Depending on the tax brackets,
deductible, so it reduces taxable income and, therefore, taxes paid, leading to an increase in
the marginal rate can be higher or lower than the average rate.
operating cash flow.
34. As of 2011, which one of the following statements concerning U.S. corporate income taxes is
correct? 38. Which one of the following will increase the cash flow from assets, all else equal?
A. The largest corporations have an average tax rate of 39 percent. A. decrease in cash flow to stockholders
B. The lowest marginal rate is 25 percent. B. decrease in operating cash flow
C. A firm's tax is computed on an incremental basis. C. increase in the change in net working capital
D. A firm's marginal tax rate will generally be lower than its average tax rate once the firm's D. decrease in cash flow to creditors
income exceeds $50,000. E. decrease in net capital spending
E. When analyzing a new project, the average tax rate should be used. -> E. decrease in net capital spending will increase the cash flow from assets. Net capital spending
-> C. A firm’s tax is computed on an incremental basis. This statement is correct. represents the purchase of new fixed assets minus the sale of old fixed assets. A decrease in net capital
Corporate income tax is calculated based on a progressive tax system, where different portions of spending means the company is spending less on fixed assets, which increases cash flow from assets.
income are taxed at different rates.
39. For a tax-paying firm, an increase in will cause the cash flow from assets to
35. Depreciation: increase.
A. reduces both taxes and net income. A. depreciation
B. increases the net fixed assets as shown on the balance sheet. B. net capital spending
C. reduces both the net fixed assets and the costs of a firm. C. change in net working capital
D. is a noncash expense which increases the net income. D. taxes
E. decreases net fixed assets, net income, and operating cash flows. E. production costs
-> A. reduces both taxes and net income. Depreciation is a tax-deductible expense, so it reduces the -> A. depreciation An increase in depreciation expense will decrease taxable income, leading to
amount of taxable income, leading to lower taxes. However, it is also an expense, so it reduces net lower taxes and a higher cash flow from assets.
income.
40. Which one of the following must be true if a firm had a negative cash flow from assets? A. The
firm borrowed money.
36. Which one of the following statements related to an income statement is correct?
B. The firm acquired new fixed assets. 44. Which one of the following statements related to the cash flow to creditors is correct?
C. The firm had a net loss for the period. A. If the cash flow to creditors is positive then the firm must have borrowed more money than it
D. The firm utilized outside funding. repaid.
E. Newly issued shares of stock were sold. B. If the cash flow to creditors is negative then the firm must have a negative cash flow from
-> D. The firm utilized outside funding. A negative cash flow from assets means the company’s assets.
operating cash flow, net capital spending, and change in net working capital combined resulted in a C. A positive cash flow to creditors represents a net cash outflow from the firm.
D. A positive cash flow to creditors means that a firm has increased its long-term debt.
net cash outflow. This indicates that the firm needed to rely on external funding sources to cover its
E. If the cash flow to creditors is zero, then a firm has no long-term debt.
expenses and investments. -> C. A positive cash flow to creditors represents a net cash outflow from the firm. Cash flow to
41. An increase in the depreciation expense will do which of the following? creditors represents interest payments and net new borrowing. A positive value means the company
I. increase net income
paid out more in interest and debt repayment than it received in new borrowing, resulting in a net cash
II. decrease net income
III. increase the cash flow from assets outflow.
IV. decrease the cash flow from assets
A. I only 45. A positive cash flow to stockholders indicates which one of the following with certainty? A.
B. II only The dividends paid exceeded the net new equity raised.
C. I and III only B. The amount of the sale of common stock exceeded the amount of dividends paid.
D. II and III only C. No dividends were distributed but new shares of stock were sold.
E. II and IV only D. Both the cash flow to assets and the cash flow to creditors must be negative.
-> D. II and III only An increase in depreciation expense will decrease net income (as it is an E. Both the cash flow to assets and the cash flow to creditors must be positive.
expense) but increase the cash flow from assets (as it is a non-cash expense and reduces taxes). -> A. The dividends paid exceeded the net new equity raised. Cash flow to stockholders is
calculated as dividends paid minus net new equity raised. A positive value indicates that the
42. Which one of the following is NOT included in cash flow from assets? company paid out more in dividends than it received from issuing new equity.
A. accounts payable
B. inventory
46. A firm has $520 in inventory, $1,860 in fixed assets, $190 in accounts receivables, $210 in
C. sales
accounts payable, and $70 in cash. What is the amount of the current assets?
D. interest expense
A. $710
E. cash account
B. $780
-> D. interest expense. Cash flow from assets evaluates the cash flows associated with a company’s
C. $990
investments and operational endeavors, excluding financing activities like interest expense. D. $2,430
E. $2,640
43. Net capital spending: -> Current assets = $520 + $190 + $70 = $780
A. is equal to ending net fixed assets minus beginning net fixed assets.
B. is equal to zero if the decrease in the net fixed assets is equal to the depreciation expense. 47. A firm has net working capital of $640. Long-term debt is $4,180, total assets are $6,230, and
C. reflects the net changes in total assets over a stated period of time. fixed assets are $3,910. What is the amount of the total liabilities?
D. is equivalent to the cash flow from assets minus the operating cash flow minus the change in net A. $2,050
working capital. B. $2,690
E. is equal to the net change in the current accounts. C. $4,130
-> B. is equal to zero if the decrease in the net fixed assets is equal to the depreciation expense. D. $5,590
Net capital spending is the change in net fixed assets plus depreciation. If the decrease in net fixed E. $5,860
-> Current assets = $6,230 - $3,910 = $2,320
assets equals depreciation, it means the company only sold or disposed of assets equivalent to the
Current liabilities = $2,320 - $640 = $1,680
depreciation amount, resulting in zero net capital spending. Total liabilities = $1,680 + $4,180 = $5,860
 48. A firm has common stock of $6,200, paid-in surplus of $9,100, total liabilities of $8,400, 52. Jake owns The Corner Market which he is trying to sell so that he can retire and travel. The
current assets of $5,900, and fixed assets of $21,200. What is the amount of the shareholders' Corner Market owns the building in which it is located. This building was built at a cost of
equity? $647,000 and is currently appraised at $819,000. The counters and fixtures originally cost
A. $6,900 $148,000 and are currently valued at $65,000. The inventory is valued on the balance sheet at
B. $15,300 $319,000 and has a retail market value equal to 1.2 times its cost. Jake expects the store to collect 98
C. $18,700 percent of the $21,700 in accounts receivable. The firm has $26,800 in cash and has total debt of
D. $23,700 $414,700. What is the market value of this firm?
E. $35,500 A. $857,634
-> Shareholders' equity = $5,900 + $21,200 - $8,400 = $18,700 B. $900,166
(Note: The amount of retained earnings is not provided, so you must use total assets minus total C. $919,000
liabilities to derive the correct answer.) D. $1,314,866
E. $1,333,700
49. Your firm has total assets of $4,900, fixed assets of $3,200, long-term debt of $2,900, and -> Market value of firm = $819,000 + $65,000 + 1.2($319,000) + 0.98($21,700) + $26,800 -
short-term debt of $1,400. What is the amount of net working capital? $414,700 = $900,166
A. -$100
B. $300 53. Jensen Enterprises paid $1,300 in dividends and $920 in interest this past year. Common
C. $600 stock increased by $1,200 and retained earnings decreased by $310. What is the net income for the
D. $1,700 year?
E. $1,800 A. -$210
-> Net working capital = $4,900 - $3,200 - $1,400 = $300 B. $990
C. $1,610
50. Bonner Collision has shareholders' equity of $141,800. The firm owes a total of $126,000 of D. $1,910
which 60 percent is payable within the next year. The firm net fixed assets of $161,900. What is the E. $2,190
amount of the net working capital? -> Net income = $1,300 + (-$310) = $990
A. $25,300
B. $30,300 54. Andre's Bakery has sales of $687,000 with costs of $492,000. Interest expense is $26,000 and
C. $75,600 depreciation is $42,000. The tax rate is 35 percent. What is the net income?
D. $86,300 A. $42,750
E. $111,500 B. $44,450
-> Current liabilities = .60 ◻ $126,000 = $75,600 Total C. $82,550
assets = $141,800 + $126,000 = $267,800 Current D. $86,450
assets = $267,800 - $161,900 = $105,900 E. $124,550
Net working capital = $105,900 - $75,600 = $30,300 -> Net income = ($687,000 - $492,000 - $26,000 - $42,000) (1 - 0.35) = $82,550

51. Four years ago, Velvet Purses purchased a mailing machine at a cost of $176,000. This 55. Kaylor Equipment Rental paid $75 in dividends and $511 in interest expense. The addition to
equipment is currently valued at $64,500 on today's balance sheet but could actually be sold for retained earnings is $418 and net new equity is $500. The tax rate is 35 percent. Sales are
$58,900. This is the only fixed asset the firm owns. Net working capital is $57,200 and long-term debt $15,900 and depreciation is $680. What are the earnings before interest and taxes?
is $111,300. What is the book value of shareholders' equity? A. $589.46
A. $4,800 B. $1,269.46
B. $7,700 C. $1,331.54
C. $10,400 D. $1,951.54
D. $222,600 E. $1,949.46
E. $233,000 -> Net income = $75 + $418 = $493
-> Book value of shareholders' equity = $64,500 + $57,200 - $111,300 = $10,40 Taxable income = $493/ (1 - 0.35) = $758.46
Earnings before interest and taxes = $758.46 + $511 = $1,269.46
56. Given the tax rates as shown, what is the average tax rate for a firm with taxable income of A. $129,152
$311,360? B. $171,852
C. $179,924
D. $281,417
E. $309,076
-> Earnings before interest and taxes = $1,349,800 - $903,500 - $42,700 = $403,600 Tax
= $403,600 x 0.34 = $137,224
A. 28.25 percent Operating cash flow = $403,600 + $42,700 - $137,224 = $309,076
B. 31.09 percent
C. 33.62 percent 60. Nielsen Auto Parts had beginning net fixed assets of $218,470 and ending net fixed assets of
D. 35.48 percent $209,411. During the year, assets with a combined book value of $6,943 were sold. Depreciation for
E. 39.00 percent the year was $42,822. What is the amount of net capital spending?
-> Tax = 0.15($50,000) + 0.25($25,000) + 0.34($25,000) + 0.39($211,360) = $104,680.40 A. $33,763
Average tax rate = $104,680.40/$311,360 = 33.62 percent B. $40,706
C. $58,218
57. The tax rates are as shown. Nevada Mining currently has taxable income of $97,800. How D. $65,161
much additional tax will the firm owe if taxable income increases by $21,000? E. $67,408
-> Net capital spending = $209,411 - $218,470 + $42,822 = $33,763

61. At the beginning of the year, a firm had current assets of $121,306 and current liabilities of
$124,509. At the end of the year, the current assets were $122,418 and the current liabilities were
$103,718. What is the change in net working capital?
A. -$19,679
A. $8,080 B. -$11,503
B. $8,130 C. -$9,387
C. $8,155 D. $1,809
D. $8,170 E. $21,903
E. $8,190 -> Change in net working capital = ($122,418 - $103,718) - ($121,306 - $124,509) = $21,903
-> Additional tax = 0.34($100,000 - $97,800) + 0.39($97,800 + $21,000 - $100,000) = $8,08
62. At the beginning of the year, the long-term debt of a firm was $72,918 and total debt was
58. Winston Industries had sales of $843,800 and costs of $609,900. The firm paid $38,200 in $138,407. At the end of the year, long-term debt was $68,219 and total debt was $145,838. The
interest and $18,000 in dividends. It also increased retained earnings by $62,138 for the year. The interest paid was $6,430. What is the amount of the cash flow to creditors?
depreciation was $76,400. What is the average tax rate? A. -$18,348
A. 32.83 percent B. -$1,001
B. 33.33 percent C. $11,129
C. 38.17 percent D. $13,861
D. 43.39 percent E. $19,172
E. 48.87 percent -> Cash flow to creditors = $6,430 - ($68,219 - $72,918) = $11,129
-> Earnings before taxes = $843,800 - $609,900 - $76,400 - $38,200 = $119,300 Net
income = $18,000 + $62,138 = $80,138 63. Adelson's Electric had beginning long-term debt of $42,511 and ending long-term debt of
Taxes = $119,300 - $80,138 = $39,162 $48,919. The beginning and ending total debt balances were $84,652 and $78,613, respectively. The
Tax rate = $39,162/$119,300 = 32.83 percent interest paid was $4,767. What is the amount of the cash flow to creditors? A. -$1,641
B. -$1,272
59. Crandall Oil has total sales of $1,349,800 and costs of $903,500. Depreciation is $42,700 and the C. $1,272
tax rate is 34 percent. The firm does not have any interest expense. What is the operating cash flow? D. $7,418
E. $11,175
-> Cash flow to creditors = $4,767 - ($48,919 - $42,511) = -$1,641

64. The Daily News had net income of $121,600 of which 40 percent was distributed to the
shareholders as dividends. During the year, the company sold $75,000 worth of common stock.
What is the cash flow to stockholders?
66. What is the change in the net working capital from 2011 to 2012?
A. -$75,000
A. -$1,194
B. -$26,360
B. $1,306
C. -$2,040
C. $1,887
D. $123,640
D. $4,780
E. $147,960
E. $5,172
-> Cash flow to stockholders = 0.40($121,600) - $75,000 = -$26,36065.
-> Change in net working capital = ($4,771 - $1,532) - ($6,127 - $4,194) = $1,306
67. What is the amount of the noncash expenses for 2012?
65. The Lakeside Inn had operating cash flow of $48,450. Depreciation was $6,700 and interest
A. $740
paid was $2,480. A net total of $2,620 was paid on long-term debt. The firm spent $24,000 on
B. $1,282
fixed assets and decreased net working capital by $1,330. What is the amount of the cash flow to
C. $1,333
stockholders?
D. $1,611
A. $5,100
E. $2,351
B. $7,830
-> The noncash expense is the depreciation in the amount of $1,611.
C. $18,020
D. $19,998
68. What is the amount of the net capital spending for 2012?
E. $20,680
A. -$382
-> Cash flow from assets = $48,450 - (-$1,330) - $24,000 = $25,780 Cash
B. $1,229
flow to creditors =$2,480 - (-$2,620) = $5,100
C. $1,804
Cash flow to stockholders = $25,780 - $5,100 = $20,680
D. $2,375
E. $2,516
-> Net capital spending = $17,107 - $17,489 + $1,611 = $1,229

69. What is the operating cash flow for 2012?

A. $2,114
B. $2,900
C. $2,985
D. $3,536
E. $4,267
-> Operating cash flow = $3,396 + $1,611 - $740 = $4,267

70. What is the cash flow from assets for 2012?

A. $1,732
B. $2,247
C. $2,961
D. $3,915
E. $4,267
-> Change in net working capital = ($4,771 - $1,532) - ($6,127 - $4,194) = $1,306 Net
capital spending = $17,107 - $17,489 + $1,611 = $1,229
Operating cash flow = $3,396 + $1,611 - $740 = $4,267 Cash
flow from assets = $4,267 - $1,229 - $1,306 = $1,732
 Net fixed assets 4,006 4,123
71. What is the amount of net new borrowing for 2012? Common stock 1,900 2,100
A. -$1,812 Taxes 590 670
B. -$1,738
C. $240
D. $662 75. What is the net working capital for 2012?
E. $850 A. -$175
-> Net new borrowing = $10,650 - $9,800 = $850 B. $338
C. $1,262
72. What is the cash flow to creditors for 2012? D. $1,945
A. -$353
E. $4,941
B. -$210
-> Net working capital = $313 + $1,162 + $1,521 - $1,051 = $1,945
C. $300
76. What is the change in net working capital from 2011 to 2012?
D. $432
A. -$175
E. $527
B. -$70
-> Cash flow to creditors = $1,282 - ($10,650 - $9,800) = $432
C. $125
D. $240
73. What is the amount of dividends paid in 2012?
E. $315
A. $0
-> Change in net working capital = ($313 + $1,162 + $1,521 - $1,051) - ($250 + $1,092 + $1,495
B. $574
- $717) = -$175
C. $800
D. $2,013
77. What is the net capital spending for 2012?
E. $2,174
A. $117
-> Dividends paid = $1,374 - ($2,696 - $2,122) = $800
B. $239
C. $257
74. What is the cash flow to stockholders for 2012?
D. $338
A. -$500
E. $421
B. -$800
-> Net capital spending = $4,123 - $4,006 + $122 = $239
C. $500
D. $1,300
78. What is the operating cash flow for 2012?
E. $2,100
A. $1,226
-> Cash flow to stockholders = [$1,374 - ($2,696 - $2,122)] - ($7,000 - $7,500) = $1,300
B. $1,367
C. $1,644
M & M Foods
D. $1,766
2011 2012
E. $1,823
-> Operating cash flow = ($6,423 - $4,109 - $122) + $122 - $670 = $1,644
Sales $5,831 $6,423
COGS 3,670 4,109
79. What is the cash flow from assets for 2012?
Interest 291 280
A. $1,230
Depreciation 125 122 B. $1,580
Cash 250 313 C. $1,770
Accounts receivables 1,092 1,162 D. $1,810
Current liabilities 717 1,051 E. $1,980
Inventory 1,495 1,521 -> Operating cash flow = ($6,423 - $4,109 - $122) + $122 - $670 = $1,644
Long-term debt 2,400 1,100 Net capital spending = $4,123 - $4,006 + $122 = $239
 Change in net working capital = ($313 + $1,162 + $1,521 - $1,051) - ($250 + $1,092 + $1,495 83. What is the taxable income for 2012?
- $717) = -$175 A. $1,051.00
Cash flow from assets = $1,644 - $239 - (-$175) = $1,580 B. $1,367.78
C. $1,592.42
80. What is net new borrowing for 2012? D. $2,776.41
A. -$1,300 E. $3,091.18
B. -$1,020 -> Net income = $420 + $631 = $1,051
C. $880 Taxable income = $1,051/(1 - 0.34) = $1,592.42
D. $1,020
E. $1,300 84. What is the operating cash flow for 2012?
-> Net new borrowing = $1,100 - $2,400 = -$1,300 A. $2,078.00
B. $2,122.42
C. $2,462.58
81. What is the cash flow to creditors for 2012? D. $2,662.00
A. -$1,020 E. $2,741.42
B. -$1,100 -> Net income = $420 + $631 = $1,051
C. $280 Taxable income = $1,051/(1 - 0.34) = $1,592.42
D. $1,580 Earnings before interest and taxes = $1,592.42 + $238 = $1,830.42
E. $1,760 Operating cash flow = $1,830.42 + $789 - 0.34($1,592.42) = $2,078.00
-> Net new borrowing = $1,100 - $2,400 = -$1,300. Cash
flow to creditors = 280 - (-$1,300) = $1,580 90. Beach Front Industries has sales of $546,000, costs of $295,000, depreciation expense of
$37,000, interest expense of $15,000, and a tax rate of 32 percent. The firm paid $59,000 in cash
82. What is the cash flow to stockholders for 2012? dividends. What is the addition to retained earnings?
A. $0 A. $76,320
B. $133 B. $81,700
C. $268 C. $95,200
D. $1,709 D. $103,460
E. $1,515 E. $121,680
-> Operating cash flow = ($6,423 - $4,109 - $122) + $122 - $670 = $1,644 Net -> Net income = ($546,000 - $295,000 - $37,000 - $15,000) (1 - 0.32) = $135,320.
capital spending = $4,123 - $4,006 + $122 = $239 Addition to retained earnings = $135,320 - $59,000 = $76,320
Change in net working capital = ($313 + $1,162 + $1,521 - $1,051) - ($250 + $1,092 + $1,495
- $717) = -$175 91. The Widget Co. purchased new machinery three years ago for $4 million. The machinery can be
Cash flow from assets = $1,644 - $239 - (-$175) = $1,580 Net sold to the Roman Co. today for $2 million. The Widget Co.'s current balance sheet shows net fixed
new borrowing = $1,100 - $2,400 = -$1,300 assets of $2,500,000, current liabilities of $1,375,000, and net working capital of $725,000. If all the
Cash flow to creditors = 280 - (-$1,300) = $1,580 Cash current assets were liquidated today, the company would receive $1.9 million in cash. The book
flow to stockholders = $1,580 - $1,580 = $0 value of the Widget Co.'s assets today is and the market value of those assets is
.
A. $4,600,000; $3,900,000
B. $4,600,000; $3,125,000
2012 C. $5,000,000; $3,125,000
Cost of goods sold $4,878 D. $5,000,000; $3,900,000
Interest 238 E. $6,500,000; $3,900,000
Dividends 420 -> Book value = ($725,000 + $1,375,000) + $2,500,000 = $4,600,000 Market
Depreciation 789 value = $1,900,000 + $2,000,000 = $3,900,000
Change in retained earnings 631 Tax
rate 34%
92. Boyer Enterprises had $200,000 in 2011 taxable income. What is the firm's average tax rate -> Change in net working capital = ($1,640 - $1,140) - ($1,360 - $940) = $80
based on the rates shown in the following table?
96. The 2011 balance sheet of The Beach Shoppe showed long-term debt of $2.1 million, and the
2012 balance sheet showed long-term debt of $2.3 million. The 2012 income statement showed an
interest expense of $250,000. What was the cash flow to creditors for 2012?
A. -$200,000
B. -$150,000
C. $50,000
A. 28.25 percent
D. $200,000
B. 30.63 percent
E. $450,000
C. 32.48 percent
-> Cash flow to creditors = $250,000 - ($2,300,000 - $2,100,000) = $50,000
D. 36.50 percent
E. 39.00 percent
-> Tax = 0.15($50,000) + 0.25($25,000) + 0.34($25,000) + 0.39($200,000 - $100,000) = $61,250
97. The 2011 balance sheet of The Sports Store showed $800,000 in the common stock account and
Average tax rate = $61,250/$200,000 = 30.63 percent
$6.7 million in the additional paid-in surplus account. The 2012 balance sheet showed
$872,000 and $8 million in the same two accounts, respectively. The company paid out $600,000 in
93. Webster World has sales of $12,900, costs of $5,800, depreciation expense of $1,100, and
cash dividends during 2012. What is the cash flow to stockholders for 2012? A. -$1,372,000
interest expense of $700. What is the operating cash flow if the tax rate is 32 percent?
B. -$772,000
A. $4,704
C. -$628,000
B. $5,749
D. $372,000
C. $5,404
E. $1,972,000
D. $7,036
-> Cash flow to stockholders = $600,000 - [($872,000 + $8,000,000) - ($800,000 + $6,700,000) =
E. $7,100
-$772,000
-> Earnings before interest and taxes = $12,900 - $5,800 - $1,100 = $6,000 Taxable
income = $6,000 - $700 = $5,300
98. Suppose you are given the following information for Bayside Bakery: sales = $30,000;
Tax = .32($5,300) = $1,696
costs = $15,000; addition to retained earnings = $4,221; dividends paid = $469; interest
Operating cash flow = $6,000 + $1,100 - $1,696 = $5,404
expense = $1,300; tax rate = 30 percent. What is the amount of the depreciation expense? A.
$4,820
94. The Blue Bonnet's 2011 balance sheet showed net fixed assets of $2.2 million, and the 2012
B. $5,500
balance sheet showed net fixed assets of $2.6 million. The company's income statement showed a
C. $7,000
depreciation expense of $900,000. What was the amount of the net capital spending for 2012?
D. $8,180
A. -$500,000
E. $9,500
B. $400,000
-> Net income = $469 + $4,221 = $4,690
C. $1,300,000
Earnings before taxes = $4,690/(1 - 0.30) = $6,700
D. $1,700,000
Earnings before interest and taxes = $6,700 + $1,300 = $8,000 Depreciation
E. $1,800,000
= $30,000 - $15,000 - $8,000 = $7,00
-> Net capital spending = $2,600,000 - $2,200,000 + $900,000 = $1,300,000
99. Dee Dee's Marina is obligated to pay its creditors $6,400 today. The firm's assets have a current
95. The 2011 balance sheet of Global Tours showed current assets of $1,360 and current liabilities of
market value of $5,900. What is the current market value of the shareholders' equity? A. -
$940. The 2012 balance sheet showed current assets of $1,640 and current liabilities of $1,140. What
$600
was the change in net working capital for 2012?
B. -$500
A. $80
C. $0
B. $170
D. $500
C. $190
E. $600
D. $880
-> Shareholders' equity = Max [($5,900 - $6,400), 0]. Since the market value of equity cannot be
E. $920
negative, the answer is zero.
100. During 2012, RIT Corp. had sales of $565,600. Costs of goods sold, administrative and
selling expenses, and depreciation expenses were $476,000, $58,800, and $58,800, respectively. In
addition, the company had an interest expense of $112,000 and a tax rate of 32 percent. What is the
operating cash flow for 2012? Ignore any tax loss carry-back or carryforward provisions.
A. $17,920
B. $21,840
C. $30,800
D. $52,600
E. $77,840
-> Earnings before interest and taxes = Net income = $565,600 - $476,000 - $58,800 - $58,800 =
-$28,000
Operating cash flow = -$28,000 + $58,800 - $0 = $30,800
 Chap 3 TCDN
Chapter 03. Working with Financial Statements. Answer Key 5. Relationships determined from a firm's financial information and used for comparison
Multiple Choice Questions purposes are known as:
A. financial ratios.
1. Activities of a firm which require the spending of cash are known as: B. identities.
A. sources of cash. C. dimensional analysis.
B. uses of cash. D. scenario analysis.
C. cash collections. E. solvency analysis.
D. cash receipts. -> A. financial ratios: Financial ratios are relationships determined from a company’s financial
E. cash on hand. information and used for comparison purposes. They provide insights into a company’s liquidity,
-> B. uses of cash: Activities of a firm that require the spending of cash are known as uses of profitability, and efficiency
cash. These activities can include purchasing inventory, paying dividends to shareholders,
or repaying debt. 6. The formula which breaks down the return on equity into three component parts is referred to as
which one of the following?
2. The sources and uses of cash over a stated period of time are reflected on the: A. equity equation
A. income statement. B. profitability determinant
B. balance sheet. C. SIC formula
C. tax reconciliation statement. D. Du Pont identity
D. statement of cash flows. E. equity performance formula
E. statement of operating position. -> D. DuPont identity: The DuPont identity is a formula that breaks down a company’s return on
-> D. statement of cash flows: The statement of cash flows is a financial statement that summarizes equity (ROE) into three parts: net profit margin, total asset turnover, and financial leverage. This
the amount of cash and cash equivalents entering and leaving a company. It measures how well a helps to understand the factors driving a company’s ROE.
company manages its cash position, meaning how well the company generates cash to pay its debt
obligations and fund its operating expenses. 7. The U.S. government coding system that classifies a firm by the nature of its business
operations is known as the:
3. A common-size income statement is an accounting statement that expresses all of a firm's A. NASDAQ 100.
expenses as percentage of: B. Standard & Poor's 500.
A. total assets. C. Standard Industrial Classification code.
B. total equity. D. Governmental ID code.
C. net income. E. Government Engineered Coding System.
D. taxable income.
-> C. Standard Industrial Classification code: The Standard Industrial Classification (SIC) code
E. sales.
is a system used by the U.S. government to classify industries by a four-digit code. It is used to
-> E. sales: A common-size income statement is a financial statement in which each line item is classify industries by the type of activity they are engaged in.
expressed as a percentage of sales. This allows for easy comparison of different companies’ income
statements, regardless of their size.
8. Which one of the following is a source of cash?
4. Which one of the following standardizes items on the income statement and balance sheet A. increase in accounts receivable
relative to their values as of a common point in time? B. decrease in notes payable
A. statement of standardization C. decrease in common stock
B. statement of cash flows D. increase in accounts payable
C. common-base year statement E. increase in inventory
D. common-size statement -> D. increase in accounts payable: An increase in accounts payable is a source of cash because it
E. base reconciliation statement means the company is delaying payment to its suppliers, effectively keeping more cash on hand.
-> C. common-base year statement: A common-base year statement is a standardized financial
statement that presents all items relative to a certain base year amount. This allows for easy 9. Which one of the following is a use of cash?
comparison of a firm’s financial performance over time. A. increase in notes payable
B. decrease in inventory
C. increase in long-term debt
D. decrease in accounts receivables -> C. I, II, and III only On the Statement of Cash Flows, operating activities include transactions that
E. decrease in common stock affect net income and changes in current assets and liabilities. Costs of goods sold (I) directly impact
-> E. decrease in common stock: A decrease in common stock is a use of cash because it typically net income as an expense related to production. A decrease in accounts payable (II) reflects cash
means the company is buying back its own shares, which requires spending cash. outflows from paying off suppliers, affecting operational cash flow. Interest paid (III) is also included
as it represents a cost of financing that impacts net income. However, dividends paid (IV) are not part
10. Which one of the following is a source of cash? of operating activities; they are classified under financing activities as they involve distributing
A. repurchase of common stock profits to shareholders. Therefore, only costs of goods sold, decrease in accounts payable, and
B. acquisition of debt interest paid are considered operating activities.
C. purchase of inventory
D. payment to a supplier
E. granting credit to a customer 14. According to the Statement of Cash Flows, a decrease in accounts receivable will the
-> B. acquisition of debt: The acquisition of debt is a source of cash because the company receives cash flow from activities.
money from the lender when it takes out a loan. A. decrease; operating
B. decrease; financing
11. Which one of the following is a source of cash? C. increase; operating
A. increase in accounts receivable D. increase; financing
B. decrease in common stock E. increase; investment
C. decrease in long-term debt -> C. increase; operating: A decrease in accounts receivable means that the company is collecting
D. decrease in accounts payable money from its customers, which increases cash flow from operating activities.
E. decrease in inventory
-> E. decrease in inventory: A decrease in inventory is a source of cash because it means the
company is selling its inventory, which generates cash. 15. According to the Statement of Cash Flows, an increase in interest expense will the cash
flow from activities.
12. On the Statement of Cash Flows, which of the following are considered financing activities? A. decrease; operating
I. increase in long-term debt B. decrease; financing
II. decrease in accounts payable C. increase; operating
III. interest paid D. increase; financing
IV. dividends paid E. increase; investment
A. I and IV only -> A. decrease; operating: An increase in interest expense decreases net income, which in turn
B. III and IV only decreases the cash flow from operating activities.
C. II and III only
D. I, III, and IV only
E. I, II, III, and IV 16. On a common-size balance sheet all accounts are expressed as a percentage of:
A. sales for the period.
-> A. I and IV only Increasing long-term debt (borrowing more money) and paying dividends are B. the base year sales.
both considered financing activities because they involve transactions with the company’s creditors C. total equity for the base year.
or owners. D. total assets for the current year.
13. On the Statement of Cash Flows, which of the following are considered operating activities? E. total assets for the base year.
I. costs of goods sold -> D. total assets for the current year: On a common-size balance sheet, all accounts are
II. decrease in accounts payable expressed as a percentage of total assets for the current year. This allows for easy comparison of
III. interest paid different companies’ balance sheets or the same company’s balance sheet over time.
IV. dividends paid
A. I and III only
B. III and IV only 17. On a common-base year financial statement, accounts receivables will be expressed relative to
C. I, II, and III only which one of the following?
D. I, III, and IV only A. current year sales
B. current year total assets
E. I, II, III, and IV
C. base-year sales
D. base-year total assets -> C. decrease in the quick ratio: An increase in current liabilities, while holding other factors
E. base-year accounts receivables constant, will decrease the quick ratio. This is because the quick ratio is calculated as (Current
Assets - Inventory) / Current Liabilities. An increase in current liabilities will increase the
-> E. base-year accounts receivables: On a common-base year financial statement, accounts
denominator of this ratio, leading to a decrease in the overall value.
receivables are expressed relative to the base-year accounts receivables. This method sets the base
year as 100%, allowing for a comparison of the current year’s accounts receivables as a percentage of
the base-year value, highlighting changes over time. 21. An increase in which one of the following will increase a firm's quick ratio without affecting its
cash ratio?
A. accounts payable
18. A firm uses 2008 as the base year for its financial statements. The common-size, base-year
B. cash
statement for 2009 has an inventory value of 1.08. This is interpreted to mean that the 2009
C. inventory
inventory is equal to 108 percent of which one of the following?
D. accounts receivable
A. 2008 inventory
E. fixed assets
B. 2008 total assets
C. 2009 total assets -> D. accounts receivable: An increase in accounts receivable would increase a firm’s quick ratio
D. 2008 inventory expressed as a percent of 2008 total assets without affecting its cash ratio. This is because accounts receivable are included in current assets but
E. 2009 inventory expressed as a percent of 2009 total assets not in the quick ratio’s numerator.
-> D. 2008 inventory expressed as a percent of 2008 total assets: In common-base year financial
statements, each item is expressed as a percentage of the base year value. In this case, the inventory 22. A supplier, who requires payment within ten days, should be most concerned with which one of
value of 1.08 in the 2009 common-size statement means that the 2009 inventory is 108% of the the following ratios when granting credit?
2008 inventory expressed as a percentage of 2008 total assets. The common-base year statement A. current
allows for analysis of how a particular item, such as inventory, has changed relative to the B. cash
company’s overall size in the base year. C. debt-equity
D. quick
19. Which of the following ratios are measures of a firm's liquidity? E. total debt
I. cash coverage ratio
-> B. cash: The cash ratio measures the company’s ability to cover its short-term liabilities with its
II. interval measure
cash and cash equivalents alone. Since the supplier expects payment within a short timeframe, they
III. debt-equity ratio
would want to ensure that the company has enough cash on hand to meet its obligations promptly.
IV. quick ratio
Therefore, the cash ratio is the most appropriate measure for the supplier to consider when granting
A. I and III only
credit in this scenario.
B. II and IV only
C. I, III, and IV only 23. A firm has an interval measure of 48. This means that the firm has sufficient liquid assets to do
D. I, II, and III only which one of the following?
E. I, II, III, and IV A. pay all of its debts that are due within the next 48 hours
B. pay all of its debts that are due within the next 48 days
-> B. II and IV only: The interval measure and the quick ratio are both measures of a firm’s C. cover its operating costs for the next 48 hours
liquidity. The interval measure indicates how many days a company can operate on its current liquid
D. cover its operating costs for the next 48 days
assets. The quick ratio measures a company’s ability to meet its short-term obligations with its most
E. meet the demands of its customers for the next 48 hours
liquid assets.
-> D. cover its operating costs for the next 48 days: An interval measure of 48 means the firm has
enough liquid assets to cover its operating costs for the next 48 days.
20. An increase in current liabilities will have which one of the following effects, all else held
constant? Assume all ratios have positive values.
A. increase in the cash ratio 24. Over the past year, the quick ratio for a firm increased while the current ratio remained
B. increase in the net working capital to total assets ratio constant. Given this information, which one of the following must have occurred? Assume all
C. decrease in the quick ratio ratios have positive values. A. current assets increased
D. decrease in the cash coverage ratio B. current assets decreased
E. increase in the current ratio C. inventory increased
D. inventory decreased
E. accounts payable increased C. payment of interest to a lender
D. payment of principle to a lender
-> D. inventory decreased: If a firm’s quick ratio increases while its current ratio remains constant,
E. payment of a dividend to a shareholder
it means that inventory must have decreased. This is because the quick ratio excludes inventory
from current assets, while the current ratio includes it. -> C. payment of interest to a lender: The cash coverage ratio measures a company’s ability to
cover its interest payments with its earnings before interest and taxes (EBIT). It is calculated as
(EBIT + Depreciation) / Interest.
25. Ratios that measure a firm's financial leverage are known as ratios.
A. asset management
B. long-term solvency 29. Jasper United had sales of $21,000 in 2008 and $24,000 in 2009. The firm's current accounts
C. short-term solvency remained constant. Given this information, which one of the following statements must be true?
D. profitability A. The total asset turnover rate increased.
E. book value B. The days' sales in receivables increased.
C. The net working capital turnover rate increased.
-> B. long-term solvency: Ratios that measure a firm’s financial leverage are known as long-term
D. The fixed asset turnover decreased.
solvency ratios. Financial leverage refers to the extent to which a company uses debt to finance its
E. The receivables turnover rate decreased.
assets. Long-term solvency ratios assess a company’s ability to meet its long-term financial
obligations. -> C. The net working capital turnover rate increased: Net working capital turnover is calculated
as Sales / Average Net Working Capital. Since current assets (and current liabilities) are constant, net
working capital is also constant. With sales increasing, the net working capital turnover will
26. Which one of the following statements is correct?
increase.
A. If the total debt ratio is greater than .50, then the debt-equity ratio must be less than 1.0.
B. Long-term creditors would prefer the times interest earned ratio be 1.4 rather than 1.5.
C. The debt-equity ratio can be computed as 1 plus the equity multiplier. 30. The Corner Hardware has succeeded in increasing the amount of goods it sells while holding the
D. An equity multiplier of 1.2 means a firm has $1.20 in sales for every $1 in equity. amount of inventory on hand at a constant level. Assume that both the cost per unit and the selling
E. An increase in the depreciation expense will not affect the cash coverage ratio. price per unit also remained constant. This accomplishment will be reflected in the firm's financial
ratios in which one of the following ways?
-> E. An increase in the depreciation expense will not affect the cash coverage ratio. The cash
A. decrease in the inventory turnover rate
coverage ratio is calculated as (EBIT + Depreciation) / Interest. Depreciation is a non-cash expense,
B. decrease in the net working capital turnover rate
meaning it doesn’t involve an actual outflow of cash. Therefore, an increase in depreciation expense
C. no change in the fixed asset turnover rate
will increase the numerator of the cash coverage ratio without affecting the denominator, resulting in
D. decrease in the day's sales in inventory
a higher ratio.
E. no change in the total asset turnover rate
-> D. decrease in the day’s sales in inventory: The days’ sales in inventory ratio measures the
27. If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the average number of days a company holds inventory before selling it. It is calculated as 365 /
following? Inventory Turnover. If a company increases sales while keeping inventory constant, it means
A. 0.0 inventory is being sold more quickly, resulting in a decrease in the days’ sales in inventory.
B. 0.5
C. 1.0
31. Dee's has a fixed asset turnover rate of 1.12 and a total asset turnover rate of 0.91. Sam's has a
D. 1.5
fixed asset turnover rate of 1.15 and a total asset turnover rate of 0.88. Both companies have similar
E. 2.0
operations. Based on this information, Dee's must be doing which one of the following?
-> B. 0.5: The debt-equity ratio is calculated as Total Debt / Total Equity. If the debt-equity ratio is 1.0, A. utilizing its fixed assets more efficiently than Sam's
it means that the company has an equal amount of debt and equity. In this case, if we assume the B. utilizing its total assets more efficiently than Sam's
company has $1 of debt, it also has $1 of equity, making total assets equal to $2. The total debt ratio is C. generating $1 in sales for every $1.12 in net fixed assets
then calculated as Total Debt / Total Assets, which would be $1/ $2 = 0.5 D. generating $1.12 in net income for every $1 in net fixed assets
E. maintaining the same level of current assets as Sam's
28. The cash coverage ratio directly measures the ability of a firm's revenues to meet which one of -> B. utilizing its total assets more efficiently than Sam’s: The total asset turnover ratio measures
its following obligations? how efficiently a company uses its assets to generate sales. A higher total asset turnover ratio
A. payment to supplier indicates better asset utilization efficiency. Since Dee’s has a higher total asset turnover ratio than
B. payment to employee Sam’s, it implies that Dee’s is using its total assets more efficiently.
32. Ratios that measure how efficiently a firm manages its assets and operations to generate net PEG ratio than Ben’s despite having the same P/E ratio, it means that Ben’s must have a higher
income are referred to as ratios. earnings growth rate.
A. asset management
B. long-term solvency
36. Tobin's Q relates the market value of a firm's assets to which one of the following?
C. short-term solvency
A. initial cost of creating the firm
D. profitability
B. current book value of the firm
E. turnover
C. average asset value of similar firms
-> D. profitability: Profitability ratios measure how efficiently a firm manages its assets and D. average market value of similar firms
operations to generate net income. These ratios assess a company’s ability to generate profits from its E. today's cost to duplicate those assets
sales, assets, and equity.
-> E. today’s cost to duplicate those assets: Tobin’s Q is a ratio that compares the market value of a
company’s assets to their replacement cost. It is calculated as Market Value of Assets/ Replacement
33. If a firm produces a twelve percent return on assets and also a twelve percent return on equity, Cost of Assets.
then the firm:
A. may have short-term, but not long-term debt.
B. is using its assets as efficiently as possible. 37. The price-sales ratio is especially useful when analyzing firms that have which one of the
C. has no net working capital. following?
D. has a debt-equity ratio of 1.0. A. volatile market prices
E. has an equity multiplier of 1.0. B. negative earnings
C. positive PEG ratios
-> E. has an equity multiplier of 1.0: The return on assets (ROA) measures a firm’s profitability
D. a negative Tobin's Q
relative to its total assets, while the return on equity (ROE) measures profitability relative to
E. increasing sales
shareholders’ equity. If both ROA and ROE are equal, it implies that the company has no debt (or
negligible debt), resulting in an equity multiplier of 1.0. -> B. negative earnings: The price-sales (P/S) ratio is a valuation ratio that compares a company’s
stock price to its revenue per share. It is particularly useful when analyzing firms with negative
earnings, as the price-earnings (P/E) ratio becomes meaningless in such cases.
34. Which one of the following will decrease if a firm can decrease its operating costs, all else
constant? A. return on equity
B. return on assets 38. Shareholders probably have the most interest in which one of the following sets of ratios?
C. profit margin A. return on assets and profit margin
D. equity multiplier B. long-term debt and times interest earned
E. price-earnings ratio C. price-earnings and debt-equity
D. market-to-book and times interest earned
-> E. price-earnings ratio: Decreasing operating costs would lead to an increase in net income.
E. return on equity and price-earnings
With net income increasing and the number of shares outstanding remaining constant, earnings per
share (EPS) would also increase. If the stock price does not increase proportionally with the increase -> E. return on equity and price-earnings: Shareholders are primarily interested in the return on
in EPS, the price-earnings ratio (which is calculated as price per share divided by earnings per equity (ROE), which measures the return they are getting on their investment in the company, and the
share) would decrease. price-earnings (P/E) ratio, which helps them assess the valuation of the company’s stock.

35. Al's has a price-earnings ratio of 18.5. Ben's also has a price-earnings ratio of 18.5. Which one of 39. Which one of the following accurately describes the three parts of the Du Pont identity?
the following statements must be true if Al's has a higher PEG ratio than Ben's? A. operating efficiency, equity multiplier, and profitability ratio
A. Al's has more net income than Ben's. B. financial leverage, operating efficiency, and profitability ratio
B. Ben's is increasing its earnings at a faster rate than the Al's. C. equity multiplier, profit margin, and total asset turnover
C. Al's has a higher market value per share than does Ben's. D. debt-equity ratio, capital intensity ratio, and profit margin
D. Ben's has a lower market-to-book ratio than Al's. E. return on assets, profit margin, and equity multiplier
E. Al's has a higher net income than Ben's. -> C. equity multiplier, profit margin, and total asset turnover:
The DuPont Identity breaks down Return on Equity (ROE) into three components:
-> B. Ben’s is increasing its earnings at a faster rate than the Al’s: The PEG ratio is the price-
Profitability: Measured by the profit margin (Net Income / Sales). This shows how much profit a
earnings (P/E) ratio divided by the earnings growth rate. A higher PEG ratio suggests that a
company generates for every dollar of sales.
company’s stock price is potentially overvalued relative to its earnings growth. If Al’s has a higher
Operating Efficiency: Measured by the total asset turnover (Sales / Total Assets). This shows how I. How many sales dollars has the firm generated per each dollar of assets? (Total asset
effectively a company uses its assets to generate sales. turnover)
Financial Leverage: Measured by the equity multiplier (Total Assets / Total Equity). This indicates II. How many dollars of assets has a firm acquired per each dollar in shareholders’
the extent to which a company uses debt to finance its assets equity? (Equity multiplier)
III. How much net profit is a firm generating per dollar of sales? (Net profit margin)
40. An increase in which of the following will increase the return on equity, all else constant? I.
sales. II. net income. III. Depreciation. IV. total equity 43. A firm currently has $600 in debt for every $1,000 in equity. Assume the firm uses some of its
cash to decrease its debt while maintaining its current equity and net income. Which one of the
A. I only following will decrease as a result of this action?
B. I and II only A. equity multiplier
C. II and IV only B. total asset turnover
D. II and III only C. profit margin
E. I, II, and III only D. return on assets
-> B. I and II only: E. return on equity
I. sales: An increase in sales, assuming costs are controlled, will lead to higher net income and
-> A. equity multiplier: The equity multiplier is a measure of financial leverage, calculated as Total
thus a higher return on equity (ROE).
Assets / Total Equity. If a firm decreases its debt while maintaining its equity, its total assets will
II. net income: An increase in net income directly increases ROE, as it is the numerator in the ROE
decrease, leading to a lower equity multiplier.
calculation (Net Income / Total Equity).
41. Which of the following can be used to compute the return on equity?
I. Profit margin x Return on assets 44. Which one of the following statements is correct?
II. Return on assets x Equity multiplier A. Book values should always be given precedence over market values.
III. Net income/Total equity B. Financial statements are frequently used as the basis for performance evaluations.
IV. Return on assets x Total asset turnover C. Historical information provides no value to someone who is predicting future performance.
D. Potential lenders place little value on financial statement information.
A. I and III only E. Reviewing financial information over time has very limited value.
B. II and III only -> B. Financial statements are frequently used as the basis for performance evaluations.
C. II and IV only Financial statements provide valuable information about a company’s financial performance and
D. I, II, and III only position, making them a crucial tool for evaluating its success and identifying areas for
E. I, II, III, and IV improvement.
-> B. II and III only:
II. Return on assets x Equity multiplier: This is the DuPont identity, which is a valid way to
calculate ROE. 45. It is easier to evaluate a firm using financial statements when the firm: A. is a
III. Net income/Total equity: This is the basic formula for calculating ROE. conglomerate.
B. has recently merged with its largest competitor.
42. The Du Pont identity can be used to help managers answer which of the following questions C. uses the same accounting procedures as other firms in the industry.
related to a firm's operations? D. has a different fiscal year than other firms in the industry.
I. How many sales dollars has the firm generated per each dollar of assets? E. tends to have many one-time events such as asset sales and property acquisitions.
II. How many dollars of assets has a firm acquired per each dollar in shareholders' equity? -> C. uses the same accounting procedures as other firms in the industry: When a firm uses the
III. How much net profit is a firm generating per dollar of sales? same accounting procedures as other firms in its industry, it becomes easier to compare their
IV. Does the firm have the ability to meet its debt obligations in a timely manner? financial statements, as there is less need for adjustments due to differences in accounting methods.
A. I and III only
B. II and IV only 46. The most acceptable method of evaluating the financial statements of a firm is to compare the
C. I, II, and III only firm's current:
D. II, III and IV only A. financial ratios to the firm's historical ratios.
E. I, II, III, and IV B. financial statements to the financial statements of similar firms operating in other
C. countries.
-> C. I, II, and III only: The DuPont identity can help managers answer the following questions: D. financial ratios to the average ratios of all firms located within the same geographic area.
E. financial statements to those of larger firms in unrelated industries.
F. financial statements to the projections that were created based on Tobin's Q. 48. Wise's Corner Grocer had the following current account values. What effect did the change in net
working capital have on the firm's cash flows for 2009?
-> A. financial ratios to the firm’s historical ratios: Comparing a firm’s current financial ratios to
its historical ratios is the most acceptable method of evaluating its financial statements. This allows
for the identification of trends and changes in the firm’s performance over time.

47. Which of the following represent problems encountered when comparing the financial
statements of two separate entities? A. net use of cash of $37
I. Either one, or both, of the firms may be conglomerates and thus have unrelated lines of B. net use of cash of $83
business. C. net source of cash of $83
II. The operations of the two firms may vary geographically. D. net source of cash of $111
III. The firms may use differing accounting methods. E. net source of cash of $135
IV. The two firms may be seasonal in nature and have different fiscal year ends.
A. I and II only
B. II and III only
C. I, III, and IV only
D. I, II, and III only
E. I, II, III, and IV

-> E. I, II, III, and IV: All the options listed represent problems encountered when comparing the 49. During the year, Kitchen Supply increased its accounts receivable by $130, decreased its
financial statements of two separate entities: inventory by $75, and decreased its accounts payable by $40. How did these three accounts affect the
I. Either one, or both, of the firms may be conglomerates and thus have unrelated lines of firm's cash flows for the year?
business.This can make it difficult to find a meaningful basis for comparison. A. $245 use of cash
B. $165 use of cash
II. The operations of the two firms may vary geographically. Different geographic locations may C. $95 use of cash
have different economic conditions, regulations, and customer preferences, affecting the D. $95 source of cash
comparability of financial results. E. $165 source of cash
III. The firms may use differing accounting methods. Different accounting methods can lead to
significant variations in financial statement figures, making comparisons less reliable.
IV. The two firms may be seasonal in nature and have different fiscal year ends. Seasonal
businesses experience fluctuations in sales and expenses throughout the year. Different fiscal year-
ends can further complicate comparisons due to variations in timing.

50. A firm generated net income of $878. The depreciation expense was $47 and dividends were
paid in the amount of $25. Accounts payables decreased by $13, accounts receivables increased by
$22, inventory decreased by $14, and net fixed assets decreased by $8. There was no interest
expense. What was the net cash flow from operating activity?
A. $876
B. $902
C. $904
D. $922
E. $930
-> Net cash from operating activities = $878 + $47 - $13 - $22 + $14 = $904
51. A firm has sales of $2,190, net income of $174, net fixed assets of $1,600, and current -> Net working capital to total assets = ($1,263 + $3,907 + $7,950 - $2,214)/ ($1,263 + $3,907 +
assets of $720. The firm has $310 in inventory. What is the common-size statement value of $7,950 + $8,400) = 0.51
inventory?
A. 13.36 percent 56. A firm has total assets of $311,770 and net fixed assets of $167,532. The average daily
B. 14.16 percent operating costs are $2,980. What is the value of the interval measure?
C. 19.38 percent A. 31.47 days
D. 30.42 percent B. 48.40 days
E. 43.06 percent C. 56.22 days
-> Common-size inventory = $310/($1,600 + $720) = 13.36 percent D. 68.05 days
E. 104.62 days
52. A firm has sales of $3,400, net income of $390, total assets of $4,500, and total equity of -> Interval measure = ($311,770 - $167,532)/$2,980 = 48.40 days
$2,750. Interest expense is $40. What is the common-size statement value of the interest expense?
A. 0.89 percent 57. A firm has a debt-equity ratio of 0.42. What is the total debt ratio?
B. 1.18 percent A. 0.30
C. 3.69 percent B. 0.36
D. 10.26 percent C. 0.44
E. 14.55 percent D. 1.58
-> Common-size interest = $40/$3,400 = 1.18 percent E. 2.38
-> The debt-equity ratio is 0.42. If total debt is $42 and total equity is $100, then total assets are
53. Last year, which is used as the base year, a firm had cash of $52, accounts receivable of $218, $142. Total debt ratio = $42/$142 = 0.30.
inventory of $509, and net fixed assets of $1,107. This year, the firm has cash of $61, accounts
receivable of $198, inventory of $527, and net fixed assets of $1,216. What is the common-base year 58. A firm has total debt of $4,620 and a debt-equity ratio of 0.57. What is the value of the
value of accounts receivable? total assets? A. $6,128.05
A. 0.08 B. $7,253.40
B. 0.10 C. $9,571.95
C. 0.88 D. $11,034.00
D. 0.91 E. $12,725.26
E. 1.18 -> Total equity = $4,620/0.57 = $8,105.26
-> Common-base year accounts receivable = $198/$218 = 0.91 Total assets = $4,620 + $8,105.26 = $12,725.26

54. Russell's Deli has cash of $136, accounts receivable of $87, accounts payable of $215, and 59. A firm has sales of $68,400, costs of $42,900, interest paid of $2,100, and depreciation of
inventory of $409. What is the value of the quick ratio? $6,500. The tax rate is 34 percent. What is the value of the cash coverage ratio?
A. 0.31 A. 12.14
B. 0.53 B. 15.24
C. 0.71 C. 17.27
D. 1.04 D. 23.41
E. 1.07 E. 24.56
-> Quick ratio = ($136 + $87)/$215 = 1.04 -> Cash coverage ratio = ($68,400 - $42,900)/$2,100 = 12.14

55. Uptown Men's Wear has accounts payable of $2,214, inventory of $7,950, cash of $1,263, 60. The Bike Shop paid $2,310 in interest and $1,850 in dividends last year. The times interest
fixed assets of $8,400, accounts receivable of $3,907, and long-term debt of $4,200. What is the earned ratio is 2.2 and the depreciation expense is $460. What is the value of the cash coverage
value of the net working capital to total assets ratio? ratio?
A. 0.31 A. 1.67
B. 0.42 B. 1.80
C. 0.47 C. 2.21
D. 0.51 D. 2.40
E. 0.56 E. 2.52
-> EBIT = 2.2 x $2,310 = $5,082; Cash coverage ratio = ($5,082 + $460)/$2,310 = 2.40
61. Al's Sport Store has sales of $897,400, costs of goods sold of $628,300, inventory of D. 28.56 percent
$208,400, and accounts receivable of $74,100. How many days, on average, does it take the firm to E. 32.14 percent
sell its inventory assuming that all sales are on credit? ->Return on equity = (0.0968 x $807,200)/[$1,105,100 x (1 - 0.78)] = 32.14 percent
A. 74.19 days
B. 84.76 days 66. The Meat Market has $747,000 in sales. The profit margin is 4.1 percent and the firm has
C. 121.07 days 7,500 shares of stock outstanding. The market price per share is $27. What is the priceearnings
D. 138.46 days ratio?
E. 151.21 days A. 6.61
-> Inventory turnover = $628,300/$208,400 = 3.014875. B. 8.98
Days in inventory = 365/3.014875 = 121.07 days C. 11.42
D. 13.15
62. The Flower Shoppe has accounts receivable of $3,709, inventory of $4,407, sales of E. 14.27
$218,640, and cost of goods sold of $167,306. How many days does it take the firm to both sell its  Earnings per share = (0.041 x $747,000)/7,500 = 4.0836
inventory and collect the payment on the sale assuming that all sales are on credit? Price-earnings ratio = $27/4.0836 = 6.61
A. 14.67 days
B. 15.81 days 67. Big Guy Subs has net income of $150,980, a price-earnings ratio of 12.8, and earnings per
C. 16.23 days share of $0.87. How many shares of stock are outstanding?
D. 17.18 days A. 13,558
E. 17.47 days B. 14,407
-> Days in inventory = 365/($167,306/$4,407) = 9.614 days C. 165,523
Days' sales in receivables = 365/($218,640/$3,709) = 6.192 days Total D. 171,000
days in inventory and receivables = 9.614 + 6.192 = 15.81 days E. 173,540
 Number of shares = $150,980/$0.87 = 173,540
63. A firm has net working capital of $2,715, net fixed assets of $22,407, sales of $31,350, and
current liabilities of $3,908. How many dollars worth of sales are generated from every $1 in 68. A firm has 160,000 shares of stock outstanding, sales of $1.94 million, net income of
total assets? $126,400, a price-earnings ratio of 18.7, and a book value per share of $9.12. What is the market- to-
A. $1.08 book ratio?
B. $1.14 A. 1.62
C. $1.19 B. 1.84
D. $1.26 C. 2.23
E. $1.30 D. 2.45
 Total asset turnover = $31,350/($2,715 + $22,407 + $3,908) = 1.08 Every E. 2.57
$1 in total assets generates $1.08 in sales.  Earnings per share = $126,400/160,000 = $0.79
Price per share = $0.79 x 18.7 = $14.773
64. The Purple Martin has annual sales of $687,400, total debt of $210,000, total equity of Market-to-book ratio = $14.773/$9.12 = 1.62
$365,000, and a profit margin of 5.20 percent. What is the return on assets?
A. 6.22 percent 69. Oscar's Dog House has a profit margin of 5.6 percent, a return on assets of 12.5 percent, and an
B. 6.48 percent equity multiplier of 1.49. What is the return on equity?
C. 7.02 percent A. 17.14 percent
D. 7.78 percent B. 18.63 percent
E. 9.79 percent C. 19.67 percent
-> Return on assets = (.0520 ◻ $687,400)/($210,000 + $365,000) = 6.22 percent D. 21.69 percent
E. 22.30 percent
65. Reliable Cars has sales of $807,200, total assets of $1,105,100, and a profit margin of 9.68  Return on equity = 12.5 percent x 1.49 = 18.63 percent
percent. The firm has a total debt ratio of 78 percent. What is the return on equity?
A. 13.09 percent
B. 16.67 percent
C. 17.68 percent
70. Taylor's Men's Wear has a debt-equity ratio of 42 percent, sales of $749,000, net income of
$41,300, and total debt of $198,400. What is the return on equity?
A. 7.79 percent
B. 8.41 percent
C. 8.74 percent
D. 9.09 percent
E. 9.16 percent
 Return on equity = $41,300/($198,400/0.42) = 8.74 percent

71. A firm has a debt-equity ratio of 57 percent, a total asset turnover of 1.12, and a profit margin of
4.9 percent. The total equity is $511,640. What is the amount of the net income?
A. $28,079
B. $35,143
C. $44,084
D. $47,601
E. $52,418
 Return on equity = 0.049 x 1.12 x (1 + 0.57) = .0861616 Net
income = $511,640 x 0.0861616 = $44,084

72. What is the quick ratio for 2009?

A. 0.56
B. 0.60
C. 1.32
D. 1.67
E. 1.79
 Quick ratio for 2009 = ($268,100 - $186,700)/$134,700 = 0.60

73. How many days of sales are in receivables? (Use 2009 values)
A. 17.08 days
B. 23.33 days
C. 26.49 days
D. 29.41 days
E. 32.97 days
 Accounts receivable turnover for 2009 = $627,800/$56,700 = 11.07 Days'
sales in receivables for 2009 = 365/11.07 = 32.97

74. What is the price-sales ratio for 2009 if the market price is $18.49 per share?
A. 2.43
B. 3.29
C. 3.67
D. 4.12
E. 4.38
 Price-sales ratio = $18.49/[$627,800/($140,000/$1)] = 4.12
75. What is debt-equity ratio? (Use 2009 values)
A. 0.52
B. 0.87
C. 0.94
D. 1.01
E. 1.06
 Debt-equity ratio = ($134,700 + $141,000)/($140,000 + $131,800) = 1.01

76. What is the cash coverage ratio for 2009?

A. 9.43
B. 10.53
C. 11.64
D. 11.82
E. 12.31
 Cash coverage ratio = ($95,200 + $11,200)/$10,100 = 10.53

77. What is the return on equity? (Use 2009 values)

A. 10.26 percent
B. 16.38 percent
C. 20.68 percent
D. 29.96 percent
E. 40.14 percent
 Return on equity = $56,200/($140,000 + $131,800) = 20.68 percent 80. What is the net working capital to total assets ratio for 2009?
A. 24.18 percent
78. What is the amount of the dividends paid for 2009? B. 36.82 percent
A. $11,100 C. 45.49 percent
B. $15,000 D. 51.47 percent
C. $32,600 E. 65.83 percent
D. $41,200  Net working capital to total assets for 2009 = ($27,129 - $8,384)/$41,209 = 45.49 percent
E. $45,100
 Dividends paid = $56,200 - ($131,800 - $120,700) = $45,100 81. How many days on average does it take Precision Tool to sell its inventory? (Use 2009
values) A. 164.30 days
79. What is the amount of the cash flow from investment activity for 2009? B. 187.77 days
A. $18,100 C. 219.63 days
B. $24,800 D. 247.46 days
C. $29,300 E. 283.31 days
D. $32,000  Days' sales in inventory = 365/($28,225/$21,908) = 283.31 days
E. $39,400
 Cash flow from investment activity = $279,400 - $261,300 + $11,200 = $29,300 82. How many dollars of sales are being generated from every dollar of net fixed assets? (Use
2009 values.)
A. $0.88
B. $1.87
C. $2.33
D. $2.59
E. $3.09
 Fixed asset turnover for 2009 = $36,408/$14,080 = 2.59
For every $1 in net fixed assets, the firm generates $2.59 in sales.
83. What is the equity multiplier for 2009? E. 4.99
A. 1.67  PEG ratio = ($18.70/$1.21)/(0.031 x 100) = 4.99
B. 1.72
C. 1.88 89. Townsend Enterprises has a PEG ratio of 5.3, net income of $49,200, a price-earnings ratio of
D. 1.93 17.6, and a profit margin of 7.1 percent. What is the earnings growth rate?
E. 2.03 A. 0.33 percent
 Equity multiplier for 2009 = $41,209/($17,500 + $3,825) = 1.93 B. 1.06 percent
C. 3.32 percent
84. What is the times interest earned ratio for 2009? D. 5.30 percent
A. 9.63 E. 10.60 percent
B. 10.12  5.3 = 17.6/(Earnings growth rate x 100) => Earnings growth rate = 3.32 percent
C. 12.59
D. 14.97 90. A firm has total assets with a current book value of $68,700, a current market value of
E. 16.05 $74,300, and a current replacement cost of $75,600. What is the value of Tobin's Q? A. .85
 Times interest earned for 2009 = $6,423/$510 = 12.59 B. 0.87
C. 0.92
85. What is the return on equity for 2009? (Use 2009 values) D. 0.95
A. 15.29 percent E. 0.98
B. 16.46 percent  Tobin's Q = $74,300/$75,600 = 0.98
C. 17.38 percent
D. 18.02 percent 91. Dixie Supply has total assets with a current book value of $368,900 and a current replacement cost
E. 18.12 percent of $486,200. The market value of these assets is $464,800. What is the value of Tobin's Q?
 Return on equity for 2009 = $3,843/($17,500 + $3,825) = 18.02 percent A. 0.86
B. 0.92
86. What is the net cash flow from investment activity for 2009? C. 0.96
A. -$1,840 D. 1.01
B. -$1,680 E. 1.06
C. -$80  Tobin's Q = $464,800/$486,200 = 0.96
D. $80
E. $1,840 92. Dandelion Fields has a Tobin's Q of .96. The replacement cost of the firm's assets is
 Net cash flow from investment activity for 2009 = -$1,680 Addition $225,000 and the market value of the firm's debt is $109,000. The firm has 20,000 shares of stock
to net fixed assets = $14,080 - $14,160 + $1,760 = $1,680 outstanding and a book value per share of $2.09. What is the market to book ratio?
A. 2.56 times
87. How does accounts receivable affect the statement of cash flows for 2009? B. 3.18 times
A. a use of $4,218 of cash as an investment activity C. 3.54 times
B. a source of $807 of cash as an operating activity D. 4.01 times
C. a use of $4,218 of cash as a financing activity E. 4.20 times
D. a source of $807 of cash as an investment activity  Market value of assets = 0.96 x $225,000 = $216,000 Market
E. a use of $807 of cash as an operating activity value of equity = $216,000 - $109,000 = $107,000 Market
 Change in accounts receivable for 2009 = $4,218 - $3,411 = $807 value per share $107,000/20,000 = $5.35
An increase in accounts receivable is a use of cash as an operating activity. Market-to book ratio = $5.35/$2.09 = 2.56 times

88. BL Lumber has earnings per share of $1.21. The firm's earnings have been increasing at an 93. A firm has annual sales of $320,000, a price-earnings ratio of 24, and a profit margin of
average rate of 3.1 percent annually and are expected to continue doing so. The firm has 21,500 4.2 percent. There are 14,000 shares of stock outstanding. What is the price-sales ratio?
shares of stock outstanding at a price per share of $18.70. What is the firm's PEG ratio? A. 0.48 A. 0.97
B. 1.24 B. 1.01
C. 2.85 C. 1.08
D. 3.97 D. 1.15
E. 1.22 99. What value can the price-sales ratio provide to financial managers that the price-earnings ratio
 Earnings per share = ($320,000 x 0.042)/14,000 = $0.96 cannot?
Price-sales ratio = (24 x $0.96)/($320,000/14,000) = 1.01 The price-earnings ratio loses its value when a firm has either zero or negative earnings. This
problem is avoided by using the price-sales ratio as sales should always be a positive value. In
94. Lassiter Industries has annual sales of $220,000 with 10,000 shares of stock outstanding. The addition, the price-sales ratio is not affected by a firm's expenses or taxes whereas the priceearnings
firm has a profit margin of 7.5 percent and a price-sales ratio of 1.20. What is the firm's price- ratio is. If earnings are positive, both ratios can be used to ascertain if there is any major change in the
earnings ratio? relationship between a firm's costs and its sales from one time period to another.
A. 14
B. 16 100. It is commonly recommended that the managers of a firm compare the performance of their
C. 18 firm to that of its peers. Increasingly, this is becoming a more difficult task. Explain some of the
D. 20 reasons why comparisons of this type can frequently be either difficult to perform or produce
E. 22 misleading results.
 Price per share = 1.20 x ($220,000/10,000) = $26.40 Many firms are involved in multiple areas of business over diverse geographical locations thereby
Earnings per share = ($220,000 x 0.075)/10,000 = $1.65 making it difficult, if not impossible to identify a peer that has truly similar operations. Firms
Price-earnings ratio = $26.40/$1.65 = 16 operating in different areas may be subjected to various regulations which might affect also their
operations. In addition, many firms are cyclical in nature and have varying fiscal years which
Essay Questions complicates the comparison of financial statements. The financial results for a firm are also affected
by various accounting practices and one-time events, such as a merger, acquisition, or divestiture. If
95. Assume a firm has a positive cash balance which is increasing annually. Why then is it each of these differences between firms is not handled properly, any resulting comparisons or
important to analyze a statement of cash flows? conclusions can be faulty. So, while it is recommended that peer analysis be conducted, doing so in a
It is possible that the increase in the cash balance is a result of issuing more equity or assuming more meaningful manner can present quite a challenge.
debt and not the result of generating cash from operations. If a firm cannot generate positive cash flows
internally, the firm will eventually encounter difficulties in raising external funds and could possibly
face bankruptcy. Multiple Choice Questions

96. You need to analyze a firm's performance in relation to its peers. You can do this either by 101. The Burger Hut has sales of $29 million, total assets of $43 million, and total debt of $13
comparing the firms' balance sheets and income statements or by comparing the firms' ratios. million. The profit margin is 11 percent. What is the return on equity?
If you only had time to use one means of comparison which method would you use and why? A. 7.42 percent
Firms generally are sized differently making it difficult to do comparisons on a dollar basis. By B. 10.63 percent
using ratios, the relationships between variables can be seen without being influenced by firm size. C. 11.08 percent
In addition, ratios allow you to analyze performance and see relationships that are difficult to see D. 13.31 percent
when looking only at dollar amounts. Thus, the logical choice would be to compare the firms using E. 14.28 percent
ratio analysis.  Return on equity = (0.11 x $29m)/($43m - $13m) = 10.63 percent

97. In general, what does a high Tobin's Q value indicate and how reliable does that value tend to be? 102. The Home Supply Co. has a current accounts receivable balance of $300,000. Credit sales for
A high Tobin's Q indicates that the current market value of a firm's assets represents a high the year just ended were $1,830,000. How many days on average did it take for credit customers
percentage of the firm's replacement cost. Higher Q values tend to indicate that a firm has a to pay off their accounts during this past year?
significant competitive advantage and/or has attractive investment opportunities. The problem with A. 54.29 days
Tobin's Q is that the information used in the computation of the Q value is often questionable. B. 56.01 days
C. 57.50 days
98. What value does the PEG ratio provide to financial analysts? D. 59.84 days
The PEG ratio divides the PE ratio by the expected future earnings growth rate (The growth rate is E. 61.00 days
multiplied by 100). A high PEG value tends to indicate that the firm's PE ratio, and thus the stock  Receivables turnover = $1,830,000/$300,000 = 6.1 times Days'
price, is too high relative to the expected growth rate of the firm's earnings. This is particularly true sales in receivables = 365/6.1 = 59.84 days
when a firm's PEG and PE ratios are noticeably greater than those of its peers.
103. BL Industries has ending inventory of $300,000, and cost of goods sold for the year just 108. Canine Supply has sales of $2,200, total assets of $1,400, and a debt-equity ratio of 0.3. Its
ended was $1,410,000. On average, how long does a unit of inventory sit on the shelf before it is return on equity is 15 percent. What is the net income?
sold? A. $138.16
A. 17.16 days B. $141.41
B. 21.43 days C. $152.09
C. 77.66 days D. $156.67
D. 78.29 days E. $161.54
E. 83.13 days  Return on equity = 0.15 = (Net income/$2,200) x ($2,200/$1,400) x (1 + 0.30) Net
 Inventory turnover = $1,410,000/$300,000 = 4.7 times Day's income = $161.54
sales in inventory = 365/4.7 = 77.66 days
109. Billings, Inc. has net income of $161,000, a profit margin of 7.6 percent, and an accounts
104. Coulter Supply has a total debt ratio of 0.47. What is the equity multiplier? receivable balance of $127,100. Assume that 66 percent of sales are on credit. What is the days'
A. 0.89 sales in receivables?
B. 1.13 A. 21.90 days
C. 1.47 B. 27.56 days
D. 1.89 C. 33.18 days
E. 2.13 D. 35.04 days
 Debt-equity ratio = 0.47/(1 - 0.47) = 0.89 Equity E. 36.19 days
multiplier = 1 + 0.89 = 1.89  Sales = $161,000/.076 = $2,118,421
Credit sales = $2,118,421 x 0.66 = $1,398,158
105. High Mountain Foods has an equity multiplier of 1.55, a total asset turnover of 1.3, and a Accounts receivable turnover = $1,398,158/$127,100 = 11 times.
profit margin of 7.5 percent. What is the return on equity? Days' sales in receivables = 365/11 = 33.18 days
A. 8.94 percent
B. 10.87 percent 110. Gladstone Pavers has a long-term debt ratio of 0.6 and a current ratio of 1.3. Current
C. 12.69 percent liabilities are $700, sales are $4,440, the profit margin is 9.5 percent, and the return on equity is
D. 14.38 percent 19.5 percent. How much does the firm have in net fixed assets?
E. 15.11 percent A. $4,880.18
 Return on equity = 0.075 x 1.3 x 1.55 = 15.11 percent B. $5,197.69
C. $5,666.67
106. Lancaster Toys has a profit margin of 9.6 percent, a total asset turnover of 1.71, and a return on D. $5,848.15
equity of 21.01 percent. What is the debt-equity ratio? E. $6,107.70
A. 0.22  Current assets = 1.3 x $700 = $910 Net
B. 0.28 income = 0.095 x $4,440 = $421.80 Total
C. 0.46 equity = $421.80/.195 = $2,163.0769
D. 0.72 0.6 = Long term debt/(Long-term debt + $2,163.0769) => Long-term debt = $3,244.6153 Total
E. 0.78 debt = $700 + $3,244.6153 = $3,944.6153
 Equity multiplier = 0.2101/(0.096 x 1.71) = 1.28 Total assets = $3,944.6153 + $2,163.0769 = $6,107.6922 Net
Debt-equity ratio = 1.28 - 1 = 0.28 fixed assets = $6,107.6922 - $910 = $5,197.69

107. Charlie's Chicken has a debt-equity ratio of 2.05. Return on assets is 9.2 percent, and total
equity is $560,000. What is the net income?
A. $105,616
B. $148,309
C. $157,136
D. $161,008
E. $164,909
 Equity multiplier = 1 + 2.05 = 3.05
Return on equity = 0.092 x 3.05 = 0.2806 => Net income = 0.2806 x $560,000 = $157,136
111. A firm has a debt-total asset ratio of 74 percent and a return on total assets of 13 percent.
What is the return on equity?
A. 26 percent
B. 50 percent
C. 65 percent
D. 84 percent
E. 135 percent
 (Total assets - Total equity)/Total assets = 0.74 => Total equity = 0.26 Total assets Net
income = 0.13 Total assets
Return on equity = 0.13 Total assets/ 0.26 Total assets = 50 percent

112. The Dockside Inn has net income for the most recent year of $8,450. The tax rate was 38
percent. The firm paid $1,300 in total interest expense and deducted $1,900 in depreciation
expense. What was the cash coverage ratio for the year?
A. 10.48 times
B. 11.48 times
C. 12.39 times
D. 12.95 times
E. 13.07 times
 Earnings before taxes = $8,450/(1 - 0.38) = $13,629.03
Earnings before interest, taxes, and depreciation = $13,629.03 + $1,300 + $1,900 =
$16,829.03
Cash coverage ratio = $16,829.03/$1,300 = 12.95 times

113. Beach Wear has current liabilities of $350,000, a quick ratio of 1.65, inventory turnover of 3.2,
and a current ratio of 2.9. What is the cost of goods sold?
A. $980,000
B. $1,060,000
C. $1,200,000
D. $1,400,000
E. $1,560,000
 Current assets = 2.9 x $350,000 = $1,015,000
($1,015,000 - Inventory)/$350,000 = 1.65 => Inventory =$437,500
Costs of goods sold = 3.2 x $437,500 = $1,400,000
 Chap 3
Chapter 03 B. inventory period.
Short-Term Finance and Planning C. accounts receivable period.
D. accounts payable period.
Multiple Choice Questions E. cash cycle.
Choose D.
1. The length of time between the purchase of inventory and the receipt of cash from the The accounts payable period is the time a firm takes to pay its suppliers after purchasing
sale of that inventory is called the: inventory or goods.
A. operating cycle.
B. inventory period. 5. Central Supply purchased a toboggan for inventory this morning and paid cash for it.
C. accounts receivable period. The time period between today and the day Central Supply will receive cash from the
D. accounts payable period. sale of this
E. cash cycle. toboggan is called the:
Choose A. A. operating cycle.
Operating cycle has two distinct components. The first part is the time it takes to acquire and B. inventory period.
sell the inventory is called the inventory period. The second part is the time it takes to collect C. accounts receivable period.
on the sale. This is called the accounts receivable period. D. accounts payable period.
E. cash cycle.
2. The length of time that elapses between the day a firm purchases an inventory item Choose E.
and the The company paid cash for the inventory, so the accounts payable period is zero. The cash
day that item sells is called the: cycle measures the time from when cash is paid for inventory until cash is received from the
A. operating cycle. sale.
B. inventory period.
C. accounts receivable period. 6. A graphical representation of the operating and cash cycles is called a(n):
D. accounts payable period. A. operating chart.
E. cash cycle. B. cash flow timeline.
Choose B. C. production flow line.
The inventory period is the amount of time that passes between when a firm purchases D. component chart.
inventory and when it sells that inventory. It measures how long inventory sits before being E. working time line.
sold. Choose B.
A cash flow timeline is a graphical representation that shows the timing of cash outflows
3. The length of time between the sale of inventory and the collection of the payment for (like paying for inventory) and cash inflows (like receiving payment from customers). It
that sale is called the: visually illustrates the operating and cash cycles.
A. operating cycle.
B. inventory period. 7. Costs that increase as a firm acquires additional current assets are called costs.
C. accounts receivable period. A. carrying
D. accounts payable period. B. shortage
E. cash cycle. C. order
Choose C. D. safety
The accounts receivable period is the time between when a firm sells inventory (often on E. trading
credit) and when it collects payment from the customer. Choose A.
Costs that rise with increases in the level of investment in current assets are called carrying
4. The length of time between the day a firm purchases an item from its supplier until costs.
the day that supplier is paid for that purchase is called the:
A. operating cycle. 8. Costs that decrease as a firm acquires additional current assets are called costs.
A. carrying 12. Brustle's Pottery either factors or assigns all of its receivables to other firms. This is
B. shortage known as:
C. debt A. accounts receivable financing.
D. equity B. pledged financing.
E. payables C. capital funding.
Choose B. D. daily funding.
Costs that fall with increases in the level of investment in current assets are called shortage E. capital financing.
costs. Choose A.
When a company factors or assigns its receivables to another firm to raise cash, it is called
9. Steve has estimated the cash inflows and outflows for his hardware store for next accounts receivable financing. This allows the company to get immediate cash by selling or
year. The pledging its receivables.
report that he has prepared recapping these cash flows is called a:
A. pro forma income statement. 13. Rose's Gift Shop borrows money on a short-term basis by pledging its inventory as
B. sales projection. collateral. This is an example of a(n):
C. cash budget. A. debenture.
D. receivables analysis. B. line of credit.
E. credit analysis. C. banker’s acceptance.
Choose C. D. working loan.
A cash budget is a financial report that estimates cash inflows and outflows over a specific E. inventory loan.
period (like a month, quarter, or year). It helps a business plan for liquidity needs, ensuring it Choose E.
has enough cash to meet obligations. When a company factors or assigns its receivables to another firm to raise cash, it is called
accounts receivable financing. This allows the company to get immediate cash by selling or
10. Taylor Supply has made an agreement with its bank that it can borrow up to $10,000 pledging its receivables.
at any time over the next year. This arrangement is called a(n):
A. floor loan. 14. Which one of the following increases cash?
B. open loan. A. granting credit to a customer
C. compensating balance. B. purchasing new machinery
D. line of credit. C. making a payment on a bank loan
E. banknote. D. purchasing inventory
Choose D. E. accepting credit from a supplier
A line of credit is an agreement between a firm and a bank that allows the firm to borrow up Choose E. When a company accepts credit from a supplier, it delays paying cash, which
to a specified limit ($10,000 in this case) at any time during a set period. increases or preserves the company's cash balance.

11. Money deposited by a borrower with the bank in a low or non-interest-bearing 15. Which of the following are uses of cash?
account as a condition of a loan agreement is called a: I. collecting a receivable
A. compensating balance. II. increasing inventory
B. secured credit deposit. III. obtaining a bank loan
C. letter of credit. IV. paying a supplier for previous purchases
D. line of credit. A. I and III only
E. pledge. B. II and IV only
Choose A. C. I and II only
A compensating balance is some of the firm’s money kept by the bank in low-interest or D. I, II, and IV only
non-interest-bearing accounts. E. II, III, and IV only
Choose B. Uses of cash mean activities that cause cash to go out. I. Collecting a receivable III. decreasing the receivable turnover rate
→ increases cash (source, not use). II. Increasing inventory → buying more inventory uses IV. decreasing the inventory level
cash (use). III. Obtaining a bank loan → brings cash in (source, not use). IV. Paying a A. I only
supplier for previous purchases → cash goes out (use). (có thể gthich mỗi cái nào dùng cash) B. III only
C. II and IV only
16. Which one of the following will increase net working capital? Assume the current D. I and IV only
ratio is greater than 1.0. E. II and III only
A. paying a supplier for a previous purchase Answer: B. III only
B. paying off a long-term debt III. decreasing receivable turnover rate → increases receivables period → lengthens operating
C. selling inventory at cost cycle (Operating cycle = Inventory period + Accounts receivable period).
D. purchasing inventory on credit
E. selling inventory at a profit on credit 20. Which one of the following equals the operating cycle?
Choose E. Selling inventory at a profit on credit increases current assets because accounts A. cash cycle plus accounts receivable period
receivable (sale price) is higher than inventory cost. Current liabilities stay the same, so net B. inventory period plus the accounts receivable period
working capital increases. C. inventory period plus the accounts payable period
D. accounts payable period minus the cash cycle
17. Which one of the following will decrease the net working capital of a firm? Assume E. accounts payable period plus the accounts receivable period
the current ratio is greater than 1.0. Choose B. Operating cycle = Inventory period + Accounts receivable period.
A. selling inventory at cost
B. collecting payment from a customer 21. Which one of the following will decrease the operating cycle?
C. paying a payment on a long-term debt A. decreasing the inventory turnover rate
D. selling a fixed asset for book value B. decreasing the accounts payable period
E. paying a supplier for the purchase of an inventory item C. increasing the accounts receivable turnover rate
Choose C. Paying long-term debt reduces cash (a current asset) but does not affect current D. increasing the accounts payable period
liabilities. Since NWC = Current Assets - Current Liabilities, this decreases NWC. E. increasing the accounts receivable period
Choose C. Since increasing accounts receivable turnover rate → decreases receivables period
18. Which of the following are sources of cash? → shortens operating cycle.
I. decrease in inventory
II. increase in accounts receivable 22. The operating cycle describes how a product:
III. repayment of a bond A. is priced.
IV. sale of preferred stock B. is sold.
A. I and III only C. moves through the current asset accounts.
B. I and IV only D. moves through the production process.
C. II and III only E. generates a profit.
D. I, II, and III only Choose C. Operating cycle describes how a product moves through the current asset
E. I, III, and IV only accounts. The product begins life as inventory, is converted to a receivable when it is sold,
Answer: B. I and IV only and is finally converted to cash when we collect from the sale.
I. decrease in inventory → source (selling inventory frees cash) II. increase in accounts
receivable → use (more credit sales, cash tied up) III. repayment of a bond → use (paying off 23. Which of the following determines the length of the operating cycle?
debt) IV. sale of preferred stock → source (cash inflow from selling stock). I. cash cycle
II. inventory period
19. Which of the following will increase the operating cycle? III. accounts payable period
I. increasing the inventory turnover rate IV. accounts receivable period
II. increasing the payables period A. I and III only
B. II and IV only III. A negative cash cycle is preferable to a positive cash cycle.
C. I, II, and IV only IV. The cash cycle plus the accounts receivable period is equal to the operating cycle.
D. II, III, and IV only A. I only
E. I, II, III, and IV B. III and IV only
Choose B. Operating cycle = Inventory period + Accounts receivable period. So, only C. I and III only
inventory and receivables determine its length, not the cash cycle or accounts payable. D. I and IV only
E. I, II, and III only
24. Which of the following will increase the cash cycle, all else constant? Choose C. (I) Cash cycle = Operating cycle - Accounts payable period → An increase in the
I. increasing the inventory period accounts payable period shortens the cash cycle. (III) A negative cash cycle means that the
II. decreasing the accounts receivable turnover rate company receives payments from customers before it needs to pay its suppliers, effectively
III. increasing the accounts payable period using supplier credit to finance its operations.
IV. decreasing the accounts receivable period
A. I and II only 28. Which one of the following statements is correct concerning the cash cycle?
B. III and IV only A. The longer the cash cycle, the more likely a firm will need external financing.
C. I and IV only B. Increasing the accounts payable period increases the cash cycle.
D. I, II, and III only C. A positive cash cycle is preferable to a negative cash cycle.
E. I, III, and IV only D. The cash cycle can exceed the operating cycle if the payables period is equal to zero.
Choose A. Increasing in inventory period → Increasing operating cycle (Operating cycle = E. Offering early payment discounts to customers will tend to increase the cash cycle.
Inventory period + Accounts receivable period). Decreasing the accounts receivable turnover Choose A. If your cash is tied up longer, you may run short on cash and need external
rate → Increasing account receivable period → Increasing OC. funding to cover operations.

25. An increase in which one of the following will decrease the cash cycle, all else equal? 29. Which of the following actions will tend to decrease the inventory period?
A. payables turnover I. discontinuing all slow-selling merchandise
B. days sales in inventory II. selling obsolete inventory below cost just to get rid of it
C. operating cycle III. buying raw materials only as needed for the manufacturing process
D. inventory turnover rate IV. producing goods on demand versus for inventory
E. accounts receivable period A. I and III only
Choose D. When inventory turnover increases → inventory period decreases → operating B. II and IV only
cycle decreases → cash cycle decreases. C. II, III, and IV only
D. I, II, and III only
26. Metal Designs, Inc., historically produced products for inventory. Now, the firm only E. I, II, III, and IV
produces a product when it receives an actual order from a customer. All else equal, this Choose E. All actions help reduce inventory or move it faster: (I) Remove slow sellers (II)
change will: Sell obsolete stock (III) Buy only what’s needed (IV) Make only on demand → All help
A. increase the operating cycle. shorten the inventory period.
B. lengthen the accounts receivable period.
C. shorten the accounts payable period. 30. Which one of the following actions will tend to increase the accounts receivable
D. decrease the cash cycle. period?
E. decrease the inventory turnover rate. Assume the accounts receivable period is currently 34 days.
Choose D. Producing only on demand lowers inventory, reducing the inventory period, A. tightening the standards for granting credit to customers
which in turn shortens the cash cycle. B. refusing to grant additional credit to any customer who pays late
C. increasing the finance charges applied to all customer balances outstanding over thirty
27. Which of the following statements is (are) correct? days
I. An increase in the accounts payable period shortens the cash cycle. D. granting discounts for cash sales
II. The cash cycle is equal to the operating cycle minus the inventory period. E. eliminating the discount for early payment by credit customers
Choose E. Without a discount, customers are less motivated to pay early, so they delay B. payables manager
payments → longer receivable period. C. credit manager
D. purchasing manager
31. An increase in which one of the following is an indicator that an accounts receivable E. production manager
policy is becoming more restrictive? Choose B. The payables manager is in charge of when and how the company pays its bills to
A. bad debts suppliers.
B. accounts receivable turnover rate
C. accounts receivable period 36. A firm with a flexible short-term financial policy will:
D. credit sales A. maintain a low balance in accounts receivables.
E. operating cycle B. only have minimal amounts, if any, invested in marketable securities.
Choose B. A higher turnover means receivables are collected faster → suggests stricter credit C. invest heavily in inventory.
policies (e.g., fewer customers given credit or tighter terms). D. have low cash balances.
E. have tight restrictions on granting credit to customers.
32. If you pay your suppliers five days sooner, then: Choose C. A flexible policy means more current assets (like inventory) are kept on hand to
A. your payables turnover rate will decrease. avoid stockouts and meet demand.
B. you may require additional funds from other sources to fund the cash cycle.
C. the cash cycle will decrease. 37. Which one of the following is indicative of a short-term restrictive financial policy?
D. your operating cycle will increase. A. purchasing inventory on an as-needed basis
E. the accounts receivable period will decrease. B. granting credit to all customers
Choose B. Paying suppliers sooner reduces your payables period, which increases the cash C. investing heavily in marketable securities
cycle → may require extra funding. D. maintaining a large accounts receivable balance
E. keeping inventory levels high
33. Which one of the following will increase the accounts payable period, all else Choose A. A restrictive policy keeps inventory low by buying only when needed, minimizing
constant? holding costs.
A. an increase in the cost of goods sold account value
B. an increase in the ending accounts payable balance 38. Which of the following are associated with a restrictive short-term financial policy?
C. an increase in the cash cycle I. little, if any, investment in marketable securities
D. a decrease in the operating cycle II. liberal credit terms for customers
E. an increase in the accounts payable turnover rate III. low cash balances
Choose B. Holding more unpaid bills at the end of the period means you're taking longer to IV. increasing inventory levels
pay suppliers, increasing the payables period. A. I and III only
B. II and IV only
34. Which one of the following managers determines which customers must pay cash C. I and IV only
and which can charge their purchases? D. III and IV only
A. purchasing manager E. I, II, and III only
B. credit manager Choose A. Restrictive policies aim for low cash balances and minimal marketable securities,
C. controller to keep idle assets low. Not liberal credit or high inventory.
D. production manager
E. payables manager 39. The Lumber Mart recently replaced its management team. As a result, the firm is
Choose B. The credit manager decides who gets credit and who must pay cash, based on implementing a restrictive short-term policy in place of the flexible policy under which
creditworthiness. the firm had been operating. Which of the following should the employees expect as a
result of this policy change?
35. Which one of the following managers determines when a supplier will be paid? I. reduction in sales due to stock outs
A. controller II. greater inventory selection
III. decreased sales due to the new accounts receivable credit policy Choose E. Shortage costs arise when firms run out of inventory or cash, causing disruptions,
IV. decreased investment in marketable securities lost goodwill, and higher order cost and brokerage costs.
A. I and II only
B. II and IV only 43. The optimal investment in current assets for an operating firm occurs at the point
C. I, II, and IV only where:
D. I, III, and IV only A. both shortage costs and carrying costs equal zero.
E. I, II, III, and IV B. shortage costs are equal to zero.
Choose D. A restrictive policy often leads to: Stockouts (I), Stricter credit → fewer sales C. carrying costs are equal to zero.
(III), Less idle cash/securities (IV). Greater inventory selection (II) does not align with D. carrying costs exceed shortage costs.
restrictive policies. E. the total costs of holding current assets is minimized.
Choose E. The optimal investment occurs where the sum of carrying and shortage costs is
40. A flexible short-term financial policy: lowest.
A. increases a firm’s need for long-term financing.
B. minimizes net working capital. 44. Which one of the following statements is correct?
C. avoids bad debts by only selling items for cash. A. A firm with a restrictive financing policy secures sufficient long-term financing to fund all
D. maximizes fixed assets and minimizes current assets. its assets.
E. is most appropriate for a firm with relatively high carrying costs and relatively low B. A firm with a flexible financing policy frequently invests in marketable securities.
shortage costs. C. A firm with a flexible financing policy tends to use short-term financing on a frequent
Choose A. A flexible policy maintains higher levels of current assets, which must be basis.
funded—often through long-term financing. D. Firms tend to avoid short-term financing under both restrictive and flexible financing
policies.
41. A flexible short-term financial policy: E. Firms with seasonal sales select flexible financing policies.
I. increases shortage costs due to frequent cash-outs. Choose B. With a flexible policy, firms hold excess liquidity, often investing in marketable
II. tends to increase sales as compared to a restrictive policy. securities when cash isn’t immediately needed.
III. requires a sizeable investment in current assets.
IV. incurs more carrying costs than a restrictive policy. 45. Which one of the following statements is correct?
A. I and IV only A. Seasonal needs are financed externally when firms adhere to a flexible financing policy.
B. II and III only B. A flexible financing policy tends to increase the risk of encountering financial distress.
C. I, II, and III only C. Long-term interest rates tend to be less volatile than short-term rates.
D. II, III, and IV only D. Most firms tend to finance inventory with long-term debt.
E. I, III, and IV only E. Short-term interest rates are generally higher than long-term rates.
Choose D. A flexible policy requires more current assets, leading to higher carrying costs, Choose C. Short-term rates fluctuate more due to monetary policy and market changes, while
but also tends to increase sales due to better service. long-term rates are generally more stable.
46. Assume each month has 30 days and a firm has a 60-day accounts receivable period.
42. Shortage costs include which of the following? During the second calendar quarter of the year, that firm will collect payment for the
I. disruption of production schedules sales it made during which of the following months?
II. inventory ordering costs A. October, November, and December
III. lost customer goodwill B. November, December, and January
IV. brokerage costs C. December, January, and February
A. I and II only D. January, February, and March
B. II and III only E. February, March, and April
C. II, III, and IV only Choose E. With a 60-day receivables period, sales made in Feb–Apr are collected in
D. I, II, and III only Apr–Jun, the second quarter.
E. I, II, III, and IV
47. The Harvester collects 25 percent of sales in the month of sale, 60 percent of sales in A. I and III only
the month following the month of sale, and 15 percent of sales in the second month B. II and IV only
following the month of sale. During the month of April, the firm will collect: C. III and IV only
A. 60 percent of February sales. D. I, II, and III only
B. 15 percent of April sales. E. II, III, and IV only
C. 60 percent of March sales. Choose B. Even a sound firm can have cash-outs due to large fixed asset purchases or
D. 15 percent of March sales. seasonal dips in cash flow (sales fluctuation).
E. 25 percent of February sales.
Choose C. April collections include: 25% of April sales 60% of March sales, 15% of 51. Which one of the following statements is correct concerning the cash balance of a
February sales. firm?
A. Most firms attempt to maintain a zero cash balance at all times.
48. A manufacturing firm has a 90-day collection period. The firm produces seasonal B. The cumulative cash surplus shown on a cash budget is equal to the ending cash balance
merchandise and thus has the least sales during the first quarter of a year and the plus the minimum desired cash balance.
highest level of sales during the fourth quarter of a year. The firm maintains a relatively C. On a cash balance report, the cumulative cash surplus at the end of May is used as June's
steady level of production which means that its cash disbursements are fairly equal in beginning cash balance.
all quarters. The firm is most apt to face a cash-out situation in: D. A cumulative cash deficit indicates a borrowing need.
A. the first quarter. E. The ending cash balance must equal the minimum desired cash balance.
B. the second quarter. Choose D. A cumulative cash deficit means cash outflows exceed inflows, signaling the firm
C. the third quarter. may need to borrow funds.
D. the fourth quarter.
E. any quarter with equal probabilities of occurrence. 52. A cumulative cash deficit indicates a firm:
Choose B. Sales (and thus collections) are lowest in Q1, but expenses are even, so cash A. has at least a short-term need for external funding.
shortfalls often happen in Q2 when inflows are still low. B. is facing long-term financial distress.
C. will go out of business within the year.
49. Jill is the CFO of Summertime Adventures which is a seasonal firm specializing in D. is capable of funding all of its needs internally.
products related to water sports. The firm purchases inventory one month before it is E. is using its cash wisely.
sold and pays for its purchases 60 days after the invoice date. Sales are highest during Choose A. A cash deficit often indicates a temporary funding gap, not necessarily long-term
July and August. Currently, Jill is preparing the cash disbursements section of the distress.
firm's cash budget. Which one of the following statements is supported by this
information? 53. The most common means of financing a temporary cash deficit is a:
A. Inventory purchases will be highest during the months of July and August. A. long-term secured bank loan.
B. Inventory purchases will be highest during the months of May and June. B. short-term secured bank loan.
C. Payments to suppliers will be highest during the months of June and July. C. short-term issue of corporate bonds.
D. Payments to suppliers will be highest during the months of July and August. D. long-term unsecured bank loan.
E. Payments to suppliers will be highest during the months of August and September. E. short-term unsecured bank loan.
Choose E. If inventory is bought 1 month before sale (May–June), and paid in 60 days, cash Choose E. For temporary deficits, firms typically use short-term unsecured loans (like lines
outflows peak in Aug–Sep. of credit) because they’re quick and flexible.

50. Which two of the following are most apt to cause a cash-out for a firm that is 54. The primary difference between a line of credit and a revolving credit arrangement
generally financially sound? is the:
I. fixed expenses A. type of collateral used to secure the loan.
II. fixed asset purchases B. length of the credit period.
III. flexible financing policy C. fact that the line of credit is a secured loan and the revolving credit arrangement is
IV. highly seasonal sales unsecured.
D. fact that the line of credit is an unsecured loan and the revolving credit arrangement is E. Credit card receivables funding is a relatively inexpensive method of borrowing on a
secured. short- term basis.
E. classification as either a committed or a non committed loan. Choose B. A cleanup period means the firm must repay the balance to zero for a set
Choose B. A line of credit is often short-term, while a revolving credit arrangement tends to time—common in lines of credit to ensure it's not used permanently.
be longer-term and more formalized.
58. Which of the following are benefits derived from short-term financial planning?
55. A compensating balance: I. having advance notice of when your firm will require external financing
I. is required when a firm acquires any bank financing other than a line of credit. II. being able to determine the extent of time for which a loan is required
II. increases the cost of short-term bank financing. III. having the ability to time capital expenditures in order to place the least financial burden
III. may be required even if a firm never borrows funds. possible on a firm
IV. is often used as a means of paying for banking services received. IV. knowing for certain what your cash balance will be six months in advance
A. I and III only A. I and III only
B. II and IV only B. I, II, and III only
C. II and III only C. II, III, and IV only
D. I and IV only D. I, II, and IV only
E. II, III, and IV only E. I, II, III, and IV
Choose E. A compensating balance: Increases financing costs (II), Might be required even if Choose B. Short-term financial planning helps firms: Anticipate funding needs (I), Plan loan
no borrowing occurs (III), Often acts as payment for bank services (IV). durations (II), Schedule spending wisely (III). But it can’t predict future cash with certainty
(IV).
56. High Point Hotel (HPH) has $165,000 in accounts receivable. To finance a major
purchase, the company assigns these receivables to Cross Town Bank. Which one of the 59. Denver Interiors, Inc., has sales of $836,000 and cost of goods sold of $601,000. The
following statements correctly describes this transaction? firm had a beginning inventory of $36,000 and an ending inventory of $47,000. What is
A. HPH will immediately receive $165,000 and will have no further obligation related to the length of the inventory period?
these A. 19.21 days
receivables. B. 20.89 days
B. HPH will receive some amount of cash immediately while maintaining full C. 25.20 days
responsibility for any uncollected receivables. D. 30.53 days
C. Cross Town Bank accepts full responsibility for the collection of the accounts receivables E. 33.69 days
and, in exchange, immediately pays HPH a discounted value for its receivables. Choose C. Average inventory: (36000+47000)/2=41500
D. Cross Town Bank accepts full responsibility for collecting the accounts receivables and Inventory turnover : 601000/41500=14.482
pays HPH a discounted price for the accounts collected after the normal collection period => Inventory period: 365/14.482=25.2
has elapsed.
E. HPH receives the full amount of its receivables upon assignment but must reimburse 60. A national firm has sales of $729,000 and cost of goods sold of $478,000. At the
Cross Town Bank for any uncollected account. beginning of the year, the inventory was $37,000. At the end of the year, the inventory
Choose B. Under an assignment of receivables, the firm retains collection responsibility, but balance was $41,000. What is the inventory turnover rate?
receives partial immediate funding. A. 12.26 times
B. 12.78 times
57. Which one of the following statements is correct? C. 14.22 times
A. The assignment of receivables involves selling the firm's accounts receivables at full price. D. 18.56 times
B. Lines of credit frequently require a cleanup period. E. 19.70 times
C. With maturity factoring, the borrower receives the loan amount immediately. Choose A. Inventory turnover rate = 478000/((37000+41000)/2)=12,256
D. Commercial paper is short-term financing offered to highly-rated corporations by major
banks.
61. North Side Wholesalers has sales of $948,000. The cost of goods sold is equal to 68 B. 22.38 days
percent of sales. The firm has an average inventory of $23,000. How many days on C. 24.90 days
average does it take the firm to sell its inventory? D. 25.89 days
A. 12.30 days E. 26.67 days
B. 13.02 days Answer C
C. 16.48 days COGS= 0.71 x 512000= 363520
D. 26.35 days payable turnover = COGS/Average=363520/24800=14.658
E. 29.68 days payable period= 365/14.658=24.9 days
Choose B
COGS = 948000x68%=644640 65. HG Livery Supply had a beginning accounts payable balance of $57,300 and an
Inventory turnover = COGS/ Average= 644640/23000=28,0278 ending accounts payable balance of $55,100. Sales for the period were $610,000 and
Inventory period = 365/28.0278=13.02 costs of goods sold were $458,000. What is the payables turnover rate?
A. 8.15 times
62. The Bear Rug has sales of $811,000. The cost of goods sold is equal to 63 percent of B. 8.39 times
sales. The beginning accounts receivable balance is $41,000 and the ending accounts C. 9.02 times
receivable balance is $38,000. How long on average does it take the firm to collect its D. 9.86 times
receivables? E. 10.85 times
A. 17.26 days Answer A
B. 17.78 days average = (57300+55100)/2=56200
C. 18.58 days payable turnover rate= 458000/56200=8,15
D. 20.44 days
E. 29.77 days 66. Your firm has an inventory turnover rate of 14, a payables turnover rate of 8, and a
Answer B receivables turnover rate of 19. How long is your firm's operating cycle?
Average = (41+38)/2=39,5 A. 45.06 days
Receivable turnover = Sale/average = 811000/39500=20,532 B. 45.28 days
Receivable turnover= 365/20,53=17,779 C. 45.63 days
D. 53.13 days
63. The Blue Star has sales of $387,000, costs of goods sold of $259,000, average E. 53.78 days
accounts receivable of $12,100, and average accounts payable of $12,600. How long does Answer B
it take for the firm's credit customers to pay for their purchases? Operating cycle = inventory + receivable = 365/14+365/19=45,282
A. 7.67 days
B. 9.24 days 67. Merryl Enterprises currently has an operating cycle of 59 days. The firm is
C. 11.41 days analyzing some operational changes, which are expected to increase the accounts
D. 11.88 days receivable period by 2 days and decrease the inventory period by 5 days. The accounts
E. 13.81 days payable turnover rate is expected to increase from 42 to 46 times per year. If all of these
Answer C changes are adopted, what will the firm's new operating cycle be?
Receivable turnover= 387000/12100=31.983 A. 51 days
Collection period= 365/31.983=11,41 days B. 54 days
C. 56 days
64. The Mountain Top Shoppe has sales of $512,000, average accounts receivable of D. 59 days
$31,400 and average accounts payable of $24,800. The cost of goods sold is equivalent to E. 65 days
71 percent of sales. How long does it take The Mountain Top Shoppe to pay its Answer C
suppliers? A/R period increases by 2
A. 21.76 days Inventory period decreases by 5
Operating cycle = (59 + 2 - 5) = 56 days A. 5.67 days
B. 23.68 days
68. On average, Furniture & More is able to sell its inventory in 27 days. The firm takes C. 41.00 days
87 days on average to pay for its purchases. On the other hand, its average customer D. 52.00 days
pays with a credit card which allows the firm to collect its receivables in 4 days. Given E. 58.81 days
this information, what is the length of operating cycle? Answer B
A. 31 days 365/17.5+36-365/11=23,68 days
B. 38 days
C. 45 days 72. Peterson's Antiquities currently has a 31 day cash cycle. Assume the firm changes its
D. 56 days operations such that it decreases its receivables period by 2 days, decreases its inventory
E. 62 days period by 3 days, and decreases its payables period by 4 days. What will the length of
Answer A the cash cycle be after these changes?
Inventory:27 A. 22 days
Receivable: 4 B. 23 days
OC=27+4=31 C. 29 days
D. 30 days
69. Interior Designs has an inventory period of 51 days, an accounts payable period of E. 31 days
38 days, and an accounts receivable period of 32 days. Management is considering an Answer D
offer from their suppliers to pay within 10 days and receive a 2 percent discount. If the OC = Inventory + Receivable = cash + payable
new discount is taken, the accounts payable period is expected to decline by 26 days. If ⇔ -3-2=x-4=>x=-1 => 30 days
the new discount is taken, the operating cycle will be days.
A. 52 73. A company currently has a 51 day cash cycle. Assume the firm changes its
B. 62 operations such that it decreases its receivables period by 2 days, increases its inventory
C. 78 period by 3 days, and increases its payables period by 4 days. What will the length of
D. 83 the cash cycle be after these changes?
E. 91 A. 42 days
Answer D B. 45 days
51+32=83 C. 48 days
D. 49 days
70. Metal Products Co. has an inventory period of 53 days, an accounts payable period E. 51 days
of 68 days, and an accounts receivable turnover rate of 18. What is the length of the Answer C
cash cycle? OC= inventory + receivable = cash + payable
A. 3.00 days => 3-2=x+4=> x = -3 => 48 days
B. 5.28 days
C. 26.28 days 74. Tall Guys Clothing has a 45 day collection period. Sales for the next calendar year
D. 71.00 days are estimated at $2,100, $1,600, $2,500 and $2,300, respectively, by quarter, starting
E. 73.28 days with the first quarter of the year. Given this information, which one of the following
Answer B statements is correct? Assume a year has 360 days.
Operating = Inventory+Receivable= cash cycle + payable A. The firm will collect $800 in Quarter 2.
=> cash cycle = 53+ 365/18-68=5,278 B. The accounts receivable balance at the beginning of Quarter 4 will be $1,150.
C. The firm will collect $2,000 in Quarter 3.
71. West Chester Automation has an inventory turnover of 17.5 and an accounts D. The firm will have an accounts receivable balance of $2,300 at the end of the year.
payable turnover of 11. The accounts receivable period is 36 days. What is the length of E. The firm will collect a total of $2,400 in Quarter 4.
the cash cycle? Answer E. April collection = ½ x 2500+½ x 2300= 2400
75. Forest Gardens, Inc., has a beginning receivables balance on February 1 of $730. Answer B.
Sales for February through May are $720, $780, $820, and $850, respectively. The A/R begin Q3=A/R end Q2=½ x7100=3550
accounts receivable period is 30 days. What is the amount of the April collections?
Assume a year has 360 days. 79. The Dog House expects sales of $560, $650, $630, and $610 for the months of May
A. $720 through August, respectively. The firm collects 20 percent of sales in the month of sale,
B. $780 70 percent in the month following the month of sale, and 8 percent in the second month
C. $790 following the month of sale. The remaining 2 percent of sales is never collected. How
D. $820 much money does the firm expect to collect in the month of August?
E. $850 A. $615
Answer B B. $628
April collection = March sales =780 C. $633
D. $639
76. Davis and Davis have expected sales of $490, $465, $450, and $570 for the months of E. $643
January through April, respectively. The accounts receivable period is 28 days. What is Answer A
the accounts receivable balance at the end of March? Assume a year has 360 days. August collection = 0.2 x 610 + 0.7 x 630 + 0.08 x 650 = 615
A. $420
B. $426 80.
C. $440
D. $450
E. $482
Answer A
March AC = 28/30 x 450=420
The Wire House purchases its inventory one quarter prior to the quarter of sale. The
77. The Athletic Sports Store has a beginning receivables balance on January 1 of $410. purchase price is 55 percent of the sales price. The accounts payable period is 45 days.
Sales for January through April are $440, $480, $690, and $720, respectively. The The accounts payable balance at the beginning of quarter one is $62,000. What is the
accounts receivable period is 60 days. How much did the firm collect in the month of amount of the expected disbursements for quarter two given the following expected
April? Assume a year has 360 days. quarterly sales?
A. $410 A. $20,500
B. $440 B. $21,725
C. $480 C. $24,250
D. $690 D. $26,000
E. $720 E. $26,675
Answer C Answer B
April collection = February sales = 480 (60 days) Q2 disbursements = [(45/90) (0.55) $36,000] + [(45/90) (0.55) $43,000] = $21,725

78. Breakwater Aquatics has a 45 day accounts receivable period. The estimated 81. Nadine's Boutique has a 30 day accounts payable period. The firm has expected
quarterly sales for this year, starting with the first quarter, are $6,800, $7,100, $8,200, quarterly sales of $1,100, $1,400, $1,600, and $2,100, respectively, for next year. The
and $6,400,respectively. What is the accounts receivable balance at the beginning of the quarterly cost of goods sold is equal to 68 percent of the next quarter's sales. The firm
third quarter? Assume a year has 360 days. has a beginning accounts payable balance of $550 as of Quarter 1. What is the amount
A. $3,400 of the projected cash disbursements for accounts payable for Quarter 3 of the next
B. $3,550 year? Assume a year has 360 days.
C. $6,950 A. $1,195
D. $7,100 B. $1,208
E. $7,650 C. $1,247
D. $1,315 85. The Mish Mash Store has a beginning cash balance of $440 on March 1. The firm
E. $1,337 has projected sales of $610 in February, $680 in March, and $740 in April. The cost of
Answer D goods sold is equal to 70 percent of sales. Goods are purchased one month prior to the
Disbursement = [(30/90) (0.68 $1,600)] + [(60/90) (0.68 $2,100)] = $1,315 month of sale. The accounts payable period is 30 days and the accounts receivable
period is 10 days. The firm has monthly cash expenses of $125. What is the projected
82. Kid's Delight expects to sell $8,200 worth of toys in December, $3,700 worth in ending cash balance at the end of March? Assume every month has 30 days.
January, $4,400 in February, and $6,100 in March. The wholesale cost is 72 percent of A. $461
the retail price. The firm has a receivables period of 30 days, a payables period of 60 B. $496
days, and buys inventory one month prior to selling it. Which one of the following C. $507
statements is correct? D. $567
A. The February payments to suppliers are $2,992. E. $621
B. The March collections are $3,700. Answer B
C. The accounts receivable balance at the end of March is $4,400. March collections = (10/30) $610 + (20/30) $680 = $657
March disbursements for payables = 0.70 ($680) = $476
D. The purchases for February are $3,168. March ending cash balance = $440 + $657 - $476 - $125 = $496
E. The accounts payable balance at the end of January is $5,832. 86. Fancy Footwear has a line of credit with a local bank in the amount of $80,000. The
Answer E loan agreement calls for interest of 7 percent with a compensating balance of 5 percent,
January ending A/P balance = 0.72($3,700) + 0.72($4,400) = $5,832 which is based on the total amount borrowed. The compensating balance will be
deposited into an interest-free account. What is the effective interest rate on the loan if
83. As of the beginning of the quarter, Swenson's, Inc. had a cash balance of $460. the firm needs to borrow $75,000 for one year to cover operating expenses?
During the quarter, the company collected $480 from customers and paid suppliers A. 7.37 percent
$360. The company also paid an interest payment of $20 and a tax payment of $110. In B. 7.43 percent
addition, the company repaid $140 on its long-term debt. What is Callahan's cash C. 7.56 percent
balance at the end of the quarter? D. 8.17 percent
A. -$110 E. 8.33 percent
B. $290 Answer A
C. $310 Amount borrowed = $75,000/(1 - 0.05) = $78,947.37
D. $350 Annual interest = $78,947.37 x 0.07 = $5,526.32
E. $490 Effective interest rate = $5,526.32/$75,000 = 7.37 percent
Answer C
Cash balance = $460 + 480 - $360 - $20 - $110 - $140 = $310 87. Juno Industrial Supply has a $150,000 line of credit with a 7.5 percent interest rate.
The loan agreement requires a 2 percent compensating balance, which is based on the
84. On May 1, your firm had a beginning cash balance of $175. Your sales for April total amount borrowed, and which will be held in an interest-free account. What is the
were $430 and your May sales were $480. During May, you had cash expenses of $110 effective interest rate if the firm borrows $90,000 on the line of credit for one year?
and payments on your accounts payable of $290. Your accounts receivable period is 30 A. 5.42 percent
days. What is your firm's beginning cash balance on June 1? B. 5.50 percent
A. $145 C. 7.30 percent
B. $155 D. 7.50 percent
C. $205 E. 7.65 percent
D. $215 Answer E
E. $265 Amount borrowed = $90,000/(1 - 0.02) = $91,836.73
Answer C Annual interest = $91,836.73 x 0.075 = 6887,75
Cash balance = $175 - $110 - $290 + $430 = $205 Effective interest rate = $6887,75/$90,000=7.65%
88. Rachel's has a $50,000 line of credit with Uptown Bank. The line of credit calls for 91. The Sports Store has a $100,000 line of credit with City Bank. The loan agreement
an interest rate of 8 percent and a compensating balance of 4 percent. The requires that 2 percent of the unused portion of the credit line be deposited in a
compensating balance is based on the total amount borrowed and will be held in an non-interest bearing account as a compensating balance. The interest rate on the
interest-free account. What is the effective annual interest rate if the firm borrows borrowed funds is 1.75 percent per quarter. The Sport Store's short-term investments
$35,000 for one year? are paying 1.5 percent per quarter. What is the effective annual interest rate on the line
A. 7.76 percent of credit if The Sports Store borrows the entire $100,000 for one year? Assume any
B. 8.00 percent funds borrowed or invested use compound interest.
C. 8.17 percent A. 7.19 percent
D. 8.33 percent B. 7.76 percent
E. 8.42 percent C. 8.00 percent
Answer D D. 8.08 percent
Amount borrowed = $35,000/(1 - 0.04) = $36,458.33 E. 8.14 percent
Annual interest = $36,458.33 0.08 = $2,916.67 Answer A
Effective interest rate = $2,916.67/$35,000 = 8.33 percent ((1,0175)^4)-1=0,0719

89. The Delta Fish Hatchery factors its accounts receivables immediately at a 2 percent 92. Your bank offers you a $40,000 line of credit with an interest rate of 1.75 percent per
discount. The average collection period is 34 days. Assume that all accounts are quarter. The loan agreement also requires that 2 percent of the unused portion of the
collected in full. What is the effective annual interest rate on this arrangement? credit line be deposited in a non-interest bearing account as a compensating balance.
A. 24.22 percent Your short-term investments are paying 0.20 percent per month. What is your effective
B. 25.20 percent annual interest rate on this arrangement if you do not borrow any money on this credit
C. 25.36 percent line during the year? Assume any funds borrowed or invested use compound interest.
D. 25.78 percent A. 2.00 percent
E. 26.04 percent B. 2.43 percent
Answer A C. 3.18 percent
Interest rate for 34 days = 0.02/(1 - 0.02) =0.0204 D. 7.00 percent
Number of periods per year = 365/34 = 10.735294 E. 7.19 percent
Effective annual rate = (1.0204^10.73) -1= 24.22 Answer B
Effective annual interest = ((1.002)^12) - 1 = 2.43 percent
90. New York Bank provides Food Canning, Inc. a $250,000 line of credit with an
interest rate of 1.75 percent per quarter. The credit line also requires that 1 percent of 93. New Town Bank offers you a $40,000 line of credit with an interest rate of 1.6
the unused portion of the credit line be deposited in a non-interest bearing account as a percent per quarter. The loan agreement also requires that 3 percent of the unused
compensating balance. Food Canning, Inc.'s short-term investments are paying 1.2 portion of the credit line be deposited in a non-interest bearing account as a
percent per quarter. What is the effective annual interest rate on this arrangement if the compensating balance. Short-term investments are currently paying 1.1 percent per
line of credit goes unused all year? Assume any funds borrowed or invested use quarter. What is the effective annual interest rate on the line of credit if you borrow the
compound interest. entire $40,000 for one year? Assume any funds borrowed or invested use compound
A. 4.76 percent interest.
B. 4.80 percent A. 4.47 percent
C. 4.89 percent B. 4.58 percent
D. 7.00 percent C. 6.56 percent
E. 7.27 percent D. 7.78 percent
Answer C E. 12.33 percent
Effective annual interest = (1.012)^4 - 1 = 4.89 percent Answer C
EAR= ((1.016)^4)-1=
94. Josie's Craft Shack has a beginning cash balance for the quarter of $1,126. The store 97. Details Corp. has a book net worth of $8,150. Long-term debt is $1,800. Net working
has a policy of maintaining a minimum cash balance of $1,000 and is willing to borrow capital, other than cash, is $2,150. Fixed assets are $2,000. How much cash does the
funds as needed to maintain that balance. Currently, the firm has a loan balance of company have?
$480. How much will the store borrow or repay if the net cash flow for the quarter is A. $4,250
-$280? B. $4,550
A. $0 C. $5,150
B. $28 D. $5,800
C. $126 E. $6,750
D. $154 Answer D
E. $280 Cash = $8,150 + $1,800 - $2,150 - $2,000 = $5,800
Answer D
Cash deficit = $1,126 - $280 - $1,000 = -$154 98. The Wake-Up Coffee Company has projected the following quarterly sales amounts
The firm needs to borrow $154. for the coming year:

95. The Cement Works has a beginning cash balance for the quarter of $784. Susie, the
firm's president, requires that a minimum cash balance of $900 be maintained and
requires that borrowing be used to maintain that balance. If funds have been borrowed,
then she requires that those loans be repaid as soon as excess funds are available.
Accounts receivable at the beginning of the year are $200. Wake-Up has a 60-day
Currently, the firm has a loan outstanding of $1,260. How much will the firm borrow or
collection period. What is the amount of the accounts receivable balance at the end of
repay this quarter if the quarterly receipts are $3,918 and the quarterly disbursements
Quarter 3?
are $3,774?
A. $375
A. borrow $16
B. $450
B. borrow $128
C. $500
C. borrow $144
D. $600
D. repay $28
E. $700
E. repay $144
Answer C
Answer D
A/R Q3 end = (60/90) $750 = $500
Cash surplus = $784 + $3,918 - $3,774 - $900 = $28
The firm will repay $28 this quarter.
99. Consider the following financial statement information for the Bulldog Icers
Corporation:
96. At the beginning of the year, you have an outstanding short-term loan of $274 which
was used to cover your cash needs for the previous year. The interest expense for the
year is $19. The projected net cash flow for this year is $123, prior to any payment of
principal or interest on this loan. What is your anticipated loan balance at year end?
A. $151
B. $170
C. $176
D. $189
E. $193
Answer B
Loan balance = $274 + $19 - $123 = $170 How long is the cash cycle?
A. 39.0 days
B. 40.2 days
C. 41.0 days $60 per quarter. No capital expenditures are planned. Sales for the first quarter of the
D. 41.4 days following year are projected at $720. The projected quarterly sales are:
E. 42.8 days
Answer A
Inventory turnover = $58,638/[($9,338 + $11,550)/2] = 5.6145
Inventory period = 365/5.6145 = 65.01 days
Receivables turnover = $82,544/[($5,670 + $6,947)/2] = 13.08
Receivables period = 365/13.08 = 27.9 What is the amount of the total disbursements for Quarter 2?
Payables turnover = $58,638/[($7,689 + $9,625)/2] = 6.773 A. $564.27
Payables period = 365/6.773 = 53.89 days\ B. $579.43
Cash cycle = 65.01+27.9-53,89 =39 days C. $582.15
D. $585.30
100. Your firm has an average collection period of 42 days. Current practice is to factor E. $590.67
all receivables immediately at a 4 percent discount. Assume that default is extremely Answer B
unlikely. What is the effective cost of borrowing? Payment of accounts = (60/90)x 0.65x $660 + (30/90)x 0.65 x $590 = $413.83
A. 28.79 percent Total disbursements = $413.83 + (0.16 $660) + $60 = $579.43
B. 36.20 percent
C. 37.78 percent 103. The following is the sales budget for Duck-n-Run, Inc., for the first quarter of 2012:
D. 40.97 percent
E. 42.58 percent
Answer E
Number of periods = 365/42 = 8.6905
EAR = {1 + [0.04/(1 - 0.04)]^8.6905 - 1 = 42.58 percent

101. Workout Together has projected the following sales for the coming year:

The accounts receivable balance at the end of the previous quarter was $45,000 ($32,000
of which was uncollected December sales.) What is the amount of the January
Sales in the year following this one are projected to be 18 percent greater in each collections?
quarter. Assume the firm places orders during each quarter equal to 35 percent of A. $112,400.00
projected sales for the next quarter. How much will the firm pay to its suppliers in B. $112,408.16
Quarter 2 if its accounts payable period is 60 days? C. $95,663.83
A. $212.67 D. $122,356.33
B. $241.33 E. $125,400.00
C. $291.67 Answer C
D. $351.33 January collections = 0.53 x $120,000 + (0.28/0.47) x $32,000 + $45,000 - $32,000 = 95663
E. $356.67
Answer C 104. Here are some important figures from the budget of Nashville Nougats, Inc., for the
Q2 payments = (60/90) x 0.35 x $800 + (30/90) x 0.35 x $900 = 291.33 second quarter of 2012:

102. The Thunder Dan's Corporation's purchases from suppliers in a quarter are equal
to 65 percent of the next quarter's forecasted sales. The payables period is 60 days.
Wages, taxes, and other expenses are 16 percent of sales, and interest and dividends are
 106. A bank offers your firm a revolving credit arrangement for up to $115 million at an
interest rate of 2 percent per quarter. The bank also requires you to maintain a
compensating balance of 5 percent against the unused portion of the credit line, to be
deposited in a non-interest-bearing account. Assume you have a short-term investment
account at the bank that pays 1.3 percent per quarter, and assume the bank uses
compound interest on its revolving credit loans. What is the effective annual interest
rate on the revolving credit arrangement if your firm does not borrow any money
during the year?
A. 0 percent
The company predicts that 3 percent of its credit sales will never be collected, 36 percent B. 5.0 percent
of its sales will be collected in the month of sale, and the remaining 61 percent will be C. 5.2 percent
collected in the following month. Credit purchases will be paid in the month following D. 5.3 percent
the purchase. In March 2012, credit sales were $302,400, and credit purchases were E. 5.5 percent
$224,640. The April 1 cash balance was $403,200. What is the cash balance at the end of Answer D
May? ear=(1+0.013)^4-1=5.3%
A. $348,887
B. $366,846
C. $414,141
D. $457,777
E. $477,374
Answer E
April cash balance = $403,200 + (0.36 x $547,200) + (0.61x $302,400) - $224,640 - $57,240
- $16,410 - $119,520 = $366,846
May cash balance = $366,846 + (0.36 x $570,240) + (0.61 x $547,200) - $211,680 - $69,420
- $16,410 - $131,040 = $477,374

105. You've worked out a line of credit arrangement that allows you to borrow up to $50
million at any time. The interest rate is 0.5 percent per month. In addition, 7 percent of
the amount that you borrow must be deposited in a non-interest bearing account.
Assume your bank uses compound interest on its line of credit loans. What is the
effective annual interest rate on this lending arrangement?
A. 6.65 percent
B. 6.72 percent
C. 6.81 percent
D. 6.87 percent
E. 6.94 percent
Answer A
Monthly interest = $50,000,000x (0.005) = $250,000
Amount received = (1 - 0.07) x $50,000,000 = $46,500,000
Periodic interest = $250,000/$46,500,000 = 0.005376
EAR = (1 + 0.005376)^12 - 1 =
 Chap 4
Chapter 04 (CHƯƠNG 4 SÁCH TCDN) B. dividend yield
Long-Term Financial Planning and Growth C. dividend payout ratio
D. dividend portion
1. Phil is working on a financial plan for the next three years. This time period is E. dividend section
referred to as which one of the following? Answer: C
A. financial range The dividend payout ratio is defined as the percentage of net income that is paid out to
B. planning horizon shareholders in the form of dividends.
C. planning agenda Dividend Payout Ratio = Net Income/Dividends Paid × 100%
D. short-run
E. current financing period 5. Which one of the following correctly defines the retention ratio?
Answer: B A. one plus the dividend payout ratio
A planning horizon refers to the length of time into the future that a financial plan covers. B. addition to retained earnings divided by net income
C. addition to retained earnings divided by dividends paid
2. Atlas Industries combines the smaller investment proposals from each operational D. net income minus additions to retained earnings
unit into a single project for planning purposes. This process is referred to as which one E. net income minus cash dividends
of the following? Answer: B
A. conjoining This defines the retention ratio, which measures the proportion of net income a firm keeps to
B. aggregation reinvest in operations rather than distributing as dividends.
C. conglomeration
D. appropriation 6. Which one of the following ratios identifies the amount of assets a firm needs in order
E. summation to generate $1 in sales?
Answer: B A. current ratio
In financial planning and capital budgeting, aggregation refers to the process of combining B. equity multiplier
smaller investment proposals or forecasts from various departments or units into a single C. retention ratio
overall plan or project. This allows a company like Atlas Industries to evaluate and manage D. capital intensity ratio
its total investment needs more effectively. E. payout ratio
Answer: D
3. Which one of the following terms is applied to the financial planning method which Capital intensity ratio calculated as Total Assets/Sales, this indicates how much investment
uses the projected sales level as the basis for determining changes in balance sheet and in assets is needed to generate each dollar of sales. A high ratio means the business is
income statement account values? asset-heavy.
A. percentage of sales method
B. sales dilution method 7. The internal growth rate of a firm is best described as the:
C. sales reconciliation method A. minimum growth rate achievable assuming a 100 percent retention ratio.
D. common-size method B. minimum growth rate achievable if the firm maintains a constant equity multiplier.
E. trend method C. maximum growth rate achievable excluding external financing of any kind.
Answer: A D. maximum growth rate achievable excluding any external equity financing while
The percentage of sales method is a financial planning technique where future income maintaining a constant debt-equity ratio.
statements and balance sheet items are estimated as a percentage of projected sales. It E. maximum growth rate achievable with unlimited debt financing.
assumes that many financial statement items vary directly with sales, allowing planners to Answer: C
forecast future financial needs based on expected revenue. This is the internal growth rate, showing how fast a company can grow using only retained
earnings without borrowing or issuing equity.
4. Which one of the following terms is defined as dividends paid expressed as a
percentage of net income? 8. The sustainable growth rate of a firm is best described as the:
A. dividend retention ratio A. minimum growth rate achievable assuming a 100 percent retention ratio.
B. minimum growth rate achievable if the firm maintains a constant equity C. I, III, and IV only
multiplier. D. I, II, and III only
C. maximum growth rate achievable excluding external financing of any kind. E. I, II, III, and IV
D. maximum growth rate achievable excluding any external equity financing while Answer: E
maintaining a constant debt-equity ratio. Effective financial planning helps determine resource needs, prepare for uncertainty, set
E. maximum growth rate achievable with unlimited debt financing. strategic goals, and evaluate financing strategies.
Answer: D
This defines the sustainable growth rate, the rate at which a firm can grow without changing 12. Which of the following questions are appropriate to address during the financial
its financial leverage. planning process?
I. Should the firm merge with a competitor?
9. You are developing a financial plan for a corporation. Which of the following II. Should additional shares of stock be sold?
questions will be considered as you develop this plan? III. Should a particular division be sold?
I. How much net working capital will be needed? IV. Should a new product be introduced?
II. Will additional fixed assets be required? A. I, II, and III only
III. Will dividends be paid to shareholders? B. I, II, and IV only
IV. How much new debt must be obtained? C. I, III, and IV only
A. I and IV only D. II, III, and IV only
B. II and III only E. I, II, III, and IV
C. I, III, and IV only Answer: E
D. II, III, and IV only Strategic choices such as asset acquisition, financing mix, growth targets, and dividend policy
E. I, II, III, and IV must all align with the financial plan.
Answer: E
All listed elements (net working capital needs, fixed asset needs, dividend policy, and 13. Which one of the following statements concerning financial planning for a firm is
financing needs) are integral to comprehensive financial planning. correct?
A. Financial planning for fixed assets is done on a segregated basis within each division.
10. Financial planning: B. Financial plans often contain alternative options based on economic developments.
A. focuses solely on the short-term outlook for a firm. C. Financial plans frequently contain conflicting goals.
B. is a process that firms employ only when major changes to a firm's D. Financial plans assume that firms obtain no additional external financing.
operations are anticipated. E. The financial planning process is based on a single set of economic assumptions.
C. is a process that firms undergo once every five years. Answer: B
D. considers multiple options and scenarios for the next two to five years. Financial plans are adaptable to various economic conditions and help firms remain flexible.
E. provides minimal benefits for firms that are highly responsive to economic
changes. 14. You are getting ready to prepare pro forma statements for your business. Which one
Answer: D of the following are you most apt to estimate first as you begin this process?
Financial planning involves projecting future operations under various assumptions to help A. fixed assets
make informed decisions. B. current expenses
C. sales forecast
11. Financial planning accomplishes which of the following for a firm? D. projected net income
I. determination of asset requirements E. external financing need
II. development of plans to contend with unexpected events Answer: C
III. establishment of priorities Sales are typically forecasted first because many other figures (expenses, assets, etc.) are
IV. analysis of funding options driven by projected sales.
A. I and III only
B. II and IV only 15. Which one of the following statements is correct?
A. Pro forma statements must assume that no new equity is issued. Net working capital includes items like receivables and inventory, which typically change as
B. Pro forma statements are projections, not guarantees. sales grow or decline.
C. Pro forma statements are limited to a balance sheet and income statement.
D. Pro forma financial statements must assume that no dividends will be paid. 19. A pro forma statement indicates that both sales and fixed assets are projected to
E. Net working capital needs are excluded from pro forma computations. increase by 7 percent over their current levels. Given this, you can safely assume that
Answer: B the firm:
These financial statements estimate future performance and are tools for planning, not A. is projected to grow at the internal rate of growth.
promises of outcomes. B. is projected to grow at the sustainable rate of growth.
C. currently has excess capacity.
16. When utilizing the percentage of sales approach, managers: D. is currently operating at full capacity.
I. estimate company sales based on a desired level of net income and the current profit E. retains all of its net income.
margin. Answer: D
II. consider only those assets that vary directly with sales. If sales growth requires more fixed assets, it implies no unused capacity is currently
III. consider the current production capacity level. available.
IV. can project both net income and net cash flows.
A. I and II only 20. A firm is currently operating at full capacity. Net working capital, costs, and all
B. II and III only assets vary directly with sales. The firm does not wish to obtain any additional equity
C. III and IV only financing. The dividend payout ratio is constant at 40 percent. If the firm has a positive
D. I, III, and IV only external financing need, that need will be met by:
E. II, III, and IV only A. accounts payable.
Answer: C B. long-term debt.
The basic idea of the percentage of sales approach is to separate the income statement and C. fixed assets.
balance sheet accounts into two groups - those that vary directly with sales and those that do D. retained earnings.
not. Given a sales forecast, we will then be able to calculate how much financing the firm E. common stock.
will need to support the predicted sales level. Answer: B
When internal funds and equity are insufficient, long-term debt is the typical source for
17. Which one of the following is correct in relation to pro forma statements? covering financing needs.
A. Fixed assets must increase if sales are projected to increase.
B. Net working capital is affected only when a firm's sales are expected to exceed the firm's 21. Which one of the following policies most directly affects the projection of the
current production capacity. retained earnings balance to be used on a pro forma statement?
C. The addition to retained earnings is equal to net income plus dividends paid. A. net working capital policy
D. Long-term debt varies directly with sales when a firm is currently operating at maximum B. capital structure policy
capacity. C. dividend policy
E. Inventory changes are directly proportional to sales changes. D. capital budgeting policy
Answer: E E. capacity utilization policy
Inventory is often assumed to scale with sales, especially in forecasting models. Answer: C
Retained earnings, which fund growth, depend directly on how much profit is paid out in
18. When constructing a pro forma statement, net working capital generally: dividends.
A. remains fixed.
B. varies only if the firm is currently producing at full capacity. 22. You are comparing the current income statement of a firm to the pro forma income
C. varies only if the firm maintains a fixed debt-equity ratio. statement for next year. The pro forma is based on a four percent increase in sales. The
D. varies only if the firm is producing at less than full capacity. firm is currently operating at 85 percent of capacity. Net working capital and all costs
E. varies proportionally with sales. vary directly with sales. The tax rate and the dividend payout ratio are fixed. Given this
Answer: E information, which one of the following statements must be true?
A. The projected net income is equal to the current year's net income. To determine how much fixed assets are needed per dollar of sales, we must understand the
B. The tax rate will increase at the same rate as sales. asset base (current amount of fixed assets), calculate how much sales are currently supported
C. Retained earnings will increase by four percent over its current level. by those assets (current sales) and assess whether the firm is at full capacity or has room to
D. Total assets will increase by less than four percent. grow without adding more assets (current level of operating capacity)
E. Total liabilities and owners' equity will increase by four percent.
Answer: D 26. The plowback ratio is:
When not at full capacity, a firm can increase output without needing a proportionate A. equal to net income divided by the change in total equity.
increase in assets. B. the percentage of net income available to the firm to fund future growth.
C. equal to one minus the retention ratio.
23. A firm is operating at 90 percent of capacity. This information is primarily needed D. the change in retained earnings divided by the dividends paid.
to project which one of the following account values when compiling pro forma E. the dollar increase in net income divided by the dollar increase in sales.
statements? Answer: B
A. sales The percentage of net income available to the firm to fund future growth - known as the
B. costs of goods sold plowback ratio, it shows how much profit is reinvested rather than distributed.
C. accounts receivable
D. fixed assets 27. A firm's net working capital and all of its expenses vary directly with sales. The firm
E. long-term debt is operating currently at 96 percent of capacity. The firm wants no additional external
Answer: D financing of any kind. Which one of the following statements related to the firm's pro
When capacity limits are reached, increasing sales requires more investment in fixed assets. forma statements for next year must be correct?
A. Total liabilities will remain constant at this year's value.
24. Which one of the following capital intensity ratios indicates the largest need for fixed B. The maximum rate of sales increase is 4 percent.
assets per dollar of sales? C. The firm cannot exceed its internal rate of growth.
A. 0.70 D. The projected owners' equity will equal this year's ending equity balance.
B. 0.86 E. Fixed assets must remain constant at the current level.
C. 1.00 Answer: C
D. 1.06 The firm cannot exceed its internal rate of growth because it does not want any external
E. 1.15 financing, so growth is limited to what can be supported by internally generated funds, i.e.,
Answer: E the internal growth rate.
This is the highest capital intensity ratio, meaning the firm uses $1.15 in assets to
generate $1 in sales, indicating a high investment requirement. 28. Which one of the following will increase the maximum rate of growth a
corporation can achieve?
25. Which of the following are needed to determine the amount of fixed assets required A. avoidance of external equity financing
to support each dollar of sales? B. increase in corporate tax rates
I. current amount of fixed assets C. reduction in the retention ratio
II. current sales D. decrease in the dividend payout ratio
III. current level of operating capacity E. decrease in sales given a positive profit margin
IV. projected growth rate of sales Answer: D
A. I and III only Retaining more earnings increases the funds available for reinvestment, enhancing the
B. II and IV only sustainable growth rate.
C. I, II, and III only
D. II, III, and IV only 29. Martin Aerospace is currently operating at full capacity based on its current level of
E. I, II, III, and IV assets. Sales are expected to increase by 4.5 percent next year, which is the firm's
Answer: C internal rate of growth. Net working capital and operating costs are expected to increase
directly with sales. The interest expense will remain constant at its current level. The tax
rate and the dividend payout ratio will be held constant. Current and projected net B. decrease in net income
income is positive. Which one of the following statements is correct regarding the pro C. increase in the dividend payout ratio
forma statement for next year? D. decrease in total assets
A. The pro forma profit margin is equal to the current profit margin. E. increase in costs of goods sold
B. Retained earnings will increase at the same rate as sales. Answer: D
C. Total assets will increase at the same rate as sales. More efficient asset use (lower capital intensity) allows the firm to grow faster using internal
D. Long-term debt will increase in direct relation to sales. funds.
E. Owners' equity will remain constant.
Answer: C 34. The external financing need:
Since Martin Aerospace is operating at full capacity, any increase in sales (4.5%) will require A. will limit growth if unfunded.
a proportional increase in total assets to support the higher sales volume, making total assets B. is unaffected by the dividend payout ratio.
grow at the same rate as sales. C. must be funded by long-term debt.
D. ignores any changes in retained earnings.
30. A firm's external financing need is financed by which of the following? E. considers only the required increase in fixed assets.
A. retained earnings Answer: A
B. net working capital and retained earnings Growth plans require capital; if not funded, growth potential is constrained.
C. net income and retained earnings
D. debt or equity 35. Which one of the following will cause the sustainable growth rate to equal to internal
E. owners' equity, including retained earnings growth rate?
Answer: D A. dividend payout ratio greater than 1.0
External financing includes both debt and issuing new shares of equity. B. debt-equity ratio of 1.0
C. retention ratio between 0.0 and 1.0
31. Sales can often increase without increasing which one of the following? D. equity multiplier of 1.0
A. accounts receivable E. zero dividend payments
B. cost of goods sold Answer: D
C. accounts payable When the equity multiplier is 1.0, total assets = total equity => no debt is used. It means the
D. fixed assets firm uses only internal funds, so the sustainable growth rate equals the internal growth rate.
E. inventory
Answer: D 36. The sustainable growth rate:
If the firm is not at full capacity, sales can grow without requiring more fixed assets. A. assumes there is no external financing of any kind.
B. assumes no additional long-term debt is available.
32. Blasco Industries is currently at full-capacity sales. Which one of the following is C. assumes the debt-equity ratio is constant.
limiting sales to this level? D. assumes the debt-equity ratio is 1.0.
A. net working capital E. assumes all income is retained by the firm.
B. long-term debt Answer: C
C. inventory Assumes the debt-equity ratio is constant, the sustainable growth rate model assumes a fixed
D. fixed assets capital structure.
E. debt-equity ratio
Answer: D 37. If a firm equates its pro forma sales growth to the rate of sustainable growth, and
At full capacity, the firm must invest in fixed assets to expand production and increase sales. has positive net income and excess capacity, then the:
A. maximum capacity level will have to increase at the same rate as sales growth.
33. All else constant, which one of the following will increase the internal rate of B. total assets will have to increase at the same rate as sales growth.
growth? C. debt-equity ratio will increase.
A. decrease in the retention ratio D. retained earnings will increase.
E. number of common shares outstanding will increase. A. growth limitations
Answer: D B. capacity utilization
Positive net income and a stable dividend payout increase retained earnings, supporting C. market value of a firm
growth. D. capital structure of a firm
E. dividend policy
38. Sal's Pizza has a dividend payout ratio of 10 percent. The firm does not want to issue Answer: C
additional equity shares but does want to maintain its current debt-equity ratio and its Financial planning generally relies on accounting/book values, not market valuations.
current dividend policy. The firm is profitable. Which one of the following defines the
maximum rate at which this firm can grow? 42. The financial planning process:
A. internal growth rate × (1 - 0.10) I. involves internal negotiations among divisions.
B. sustainable growth rate × (1 - 0.10) II. quantifies senior manager's goals.
C. internal growth rate III. considers only internal factors.
D. sustainable growth rate IV. reconciles company activities across divisions.
E. zero percent A. III and IV only
Answer: D B. II and III only
When no external equity is issued and other ratios are constant, growth is limited to what can C. I, II, and IV only
be supported sustainably. D. II, III, and IV only
E. I, II, III, and IV
39. Which of the following can affect a firm's sustainable rate of growth? Answer: C
I. capital intensity ratio For planning purposes, it’s helpful to view the future in terms of a short run and a long run.
II. profit margin When creating a financial plan, the firm combines all individual projects and investments to
III. dividend policy estimate the total required investment. Once the planning horizon and level of aggregation are
IV. debt-equity ratio established, a financial plan requires inputs in the form of alternative sets of assumptions
A. III only about important variables. The financial planning process might require each division to
B. I and III only prepare three alternative business plans for the next three years.
C. II, III, and IV only
D. I, II, and IV only 43. A Procrustes approach to financial planning is based on:
E. I, II, III, and IV A. a policy of producing a financial plan once every five years.
Answer: E B. developing a plan around the goals of senior managers.
Profitability, dividend policy, financial leverage, and asset efficiency all influence the C. a proactive approach to the economic outlook.
sustainable growth rate. D. a flexible capital budget.
E. a flexible capital structure.
40. Financial plans generally tend to ignore which one of the following? Answer: B
A. dividend policy The “Procrustes” approach refers to tailoring plans to fit preconceived objectives, even if not
B. manager's goals and objectives optimal.
C. risks associated with cash flows
D. operating capacity levels 62. Major Manuscripts, Inc. is currently operating at maximum capacity. All costs,
E. capital structure policy assets, and current liabilities vary directly with sales. The tax rate and the dividend
Answer: C
payout ratio will remain constant. How much additional debt is required if no new
These are typically qualitative and not easily incorporated into basic financial planning
equity is raised and sales are projected to increase by 6 percent?
models.

41. The financial planning process tends to place the least emphasis on which one of the
following?
 63.

A. -$712
B. -$668
C. $241
D. $348
E. $367
Answer:

Major Manuscripts, Inc. is currently operating at 82 percent of capacity. All costs and
net working capital vary directly with sales. The tax rate, the profit margin, and the
dividend payout ratio will remain constant. How much additional debt is required if no
new equity is raised and sales are projected to increase by 15 percent?
A. -$1,810
B. -$1,014
C. -$642
D. $244
E. $358
Answer:

64.

Assume the profit margin and the payout ratio of Major Manuscripts, Inc. are constant.
If sales increase by 9 percent, what is the pro forma retained earnings?
A. $5,220.18
B. $5,721.42
C. $6,308.50
D. $6,648.42
E. $7,028.56
Answer:

65.
 Answer:

66.

Assume that Major Manuscripts, Inc. is currently operating at 97 percent of capacity

and that sales are projected to increase to $20,000. What is the projected addition to
fixed assets?
A. $0
B. $1,533
C. $1,629
D. $1,646 All of Fake Stone’s costs and net working capital vary directly with sales. Sales are
E. $1,688 projected to increase by 3.5 percent. What is the pro forma accounts receivable balance
for next year?
A. $1,659.80
B. $1,661.84
C. $1,780.20 A. $92.34
D. $1,787.80 B. $188.55
E. $1,800.46 C. $1,909.16
Answer: D. $2,144.34
E. $2,386.08
Answer:

67.

68.

The profit margin, the debt-equity ratio, and the dividend payout ratio for Fake Stone,
Inc. are constant. Sales are expected to increase by $1,062 next year. What is the
projected addition to retained earnings for next year?
Assume that Fake Stone, Inc. is operating at full capacity. Also assume that all costs, net Assume that Fake Stone, Inc. is operating at 88 percent of capacity. All costs and net
working capital, and fixed assets vary directly with sales. The debt-equity ratio and the working capital vary directly with sales. What is the amount of the pro forma net fixed
dividend payout ratio are constant. What is the pro forma net fixed asset value for next assets for next year if sales are projected to increase by 13 percent?
year if sales are projected to increase by 7.5 percent? A. $19,600
A. $19,800 B. $20,406
B. $21,070 C. $21,500
C. $23,600 D. $21,667
D. $24,240 E. $22,148
E. $26,810 Answer:
Answer:

69.
70. 71. Fake Stone, Inc. is projecting sales to decrease by 4 percent next year while the
profit margin remains constant. The firm wants to increase the dividend payout ratio by
2 percent. What is the projected increase in retained earnings for next year?

Assume that Fake Stone, Inc. is operating at full capacity. Also assume that assets, costs,
and current liabilities vary directly with sales. The dividend payout ratio is constant.
What is the external financing need if sales increase by 12 percent?
A. -$318.09
B. -$268.49 A. $1,711.15
C. $103.13 B. $1,898.67
D. $350.40 C. $1,904.26
E. $460.56 D. $1,969.92
Answer: E. $2,105.63
Answer: C. 7.36 percent
D. 7.49 percent
E. 8.77 percent
Answer:

72.
73.

What is the internal growth rate of Fake Stone, Inc. assuming the payout ratio remains
constant?
What are the pro forma retained earnings for next year if Fake Stone, Inc. grows at a
A. 5.20 percent
rate of 2.5 percent and both the profit margin and the dividend payout ratio remain
B. 5.55 percent
constant?
A. $4,946.90 Assume that net working capital and all of the costs of Fake Stone, Inc. increase directly
B. $5,023.10 with sales. Also assume that the tax rate and the dividend payout ratio are constant. The
C. $5,592.20 firm is currently operating at full capacity. What is the external financing need if sales
D. $5,920.67 increase by 4 percent?
E. $6,293.30 A. -$1,214.48
Answer: B. -$804.15
C. -$397.19
D. $201.16
E. $525.38
74. Answer:
75. Answer:

76.

Hungry Howie’s is currently operating at 80 percent of capacity. What is the

full-capacity level of sales?
A. $21,106.00
B. $21,580.62 Hungry Howie’s is currently operating at 84 percent of capacity. What is the total asset
C. $21,625.00 turnover ratio at full capacity?
D. $24,506.17 A. .68
E. $25,301.91
B. .78 Hungry Howie’s is currently operating at 96 percent of capacity. The profit margin and
C. .95 the dividend payout ratio are projected to remain constant. Sales are projected to
D. 1.29 increase by 5 percent next year. What is the projected addition to retained earnings for
E. 1.42 next year?
Answer: A. $1,309.19
B. $11,753.50
C. $1,884.90
D. $2,667.78
E. $3,001.40
77. Answer:
78. Answer:

79.

Hungry Howie’s is currently operating at full capacity. The profit margin and the
dividend payout ratio are held constant. Net working capital and fixed assets vary
directly with sales. Sales are projected to increase by 9 percent. What is the external
financing needed?
A. -$696.50
B. -$683.60
C. -$97.20
D. -$14.50
E. $26.80
Hungry Howie’s maintains a constant payout ratio. The firm is currently operating at 80.
full capacity. What is the maximum rate at which the firm can grow without acquiring
any additional external financing?
A. 9.74 percent
B. 12.97 percent
C. 13.06 percent
D. 13.58 percent
E. 14.23 percent
Answer:

Hungry Howie's is currently operating at 96 percent of capacity. What is the required

increase in fixed assets if sales are projected to increase by 14 percent?
A. $0
B. $811
C. $833
D. $908
E. $1,204
Answer: 82.

81.

Assets and costs are proportional to sales. Debt and equity are not. A dividend of $992
was paid, and the company wishes to maintain a constant payout ratio. Next year's sales
are projected to be $21,830. What is the amount of the external financing need?
A. $12,711
B. $13,333
Assets and costs are proportional to sales. Debt and equity are not. No dividends are C. $13,556
paid. Next year's sales are projected to be $4,750. What is the amount of the external D. $13,809
financing needed? E. $14,357
A. $797 Answer:
B. $808
C. $811
D. $818
E. $823
Answer:

External financing need = $105,622 - $91,265 = $14,357

83. 84.

Assets and costs are proportional to sales. Debt and equity are not. The company
maintains a constant 40 percent dividend payout ratio. No external equity financing is
Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity possible. What is the internal growth rate?
are not. The company maintains a constant 50 percent dividend payout ratio. Like every A. 2.91%
other firm in its industry, next year's sales are projected to increase by exactly 16 B. 3.44%
percent. What is the external financing need? C. 3.87%
A. $1,317.16 D. 4.02%
B. $1,411.16 E. 4.14%
C. $1,583.09 Answer:
D. $2,211.87
E. $2,349.98
Answer:

85.

Assets and costs are proportional to sales. The company maintains a constant 45 percent
dividend payout ratio and a constant debt-equity ratio. What is the maximum increase
in sales that can be sustained next year assuming no new equity is issued?
A. $4,808.12
B. $5,211.17
C. $5,887.48
D. $5,894.60
E. $6,666.67
Answer: 87. The Soccer Shoppe has a 9 percent return on assets and a 25 percent payout ratio.
What is its internal growth rate?
A. 4.72%
B. 5.08%
C. 5.49%
D. 6.23%
E. 7.24%
Answer:

86.

88. The Parodies Corp. has a 22 percent return on equity and a 23 percent payout ratio.
What is its sustainable growth rate?
A. 18.68%
B. 19.25%
C. 19.49%
D. 20.39%
E. 22%
Answer:

A 22 percent growth rate in sales is projected. What is the pro forma addition to
retained earnings assuming all costs vary proportionately with sales?
A. $6,299 89.
B. $7,303
C. $7,890
D. $8,011
E. $8,164
Answer:

A. 11.87%
B. 12.29%
C. 12.52%
 D. 13.42% $664,000. What amount must be spent on new "xed assets to support this growth in
E. 13.58% sales?
Answer: A. $0
B. $22,654
C. $46,319
D. $79,408
E. $93,608
Answer:
90.

93. Fixed Appliance Co. wishes to maintain a growth rate of 8 percent a year, a constant
debt-equity ratio of 0.42, and a dividend payout ratio of 50 percent. The ratio of total
assets to sales is constant at 1.3. What pro"t margin must the firm achieve?
A. 12.92%
B. 13.46%
C. 13.56%
A. 10.3%
D. 14.33%
B. 10.53%
E. 14.74%
C. 10.67%
Answer:
D. 10.89%
E. 11.01%
Answer:

94. A firm wishes to maintain a growth rate of 8 percent and a dividend payout ratio of
62 percent. The ratio of total assets to sales is constant at 1, and the profit margin is 10
91. Seaweed Mfg., Inc. is currently operating at only 84 percent of fixed asset capacity. percent. What must the debt-equity ratio be if the firm wishes to keep that ratio
Current sales are $550,000. What is the maximum rate at which sales can grow before constant?
any new fixed assets are needed? A. 0.05
A. 17.23% B. 0.4
B. 17.47% C. 0.55
C. 18.03% D. 0.6
D. 18.87% E. 0.95
E. 19.05% Answer:
Answer:

92. Seaweed Mfg., Inc. is currently operating at only 86 percent of "xed asset capacity.
Fixed assets are $387,000. Current sales are $510,000 and are projected to grow to
95. A firm wishes to maintain an internal growth rate of 11 percent and a dividend A. 10.32%
payout ratio of 24 percent. The current profit margin is 7 percent and the firm uses no B. 10.79%
external financing sources. What must the total asset turnover rate be? C. 11.78%
A. 0.87 D. 12.01%
B. 0.9 E. 12.24%
C. 1.01 Answer:
D. 1.15
E. 1.86
Answer:

98. The most recent financial statements for Moose Tours, Inc. follow. Sales for 2009 are
projected to grow by 16 percent. Interest expense will remain constant; the tax rate and
dividend payout rate will also remain constant. Costs, other expenses, current assets,
96.
and accounts payable increase spontaneously will sales. If the firm is operating at full
capacity and no new debt or equity is issued, how much external financing is needed to
support the 16 percent growth rate in sales?

A. 7.68%
B. 9.52%
C. 11.12%
D. 13.49%
E. 14.41%
Answer:

97. Country Comfort, Inc. had equity of $150,000 at the beginning of the year. At the
end of the year, the company had total assets of $195,000. During the year, the company
A. $-10,246
sold no new equity. Net income for the year was $63,000 and dividends were $44,640.
B. $8,122
What is the sustainable growth rate?
 C. $-6,708 .
D. $2,407
E. $3,309
Answer:
 Chap 5.1
Chapter 05.1 Answer: E
Cash and Liquidity Management The cash in the cash drawer used to make change is held for transaction purposes, as it is
needed for the day-to-day operations of the business. This is the transaction motive for
Multiple Choice Questions holding cash.

1. Yesterday, the president of RB Enterprises received a phone call from DLK, a 4. Float is defined as the:
competitor. DLK is a sole proprietorship. An unexpected family situation has caused the A. amount of cash a firm can immediately withdraw from its bank account.
owner to suddenly want to retire and relocate closer to his family. Thus, the assets of B. difference between book cash and bank cash.
DLK are being offered to RB Enterprises at a bargain basement price. While RB C. change in a firm’s cash balance from one accounting period to the next.
Enterprises had not anticipated purchasing these assets, it was decided that the D. amount of cash a firm has on hand.
opportunity was too good to pass up. This illustrates which of the following needs to E. cash balance according to a firm’s records.
hold cash? Answer: B
A. precautionary Float refers to the difference between the amount of cash recorded in a company’s books
B. transaction (book cash) and the actual amount of cash available in the bank account (bank cash), usually
C. speculative due to transactions like checks that have been written but not yet processed.
D. compensation
E. float 5. A lockbox is a:
Answer: C A. special safe used by a firm for overnight storage of any cash or undeposited checks.
RB Enterprises is holding cash to take advantage of an unexpected opportunity to purchase B. special safe used by a firm that can only be opened at prespecified times of the day.
assets at a bargain price. This is a speculative motive, as the company is using its cash to C. box located in a bank’s vault that is rented by a firm and used to hold unprocessed checks.
make an investment based on the potential for future gains. D. special post office box which can only be opened by prespecified postal inspectors for
direct delivery to the addressee.
2. GT Motors regularly issues short-term debt to finance its daily operations. Suddenly, E. post office box strategically located so that a firm's receivables can be collected faster.
the credit markets froze and no funds were available for borrowing. Fortunately, the Answer: E
firm had some cash reserves saved that it was able to use to fund its operations until A lockbox is a service provided by banks where a firm has a post office box located near its
additional credit was available. The need to retain cash for situations such as this is customers. Payments are sent directly to this lockbox, allowing the firm to collect receivables
referred to as which one of the following motives for holding cash? faster and streamline its cash collection process.
A. speculative
B. float 6. The Presque Isle Center has branch operations in three states. Each branch deals
C. compensating with a local bank. However, all excess funds in these branch bank accounts are
D. precautionary transferred on a daily basis to the firm’s primary bank located near the firm’s home
E. transaction office. This routine of transferring cash to the primary bank on a regular basis is
Answer: D referred to as:
The situation described illustrates the precautionary motive for holding cash. GT Motors kept A. cash concentration.
cash reserves to cover unexpected events, such as the credit market freeze, ensuring it could B. strategic cash disbursement.
continue operations without relying on external funding. C. transfer flotation.
D. payables management.
3. The cash found in a cash drawer that a check-out clerk uses to make change is an E. float management.
example of which of the following motives for holding cash? Answer: A
A. speculative Cash concentration refers to the process of transferring excess funds from various branch
B. daily float accounts to a central account (the primary bank) to better manage cash flow and ensure more
C. compensating balance efficient use of funds.
D. precautionary
E. transaction
7. An account into which funds are deposited only in an amount equal to the value of the E. excess cash costs
checks presented for payment that day is called a account. Answer: B
A. lockbox Adjustment costs are the costs incurred when a firm needs to adjust its cash balance, typically
B. concentration because it has insufficient cash (shortage). These costs are also referred to as shortage costs,
C. zero-balance which arise when a firm needs to borrow or find other means to cover a cash shortfall.
D. compensating balance
E. revolving 11. Why do firms need liquidity?
Answer: C I. to meet compensating balance requirements
A zero-balance account is one where the balance is maintained at zero, with funds being II. to take advantage of an opportunity that suddenly arises
deposited only to cover the value of the checks that are presented for payment on that day. III. to conduct daily business activities
Once the checks are paid, the balance returns to zero. IV. to be prepared for a financial emergency
A. I and II only
8. An account into which a firm transfers funds, usually from a master account, in an B. III and IV only
amount sufficient to cover the checks presented for payment that day is called a C. I, III, and IV only
account. D. II, III, and IV only
A. lockbox E. I, II, III, and IV
B. cleanup Answer: E
C. compensating balance Firms need liquidity to ensure they can smoothly run their operations. It helps them meet
D. revolving bank requirements like maintaining a minimum balance, take advantage of unexpected
E. controlled disbursement opportunities, cover daily expenses such as paying employees and suppliers, and be ready for
Answer: E financial emergencies when cash is suddenly needed. Having sufficient liquidity ensures the
A controlled disbursement account is an account where a firm transfers funds from a master firm can respond to both routine and unforeseen situations without financial strain.
account to cover the checks presented for payment that day. This helps manage cash flow by
ensuring that only the necessary funds are in the account to meet daily payment obligations. 12. Cash management primarily involves:
A. optimizing a firm’s collections and disbursements of cash.
9. The Snow Hut has analyzed the carrying and shortage costs associated with its cash B. maximizing the income a firm earns on its cash reserves.
holdings and determined that the firm should ideally maintain a cash balance of $3,600. C. reconciling a firm’s book balance with its bank balance.
This $3,600 represents which one of the following to the firm? D. determining the optimal level of liquidity a firm should maintain.
A. target cash balance E. determining the best method of raising capital.
B. concentration balance Answer: A
C. available balance Cash management focuses on efficiently managing the inflow (collections) and outflow
D. selected cash amount (disbursements) of cash to ensure the firm has enough liquidity for its operations while
E. compensating balance minimizing excess cash.
Answer: A
The target cash balance is the ideal amount of cash a firm determines it should maintain to 13. Disbursements float:
minimize the costs associated with holding too much or too little cash. In this case, $3,600 is A. occurs when a deposit is recorded but the funds are unavailable.
the optimal cash balance for The Snow Hut based on their analysis of carrying and shortage B. causes the book balance to exceed the bank balance.
costs. C. has tended to increase since the enactment of the Check Clearing Act for the 21st Century.
D. is a recommended source of funds for short-term investments.
10. Adjustment costs is another name for which one of the following? E. is eliminated when payments are made electronically.
A. borrowing costs Answer: E
B. shortage costs Disbursements float happens when there is a delay between when a payment is made (such as
C. cash transfer costs a check) and when the funds are deducted from the bank account. When payments are made
D. cash wire costs electronically, the funds are processed and deducted much faster, eliminating this float.
 D. II, III, and IV only
14. Collection float: E. I, II, III, and IV
A. is more desirable to firms than disbursement float. Answer: E
B. is totally eliminated by the installation of a lockbox system. Billing customers electronically (I) speeds up the delivery of invoices, while accepting debit
C. exists when a firm’s available balance exceeds its book balance. cards instead of checks (II) allows faster payment processing. Offering cash discounts for
D. can be avoided by collecting payments electronically at the time of sale. early payment (III) encourages customers to pay sooner, and reducing the internal processing
E. is eliminated by implementing a concentration banking system. delay by one day (IV) shortens the overall collection cycle. Together, these actions improve
Answer: D cash flow by accelerating the time it takes to receive payments.
Collection float occurs when there is a delay between the time a payment is received and
when the funds become available in the firm’s bank account. Using electronic payment 18. Which of the following should help reduce the total collection time for a firm?
methods (such as credit cards or direct transfers) eliminates the delay, allowing for quicker I. opening a post office box so mail can be received earlier in the morning
processing and faster access to funds. II. assigning additional staff in the morning to process incoming payments
III. providing a discount for customers who pay electronically
15. Which one of the following statements is correct? IV. establishing preauthorized payments from customers
A. Net float decreases every time a firm issues a check to pay one of its suppliers. A. I and II only
B. A positive net float indicates that collection float exceeds disbursements float. B. III and IV only
C. Firms prefer a zero net float over a positive net float. C. II, III, and IV only
D. Net float is equal to collection float minus disbursement float. D. I, II, and IV only
E. Net float is equal to a firm’s available balance minus its book balance. E. I, II, III, and IV
Answer: E Answer: E
Net float measures the difference caused by delays in processing transactions. A positive net All of these actions help reduce total collection time. Opening a post office box (I) allows
float means the firm’s bank shows more cash available than what is recorded in its books. mail to be received earlier. Assigning more staff in the morning (II) speeds up payment
This typically happens due to outstanding checks or deposits in transit. processing. Offering discounts for electronic payments (III) encourages faster payments.
Establishing preauthorized payments (IV) ensures timely, automatic collections. Together,
16. Check kiting is: these improve cash flow by accelerating the collection process.
A. used by most firms as an ethical means of handling its cash reserves.
B. the process of withdrawing all funds from a bank account as soon as the funds are 19. Which one of the following collection times is correctly described?
available. A. The processing delay starts when a firm mails out a billing statement and ends when the
C. the central core of a good cash management system. payment is received from a customer.
D. using uncollected cash to invest in short-term, liquid assets. B. Mailing time begins when a firm mails out a billing statement and ends when the payment
E. increasingly popular due to recent banking law changes. is received.
Answer: D C. Collection time begins when a firm mails out a billing statement and ends when the cash
Check kiting involves taking advantage of the time delay between depositing a check and payment for that billing is available to the firm.
when the funds actually clear. During this float period, a firm uses uncollected funds to invest D. Availability delay begins when a firm deposits a customer’s check into its bank account
in short-term, liquid assets to earn additional income. and ends when the cash from that payment is available to the firm.
E. Processing delay begins when a firm mails out billing statements and ends when the firm
17. Which of the following will reduce collection time? deposits the payment for that statement into its bank account.
I. billing customers electronically rather than by mail Answer: D
II. accepting debit cards but not checks as payment for a sale Availability delay begins when a firm deposits a customer’s check into its bank account and
III. offering cash discounts for early payment ends when the cash from that payment is actually available for use. This period reflects the
IV. reducing the processing delay by one day time it takes for the bank to clear the check and make funds accessible.
A. I and II only
B. I and III only 20. A lockbox system:
C. I, II, and III only
A. entails the use of a bank which is centrally located to collect payments on a nationwide C. The means selected to transfer funds into a concentration account depends primarily upon
basis. the size of the transfers.
B. is designed to deposit a customer’s check into the firm’s bank account prior to recording D. Concentration accounts are used to transfer funds to lockbox locations as needed.
the receipt of that check to a customer’s account. E. The most expedient means of transferring funds into a concentration account is a wire
C. is used to reduce the disbursement float of a firm. transfer.
D. is efficient regardless of the locations selected for lockbox destinations. Answer: C
E. automatically records payments to a customer's account when the customer’s check is The means selected to transfer funds into a concentration account depends primarily upon the
received at the lockbox location. size of the transfers because larger transfers often require faster, more expensive methods like
Answer: B wire transfers, while smaller transfers use slower, cheaper methods such as automated
A lockbox system is designed so that the bank deposits a customer’s check into the firm’s clearinghouse transfers.
bank account before the payment is formally recorded in the customer’s account. This speeds
up the collection process by making funds available earlier and improving cash flow 24. A cash concentration account:
management. A. is frequently used as a source of funds for short-term investments.
B. cannot be used to cover a compensating balance requirement.
21. Lockboxes: C. cannot be used to transfer funds into zero-balance accounts.
A. should be geographically located close to a firm’s primary customers. D. is generally the only bank account a firm needs to efficiently manage its cash.
B. should be located in remote locations to increase the net disbursement float. E. is another name for a controlled disbursement account.
C. offer no additional benefit to a firm now that the Check Clearing Act for the 21st Century Answer: A
has been enacted. A cash concentration account gathers funds from multiple accounts to centralize cash
D. tend to be negative net present value projects for firms with a large number of sizeable management. It is frequently used as a source of funds for short-term investments because it
transactions. consolidates available cash, making it easier for the firm to manage and invest excess funds
E. tend to also be used as concentration accounts. efficiently.
Answer: A
Lockboxes should be geographically located close to a firm’s primary customers to reduce 25. The main purpose of a cash concentration account is to:
mailing time and speed up the collection process. This proximity helps minimize collection A. decrease collection float.
float and improves cash flow efficiency. B. decrease disbursement float.
C. consolidate funds.
22. Cash concentration accounts: D. replace a lockbox system.
A. tend to increase the funds available for short-term investing. E. cover compensating balance requirements.
B. tend to increase the complexity of a firm’s cash management system. Answer: C
C. that utilize wire transfers rather than automated clearing house transfers are less expensive The main purpose of a cash concentration account is to consolidate funds from various
to maintain. accounts or locations into one central account. This helps a firm manage its cash more
D. receive checks directly from all of a firm’s customers. efficiently by pooling resources for better control, liquidity management, and investment
E. are all zero-balance accounts. opportunities.
Answer: A
Cash concentration accounts help firms gather funds from multiple locations into a central 26. Which one of the following statements is correct concerning a cash management
account, which increases the funds available for short-term investing by improving cash system that employs both lockboxes and a concentration bank account?
visibility and liquidity. A. All customer payments must be submitted to a lockbox.
B. The party which collects the checks from the lockbox is responsible for recording the
23. Which one of the following statements is correct? payment on the customer’s account.
A. Funds received via automated clearinghouse transfers are available that day. C. Payments received in a lockbox are transferred immediately to the concentration account.
B. A depository transfer check is the most costly means of transferring funds into a cash D. The firm’s cash manager determines how the funds in the concentration account are
concentration account. disbursed.
E. The concentration account must be zeroed out on a daily basis.
Answer: D I. cyclical activities
In a cash management system using lockboxes and concentration accounts, the firm’s cash II. desire to invest funds
manager controls how the funds in the concentration account are allocated and disbursed to III. daily operations
optimize liquidity and cash flow. IV. fixed asset purchases
A. I and III only
27. A zero-balance account: B. II and IV only
A. is used to cover the compensating balance requirement of a line of credit agreement. C. I and II only
B. is only used to deposit funds received at local lockboxes. D. III and IV only
C. is funded on an as-needed basis only. E. I and IV only
D. is limited to handling payroll disbursements. Answer: E
E. requires a compensating balance. Firms temporarily hold large cash surpluses mainly to manage cyclical fluctuations and
Answer: C prepare for fixed asset purchases. These are planned needs, unlike regular operations or
A zero-balance account is funded only as needed. The main purpose of a zero-balance investing intentions, which are uses of cash, not reasons to accumulate it.
account is to maintain a zero balance by automatically transferring funds from a master
account when payments are made, ensuring the account never holds excess cash. 31. Which one of the following statements is correct?
A. Money market accounts are low-risk, high-return investments.
28. Which one of the following statements is correct concerning zero-balance accounts? B. The rate of return earned on short-term securities tends to exceed that earned on long-term
A. Each zero-balance account is offset by a compensating balance account. securities.
B. Zero-balance accounts are used for depositing incoming funds. C. U.S. Treasury bills are well suited for short-term investments.
C. A master account must be used in conjunction with a zero-balance account. D. The income earned on U.S. Treasury bills is exempt from all taxation.
D. Zero-balance accounts are used solely in conjunction with a lockbox system. E. Short-term investments tend to have high levels of default risk.
E. Zero-balance accounts are still required to maintain a minimal balance. Answer: C
Answer: C U.S. Treasury bills (T-bills) are short-term government securities with maturities of one year
A zero-balance account is used in conjunction with a master account. Funds are automatically or less. They are highly liquid, low-risk, and ideal for investors looking for safe short-term
transferred from the master account to the zero-balance account as needed to cover payments, investment options.
keeping the zero-balance account at zero. This system helps firms manage cash flow more
efficiently across multiple accounts. 32. Municipal bonds:
A. are less liquid than U.S. Treasury bills.
29. Which one of the following statements is correct? B. produce income that is subject to federal income taxation.
A. The money market refers to securities that mature in two years or less. C. generally pay a higher coupon than corporate bonds.
B. Banks are prohibited from investing cash surpluses on behalf of their customers on a short- D. are also referred to as commercial paper.
term basis. E. are issued by the federal government.
C. Short-term securities tend to have a high degree of interest rate risk. Answer: A
D. A cyclical firm may purchase marketable securities as part of its short-term financing plan. Municipal bonds are issued by state and local governments. While they offer tax advantages
E. Corporations are not permitted to invest in money market mutual funds but can invest in (often exempt from federal and sometimes state/local taxes), they are less liquid than U.S.
bank money market accounts. Treasury bills because they are traded less frequently and have a smaller market.
Answer: D
A cyclical firm experiences fluctuations in cash flow due to economic cycles. Such firms may 33. Money market securities have which of the following characteristics?
purchase marketable securities as part of their short-term financing and liquidity management I. long maturities
strategies to efficiently use excess cash during peak periods or to meet cash needs during II. low default risk
downturns. III. high degree of liquidity
IV. low rates of return
30. Which two of the following are the primary reasons why firms temporarily A. I and III only
accumulate large cash surpluses? B. II and III only
C. I and IV only A. has a floating dividend.
D. II, III, and IV only B. is sold only under a repurchase agreement.
E. I, II, III, and IV C. is a special form of commercial paper.
Answer: D D. has more price volatility than an ordinary preferred.
Money market securities are short-term instruments, so they do not have long maturities E. has its interest rate reset daily.
(eliminating options with I). They are characterized by low default risk (II), high liquidity Answer: A
(III), and low rates of return (IV) due to their safety and short duration. A money market preferred stock pays a dividend that adjusts periodically based on short-term
interest rates, so it has a floating dividend.
34. A jumbo CD:
A. is issued by the federal government. 38. Which of the following costs related to holding cash are minimized when the
B. generally matures between 2 and 5 years. level of cash a firm holds is optimized?
C. is a loan of $100,000 or more to a municipality. A. opportunity costs
D. is a loan of $1 million or more on a short-term basis. B. trading costs
E. is a short-term loan of $100,000 or more to a commercial bank. C. total costs
Answer: E D. both trading and opportunity costs
A jumbo CD is a large-denomination certificate of deposit, typically $100,000 or more, E. trading costs, opportunity costs, and total costs
deposited with commercial banks for a short-term period. It represents a short-term loan from Answer: C
the investor to the bank. When a firm optimizes its cash holdings, it minimizes the total costs related to holding cash,
which include both opportunity costs (the lost returns from not investing the cash) and trading
35. Brown Trucking is buying a U.S. Treasury bill today with the understanding that the costs (the costs of converting assets to cash). By balancing these two costs, the firm ensures
seller will buy it back tomorrow at a slightly higher price. This investment is known as that the combined total cost is at its lowest possible level.
a:
A. commercial paper transaction. 39. Which of the following statements related to the BAT model is correct?
B. repurchase agreement. I. The BAT model is used to determine the target cash balance for a firm.
C. private certificate of deposit. II. The BAT model is rarely used in business due to its complex nature.
D. revenue anticipation note. III. The BAT model is a model that helps eliminate a firm’s collection float.
E. bill anticipation note. IV. One disadvantage of the BAT model is the fact that it assumes all cash outflows are
Answer: B known with certainty.
A repurchase agreement (repo) is a short-term agreement where one party sells a security A. I and II only
(like a U.S. Treasury bill) with a promise to buy it back at a slightly higher price on a B. III and IV only
specified future date. This is exactly what Brown Trucking is doing. C. II and III only
D. I and III only
36. A repurchase agreement generally has a maximum life of: E. I and IV only
A. 1 day. Answer: E
B. a few days. The BAT model is used to determine the optimal target cash balance that minimizes the total
C. one month. cost of holding cash. A key limitation of the model is that it assumes all cash outflows are
D. one to three months. known with certainty, which may not reflect real business conditions.
E. three to six months.
Answer: B 40. Which of the following variables are included in the BAT model?
A repurchase agreement (repo) is a short-term borrowing instrument, mainly used to raise I. upper cash limit
funds overnight or for just a few days. Therefore, the typical maximum life of a repo is II. interest rate on marketable securities
usually a few days, rarely extending to weeks or months like other types of loans. III. opportunity cost of holding cash
IV. fixed cost of each securities trade
37. A money market preferred stock: A. II only
B. I and III only When the cash balance reaches the upper limit (U*), the firm invests the excess cash (U* - C)
C. II and IV only in marketable securities to bring the cash back down to the target level (C).
D. II, III, and IV only
E. I, III, and IV only 44. Which of the following statements is correct?
Answer: D A. A firm has a greater likelihood of needing an unexpected loan when its cash flows are
The BAT model includes the interest rate on marketable securities, which represents the relatively constant over time.
opportunity cost of holding cash, and the fixed cost of each securities trade, which is the B. The cost of borrowing affects the target cash balance of a firm.
transaction cost incurred when converting securities to cash. These variables help determine C. Management’s desire to maintain a low cash balance has no effect on the borrowing needs
the optimal cash balance by balancing opportunity costs and transaction costs. of a firm.
D. The target cash balance increases as the interest rate rises.
41. The BAT model is used to: E. The target cash balance decreases as the order costs increase.
A. maximize the benefits of leverage. Answer: B
B. determine the optimal cash position of a firm. Higher borrowing costs make a firm hold more cash to avoid expensive loans. Stable cash
C. eliminate all daily cash surpluses. flows reduce unexpected borrowing, while management’s low cash preference can increase it.
D. analyze the cash balance given fluctuating cash inflows and outflows. Rising interest rates usually lower the target cash balance, and higher order costs raise it.
E. maximize the opportunity costs of holding cash.
Answer: B 45. The Hobby Shop has a checking account with a ledger balance of $692. The firm has
The BAT model is designed to help firms find the optimal cash balance that minimizes the $1,063 in uncollected deposits and $930 in outstanding checks. What is the amount of
total cost of holding cash, balancing transaction costs and opportunity costs. It does not focus the disbursement float on this account?
on leverage, eliminating all cash surpluses, analyzing fluctuating cash flows, or maximizing A. $0
opportunity costs. B. $217
C. $930
42. The Miller-Orr model assumes that: D. $990
A. the cash balance is depleted at regular intervals. E. $1,063
B. all cash flows are known with certainty. Answer: C
C. the average change in the daily cash flows is positive. Disbursement float = $930
D. management will set both the lower and the upper desired levels of cash.
E. the cash balance fluctuates in a random manner. 46. On an average day, Plastics Enterprises writes 42 checks with an average
Answer: E amount of $587. These checks clear the bank in an average of 2 days. What is the
The Miller-Orr model assumes cash flows are random and unpredictable. It sets a lower limit average amount of the disbursement float?
and calculates upper and target limits. When cash hits these limits, adjustments are made to A. $1,174
return to the target balance. B. $5,805
C. $24,654
43. The Miller-Orr model: D. $49,308
A. recommends selling securities in an amount equal to (U* - C) when the cash balance E. $73,962
reaches L. Answer: D
B. requires that marketable securities be sold whenever the cash balance falls below the target Disbursement float = 42 × $587 × 2 = $49,308
level.
C. bases the optimal level of cash solely on the opportunity costs of holding cash. 47. On average, your firm receives 65 checks a day from customers. These checks, on
D. supports the argument that the target cash balance declines as order costs increase. average, are worth $39.90 each and clear the bank in 1.5 days. In addition, your firm
E. advocates investing an amount described as (U* - C) in marketable securities when the disburses 38 checks a day with an average amount of $89.50. These checks clear your
cash balance reaches U*. bank in 2 days. What is the average amount of the collection float?
Answer: E A. $2,473.80
B. $3,401.00
C. $3,890.25
D. $5,101.50
E. $6,802.00
Answer: C
Collection float = 65 × $39.90 × 1.5 = $3,890.25

48. When Chris balanced her business checkbook, she had an adjusted bank balance of
A. $1,120
$11,418. She had 2 outstanding deposits worth $879 each and 11 checks outstanding
B. $2,333
with a total value of $3,648. What is the amount of the collection float on this account?
C. $2,640
A. -$1,890
D. $2,900
B. $1,758
E. $3,416
C. $3,648
Answer: A
D. $5,406
Average daily float = [($1,500 × 2) + ($3,900 × 1) + ($6,100 × 3) + ($4,200 × 2)]/30 = $1,120
E. $6,012
Answer: B
52. Hoyes Lumber generally receives 3 checks a month. The check amounts and the
Collection float = $879 × 2 = $1,758
collection delay for each check are shown below. Given this information, what is the
amount of the average daily float? Assume each month has 30 days.
49. Your company has an available balance of $7,911. A deposit of $2,480 that was made
this morning is not yet included in the bank's balance. There are also 4 checks
outstanding with a value of $360 each. What is the net float?
A. net collection float of $1,040
B. net collection float of $2,480
C. net float of $6,731
D. net disbursement float of $1,300
E. net disbursement float of $2,480 A. $1,386.67
Answer: A B. $1,407.19
Net collection float = $2,480 - (4 × $360) = $1,040 C. $4,750.00
D. $6,833.33
50. A firm has $16,718 in outstanding checks that have not cleared the bank. The firm E. $6,933.33
also has $13,450 in deposits that have been recorded by the firm but not by the bank. Answer: A
The current available balance is $11,407. What is the status of the net float? Average daily float = [($6,100 × 3) + ($5,500 × 1) + ($8,900 × 2)]/30 = $1,386.67
A. net collection float of $8,138
B. net collection float of $2,043 53. The Blue Star generally receives only 3 checks a month. The check amounts and the
C. net collection float of $13,450 collection delay for each check are shown below. Given this information, what is the
D. net disbursement float of $3,268 amount of the average daily float? Assume every month has 30 days.
E. net disbursement float of $5,311
Answer:D
Net disbursement float = $16,718 - $13,450 = $3,268

51. Your firm generally receives 4 checks a month. The check amounts and the
collection delay for each check is shown below. Given this information what is the
amount of the average daily float? Assume a 30 day month. A. $971.43
B. $1,376.67
C. $3,351.33
D. $5,666.67 56. Atlas Builders deals strictly with five customers. The average amount each
E. $6,800.00 customer pays per month along with the collection delay associated with each payment
Answer: B is shown below. Given this information, what is the amount of the average daily
Average daily float = [($8,800 × 2) + ($2,300 × 3) + ($8,400 × 2]/30= $1,376.67 receipts? Assume every month has 30 days.

54. The Food Wholesaler generally receives 4 checks a month. The check amounts
and the collection delay for each check are shown below. Given this information, what
is the amount of the average daily float? Assume every month has 30
days.

A. $1,143.33
B. $2,546.67
C. $2,983.33
D. $6,166.67
E. $6,860.00
A. $3,963.89 Answer: A
B. $21,750.00 Average daily receipts = ($6,800 + $8,500 + $2,000 + $9,500 + $7,500)/30 = $1,143.33
C. $22,236.67
D. $28,133.33 57. National Exporters deals strictly with two customers. The average amount each
E. $35,675.00 customer pays per month along with the collection delay associated with each payment
Answer: C is shown below. Given this information, what is the amount of the average daily
Average daily float = [($67,200 × 3) + ($91,600 × 1) + ($54,200 × 2) + ($88,500 × 3)]/30 = receipts? Assume that every month has 30 days.
$22,236.67

55. Hot Tub Builders sells to three retail outlets. Each retailer pays once a month in
the amounts shown below. The collection delay associated with each payment is also
given below. What is the amount of the average daily receipts if you assume each month
has 30 days?
A. $2,653.33
B. $3,006.33
C. $4,533.33
D. $7,811.67
E. $8,600.00
Answer: C
A. $2,389.70 Average daily receipts = ($63,200 + $72,800)/30 = $4,533.33
B. $8,513.33
C. $14,608.13 58. Cross Country Trucking provides transportation services exclusively for four
D. $23,896.97 customers. The average amount each customer pays per month along with the collection
E. $81,900.0 delay associated with each payment is shown below. Given this information, what is the
Answer: B weighted average delay? Assume each month has 30 days.
Average daily receipts = ($42,500 + $149,800 + $63,100)/30 = $8,513.33
 delay?Assume each month has 30 days.

A. 2.11 days
B. 2.27 days
A. 1.98 days
C. 2.46 days
B. 2.04 days
D. 2.50 days
C. 2.09 days
E. 2.78 days
D. 2.16 days
Answer: C
E. 2.23 days
Total monthly collections = $64,000 + $88,200 + $96,500 + $47,900= $296,600
Answer: E
Weighted average delay = [($64,000/$296,600) × 2] + [($88,200/$296,600) × 3] +
Total monthly collections = $287,000 + $416,000 + $139,000 + $233,000 = $1,075,000
[($96,500/$296,600) × 2] + [($47,900/$296,600) × 3] = 2.46 days
Weighted average delay = [($287,000/$1,075,000) × 4] + [($416,000/$1,075,000) × 1] +
[($139,000/$1,075,000) × 1] + [($233,000/$1,075,000) × 3] = 2.23 days
59. High Brow Express deals strictly with two customers. The average amount each
customer pays per month along with the collection delay associated with each payment
61. On an average day, Goose Down Feathers receives $2,400 in checks from
is shown below. Given this information, what is the weighted average delay? Assume
customers. These checks clear the bank in an average of 2.2 days. The applicable daily
that every month has 30 days.
interest rate is 0.04 percent. What is the present value of the float? Assume each month
has 30 days.
A. $115.20
B. $618.40
C. $4,080.00
D. $5,280.00
E. $6,256.50
A. 1.79 days
Answer: D
B. 1.84 days
Present value of the float = $2,400 × 2.2 = $5,280
C. 2.00 days
D. 2.07 days
62. On an average day, Town Center Hardware receives $2,420 in checks from
E. 2.55 days
customers. These checks clear the bank in an average of 2.1 days. The applicable daily
Answer: E
interest rate is 0.025 percent. What is the maximum amount this store should pay to
Total monthly collections = $478,000 + $575,000 = $1,053,000
completely eliminate its collection float? Assume each month has 30 days.
Weighted average delay = [($478,000/$1,053,000) × 2] + [($575,000/$1,053,000) × 3] = 2.55
A. $1,152.38
days
B. $1,288.15
C. $2,109.16
60. The Metallurgical Specialty Co. deals strictly with four customers. The average
D. $4,637.33
amount each customer pays per month along with the collection delay associated with
E. $5,082.00
each payment is shown below. Given this information, what is the weighted average
Answer: E
Maximum cost = Present value of the float = $2,420 × 2.1 = $5,082.00
63. On an average day, your firm receives $11,800 in checks from customers. These B. 2.6 days
checks clear the bank in an average of 2.8 days. The applicable daily interest rate is C. 4.4 days
0.015 percent. What is the highest daily fee your firm should pay to completely D. 4.8 days
eliminate the collection float? Assume each month has 30 days. E. 6.2 days
Answer: A
A. $3.72 Processing time = 6.1 - 2.6 - 1.8 = 1.7 days
B. $4.96
C. $17.78 67. Currently, your firm requires 2 days to process the checks which customers mail
D. $34.18 in to pay for their credit purchases. The average mail time associated with these
E. $37.20 payments is 3.4 days and the check clearing time is 2.1 days. If your firm adopts a
Answer: B lockbox system, the mail time will be cut in half. In addition, if employees are
Maximum daily fee = $11,800 × 2.8 × 0.00015 = $4.96 reassigned, checks could be processed the same day they are received. How long will
your collection time be if both the lockbox system and the job reassignments are
64. On an average day, Wilson & Wilson receives $7,800 in checks from customers. implemented?
These checks clear the bank in an average of 1.7 days. The applicable daily interest rate A. 3.85 days
is 0.022 percent. What is the highest daily fee this firm should pay to completely B. 4.10 days
eliminate its collection float? Assume each month has 30 days. C. 4.80 days
A. $1.72 D. 4.90 days
B. $2.92 E. 5.55 days
C. $17.20 Answer: C
D. $24.30 Collection time = (3.4 × 0.5) + 1 + 2.1 = 4.80 days
E. $29.17
Answer: B 68. You are considering implementing a lockbox system for your firm. The system is
Maximum daily fee = $7,800 × 1.7 × 0.00022 = $2.92 expected to reduce the average collection time by 1.2 days. On an average day, your
firm receives 320 checks with an average value of $99 each. The daily interest rate on
65. Your average customer is located 4.3 mailing days away from your firm. You Treasury bills is 0.014 percent. What is the anticipated amount of the daily savings if
have determined that, on average, it is taking your staff 1.5 days to process payments this system is implemented?
received from customers. In addition, it takes an average of 2.8 days for your funds to A. $2.61
be available for use once you have made your bank deposit. What is your firm's B. $3.29
collection time? C. $4.45
A. 2.2 days D. $5.32
B. 3.7 days E. $5.78
C. 4.3 days Answer: D
D. 5.8 days Daily savings = 320 × $99 × 1.2 × 0.00014 = $5.32
E. 8.6 days
Answer: E 69. Roger's Distributors receives an average of 310 checks a day. The average
Collection time = 4.3 + 1.5 + 2.8 = 8.6 days amount per check is $629. The firm is considering a lockbox system which it anticipates
will reduce the average collection time by 1.5 days. The daily interest rate on Treasury
66. It takes your firm 4.5 days to prepare and mail out all the monthly statements to bills is 0.011 percent. What is the amount of the expected daily savings of the lockbox
your customers. On average, the mail time between your firm and your customers is 2.6 system?
days. Customer checks take an average of 1.8 days to clear the bank. You have A. $2.04
determined that your total average collection time is 6.1 days. How long, on average, B. $6.92
does it take your firm to process the payments from customers? C. $14.95
A. 1.7 days D. $22.42
E. $32.17 73. Rosewell International receives an average of 268 checks a day with an average
Answer: E amount per check of $780. The firm is considering a lockbox system which it anticipates
Daily savings = 310 × $629 × 1.5 × 0.00011 = $32.17 will reduce the average collection time by 1.4 days. The bank charges $0.21 a check for
this service. The daily interest rate on Treasury bills is 0.02 percent. What is the net
70. Hand Tools, Inc. receives an average of 611 checks a day. The average amount present value of this lockbox arrangement?
per check is $425. The firm is considering a lockbox system which it anticipates will A. -$61,640
reduce the average collection time by 1 day. The bank charges $0.275 a check for this B. -$11,256
service. The daily interest rate on Treasury bills is 0.013 percent. What is the average C. $11,256
daily cost of the lockbox system? D. $30,820
A. $31.16 E. $61,640
B. $54.19 Answer: C
C. $168.03 Net present value = [268 × $780 × 1.4] - [(268 × $0.21)/.0002] = $11,256
D. $180.11
E. $199.19 74. The Eliot Co. needs $185,000 a week to pay bills. The standard deviation of the
Answer: C weekly disbursements is $17,600. The firm has established a lower cash balance limit of
Daily cost = 611 × $0.275 = $168.03 $75,000. The applicable interest rate is 5.5 percent and the fixed cost of transferring
funds is $47. Based on the BAT model, what is the optimal initial cash balance?
71. You are considering implementing a lockbox system for your firm. The system is A. $90,668
expected to reduce the average collection time by 1.3 days. On an average day, your B. $97,515
firm receives 136 checks with an average value of $219 each. The daily interest rate on C. $104,141
Treasury bills is 0.021 percent. The bank charge per check is $0.26. What is the D. $128,224
anticipated daily cost of the lockbox system? E. $136,509
A. $3.48 Answer:D
B. $6.25
C. $12.60
D. $35.36
E. $36.17
Answer: D
75. Theo's Bar & Grill needs $153,000 a week to pay bills. The standard deviation of
Daily cost = 136 × $0.26 = $35.36
the weekly disbursements is $9,600. The firm has established a lower cash balance limit
of $40,000. The applicable interest rate is 3.5 percent and the fixed cost of transferring
72. You are considering implementing a lockbox system for your firm. The system is
funds is $40. Based on the BAT model, what is the optimal average cash balance?
expected to reduce the average collection time by 2.8 days. On an average day, your
A. $36,199
firm receives 2,419 checks with an average value of $1,287 each. The daily interest rate
B. $49,568
on Treasury bills is 0.016 percent. The bank charge per check is $0.30. What is the net
C. $67,426
present value of this lockbox arrangement?
D. $99,136
A. -$4,535,625
E. $112,400
B. -$2,611,575
Answer: C
C. $187,419
D. $4,181,483
E. $13,252,733
Answer: D
Net present value = [2,419 × $1,287 × 2.8] - [(2,419 × $0.30)/.00016] = $4,181,483
76. Parkway Express needs $318,000 a week to pay bills. The standard deviation of
the weekly disbursements is $31,000. The firm has established a lower cash balance
limit of $60,000. The applicable interest rate is 4.5 percent and the fixed cost of
transferring funds is $65. Based on the BAT model, what is the opportunity cost of
holding cash?
A. $3,873
B. $4,918 79. Rosie O'Grady's spends $115,000 a week to pay bills and maintains a lower cash
C. $5,207 balance limit of $95,000. The standard deviation of the disbursements is $14,600. The
D. $109,283 applicable interest rate is 4.8 percent and the fixed cost of transferring funds is $50.
E. $110,440 What is this firm's total cost of holding cash based on the BAT model?
Answer: B A. $1,431
B. $2,862
C. $3,034
D. $4,912
E. $5,358
Answer: E
77. Penco Supply spends $325,000 a week to pay bills and maintains a lower cash
balance limit of $75,000. The standard deviation of its disbursements is $18,900. The
applicable interest rate is 5 percent and the fixed cost of transferring funds is $65. What
is the firm's optimal initial cash balance based on the BAT model?
A. $150,600
B. $158,929
C. $170,096
D. $221,506
E. $209,619
Trading cost = [52/($111,616.90/$115,000)] × $50 = $2,678.81
Answer: E
Total cost = $2,678.81 + $2,678.81 = $5,358

80. Your firm spends $346,000 a week to pay bills and maintains a lower cash
balance limit of $150,000. The standard deviation of your disbursements is $28,700. The
applicable interest rate is 5 percent and the fixed cost of transferring funds is $60. What
78. Your firm spends $54,000 a week to pay bills and maintains a lower cash balance is your optimal average cash balance based on the BAT model?
limit of $45,000. The standard deviation of your disbursements is $12,100. The A. $103,900
applicable interest rate is 4.5 percent and the fixed cost of transferring funds is $55. B. $146,500
What is your opportunity cost of holding cash based on the BAT model? C. $182,200
A. $1,318 D. $207,800
B. $1,864 E. $249,900
C. $2,204 Answer: A
D. $2,311
Answer: B
81. The Cow Pie Spreader Co. spends $214,000 a week to pay bills and maintains a applicable weekly interest rate is 0.04 percent and the fixed cost of transferring funds is
lower cash balance limit of $150,000. The standard deviation of the disbursements is $50. What is your optimal average cash balance based on the Miller-Orr model?
$16,000. The applicable weekly interest rate is 0.025 percent and the fixed cost of A. $79,116
transferring funds is $49. What is the firm's cash balance target based on the B. $83,208
Miller-Orr model? C. $110,315
D. $237,348
A. $183,511 E. $249,624
B. $208,511 Answer: B
C. $251,006 Cash balance target = $60,000 + [0.75 × $50 × ($7,5002/.0004)]1/3 =$77,405.96
D. $254,545 Average cash balance = [(4 × $77,405.96) - $60,000]/3 = $83,208
E. $258,878
Answer: A 85. Your firm spends $48,000 a week to pay bills and maintains a lower cash balance
Cash balance target = $150,000 + [0.75 × $49 × ($16,0002/.00025)]1/3 = $183,511 limit of $50,000. The standard deviation of the disbursements is $8,100. The applicable
weekly interest rate is 0.054 percent and the fixed cost of transferring funds is $65.
82. The Blue Moon Hotel and Spa spends $359,000 a week to pay bills and maintains What is your cash balance target based on the Miller-Orr model?
a lower cash balance limit of $250,000. The standard deviation of the disbursements is A. $48,156
$46,800. The applicable weekly interest rate is 0.045 percent and the fixed cost of B. $49,990
transferring funds is $60. What is the hotel's optimal upper cash limit based on the C. $54,884
Miller-Orr model? D. $68,093
A. $430,836 E. $75,726
B. $447,905 Answer: D
C. $528,700 Cash balance target = $50,000 + [.75 × $65 × ($8,1002/.00054)]1/3 =$68,093
D. $739,459
E. $861,672 86. Travel Inn Express spends $109,000 a week to pay bills and maintains a lower
Answer: A cash balance limit of $125,000. The standard deviation of the disbursements is $14,400.
Cash balance target = $250,000 + [0.75 × $60 × ($46,8002/.00045)]1/3 = $310,278.70 The applicable weekly interest rate is 0.039 percent and the fixed cost of transferring
Upper cash limit = 3 × $310,278.70 - (2 × $250,000) = $430,836 funds is $58. What is the inn's cash balance target based on the Miller-Orr model?
A. $28,492
83. Donaldson, Inc. spends $94,000 a week to pay bills and maintains a lower cash B. $31,359
balance limit of $25,000. The standard deviation of the disbursements is $13,000. The C. $153,492
applicable weekly interest rate is 0.045 percent and the fixed cost of transferring funds D. $156,359
is $52. What is your optimal average cash balance based on the Miller-Orr model? E. $225,417
A. $48,334 Answer: C
B. $57,623 Cash balance target = $125,000 + [0.75 × $58 × ($14,4002/.00039)]1/3 = $153,492
C. $82,623
D. $236,334 87. Each business day, on average, a company writes checks totaling $26,000 to pay
E. $247,334 its suppliers. The usual clearing time for the checks is 5 days. Meanwhile, the company
Answer: B is receiving payments from its customers each day, in the form of checks, totaling
Cash balance target = $25,000 + [0.75 × $52 × ($13,0002/.00045)]1/3= $49,466.94 $40,000. The cash from the payments is available to the firm after 2 days. What is the
Average cash balance = [(4 × $49,466.94) - $50,000]/3 = $57,623 amount of the firm's average net float?
A. $30,00
84. The Burger Stop spends $52,000 a week to pay bills and maintains a lower cash B. $50,000
balance limit of $60,000. The standard deviation of the disbursements is $7,500. The C. $80,000
D. $110,000
E. $130,000 is 6 percent per year. How much should the firm be willing to pay to reduce the
Answer: B weighted average float by 1.4 days?
Net float = 5($26,000) - 2($40,000) = $50,000 A. $4,165
B. $13,883
88. Purple Feet Wine, Inc. receives an average of $6,000 in checks per day. The delay C. $41,650
in clearing is typically 4 days. The current interest rate is 0.025 percent per day. Assume D. $138,883
30 days per month. What is the highest daily fee the company should be willing to pay E. $416,500
to eliminate its float entirely? Answer: B
A. $1.50 Maximum payment = Average daily float = 1.4{[(0.55 × 5,000 × $55) + (0.45 × 5,000 ×
B. $3.00 $65)]/30} = $13,883
C. $3.75
D. $6.00 92. Paper Submarine Manufacturing is investigating a lockbox system to reduce its
E. $6.50 collection time. It has determined the following:
Answer: D
Maximum daily fee = ($6,000 × 4) × 0.00025 = $6.00

89. Your neighbor goes to the post office once a month and picks up two checks, one
for $18,000 and one for $4,000. The larger check takes 4 days to clear after it is
deposited; the smaller one takes 6 days. Assume 30 days per month. What is the
weighted average delay?
The total collection time will be reduced by 2 days if the lockbox system is adopted.
A. 4.21 days
What is the NPV of adopting the lockbox system?
B. 4.36 days
A. $600,000
C. 4.78 days
B. $675,000
D. 5.00 days
C. $695,000
E. 6.00 days
D. $745,000
Answer: B
E. $795,000
Total monthly receipts = $18,000 + $4,000 = $22,000
Answer: E
Weighted average delay = [($18,000/$22,000) × 4] + [($4,000/$22,000) × 6] = 4.36 days
NPV = (2 × 300 × $3,200) - [($0.75 × 300)/0.0002] = $795,000

90. Your firm has an average receipt size of $60. A bank has approached you
93. Home Roasted Turkeys disburses checks every 4 weeks that average $70,000 and
concerning a lockbox service that will decrease your total collection time by 1 day. You
take 5 days to clear. How much interest can the company earn if it delays transfer of
typically receive 25,000 checks per day. The daily interest rate is 0.016 percent. What is
funds from an interest-bearing account that pays 0.02 percent per day for these 5 days?
the NPV of the lockbox project if the bank charges a fee of $210 per day?
Ignore the effects of compound interest. Assume 52 weeks in a year.
A. $187,500
A. $36
B. $367,500
B. $91
C. $903,350
C. $182
D. $1,412,500
D. $364
E. $1,680,000
E. $910
Answer: A
Answer: E
NPV of service = $60(25,000) - ($210/0.00016) = $187,500
Interest = $70,000 (5) (52/4) (0.0002) = $910

91. A mail-order firm processes 5,000 checks per month. Of these, 55 percent are for
94. Never Again Enterprises has an agreement with The Worth Bank whereby the
$55 and 45 percent are for $65. The $55 checks are delayed 2 days on average; the $65
bank handles $3.12 million in collections a day and requires a $1,000,000 compensating
checks are delayed 5 days on average. Assume each month has 30 days. The interest rate
balance. Never Again is contemplating canceling the agreement and dividing its eastern many customers each day, on average, are needed to make the system profitable for
region so that two other banks will handle its business. Banks A and B will each handle Cow Chips, Inc.?
$1.56 million of collections a day, and each requires a compensating balance of A. 56
$1,550,000. Never Again's financial management expects that collections will be B. 68
accelerated by one day if the eastern region is divided. The T-bill rate is 4 percent C. 74
annually. What is the amount of the annual net savings if this plan is adopted? D. 83
A. $10,200 E. 89
B. $40,800 Answer: B
C. $76,500 NPV = 0 = ($8,200 × 1 × N) - ($0.12 × N)/0.000134 - $25,000/0.05N = 68 customers per day
D. $102,000
E. $125,000
Answer: B
NPV = $3,120,000 - [2($1,550,000) - $1,000,000] = $1,020,000
Net savings = 0.04($1,020,000) = $40,800

95. Mountaintop Inns, a Kentucky company, has determined that a majority of its
customers are located in the Pennsylvania area. It therefore is considering using a
lockbox system offered by a bank located in Pittsburgh, Pennsylvania. The bank has
estimated that use of the system will reduce collection time by one day. In addition to
the variable charge shown below, there is also a fixed charge of $4,320 per year for the
lockbox system. Assume a year has 365 days. What is the NPV of the lockbox system
given the following information?

A. -$156,727
B. -$131,301
C. -$74,208
D. $11,507
E. $26,433
Answer: B
NPV = (1 × 750 × $1,800) - [($0.30 × 750)/(1.061/365 - 1)] - [$4,320/0.06] = -$131,301

96. Cow Chips, Inc., a large fertilizer distributor based in California, is planning to
use a lockbox system to speed up collections from its customers located on the East
Coast. A Philadelphia-area bank will provide this service for an annual fee of $25,000
plus 12 cents per transaction. The estimated reduction in collection and processing time
is one day. The average customer payment in this region is $8,200. Treasury bills are
currently yielding 5 percent per year. Assume a year has 365 days. Approximately how
 Chap 5.2
Chapter 05.2 A collection policy is a set of procedures a company uses to recover payments from
Credit and Inventory Management customers who buy on credit but do not pay on time. In the case of Town Hardware, the store
sends a reminder after 30 days, contacts the customer by phone after 45 days, and stops
Multiple Choice Questions offering credit if payment is still not made.

1. Blackwell Brothers sells men’s suits. The store offers a 1 percent discount if payment 4. Phil’s Print Shop grants its customers the right to pay for their print jobs within 30
is received within 10 days. Otherwise, payment is due within 30 days. This credit days of the date of service. This 30-day period is referred to as the:
offering is referred to as the: A. payables period.
A. terms of sale. B. cash cycle.
B. credit analysis. C. transactions period.
C. collection policy. D. credit period.
D. payables policy. E. disbursement period.
E. collection float. Answer: D
Answer: A The credit period is the length of time a customer is allowed to pay after receiving goods or
Terms of sale refer to the conditions a seller sets for payment, including timing and discounts. services. In this case, Phil’s Print Shop allows 30 days for payment, which defines the credit
Blackwell Brothers offers a 1 percent discount if payment is made within 10 days, and full period.
payment is due in 30 days. This arrangement defines the payment conditions, so it is
considered the terms of sale. 5. Scott purchased a shovel, a rake, and a wheelbarrow from The Local Hardware Store
yesterday. Today, the store issued a bill for these items and mailed it to Scott. What is
2. Jillian was recently hired by a major retail store. Her job is to determine the the name given to this bill?
probability that individual customers will fail to pay for their charge sales. Jillian’s job A. ledger statement
best relates to which one of the following? B. warranty
A. terms of sale C. indenture
B. credit analysis D. receipt
C. collection policy E. invoice
D. payables policy Answer: E
E. customer service An invoice is a document sent by a seller to a buyer that lists the goods or services provided
Answer: B and requests payment. The Local Hardware Store mailed a bill to Scott after his purchase,
Credit analysis involves evaluating the likelihood that a customer will repay their credit which is called an invoice.
obligations. Jillian’s responsibility is to assess the probability that customers will fail to pay
for their charge sales, which means she is analyzing the credit risk of each customer. 6. Geoff Industries offers its credit customers a 2 percent discount if they pay within 10
days. This discount is referred to as a:
3. Town Hardware sells goods on credit with payment due 30 days after purchase. If A. cash discount.
payment is not received by the 30th day, the store mails a friendly reminder to the B. purchase discount.
customer. If payment is not received by the 45th day, the store calls the customer and C. collection discount.
requests payment and also stops offering credit to that customer. These procedures are D. market discount.
referred to as the store’s: E. receivables discount.
A. customer service policy. Answer: A
B. credit policy. A cash discount is an incentive offered to buyers to encourage early payment. Geoff
C. collection policy. Industries offers a 2 percent discount if customers pay within 10 days, which is a typical
D. payables policy. example of a cash discount.
E. disbursements policy.
Answer: C
7. Any written proof that a customer owes you money for goods or services provided is Answer: E
referred to as a(n): These five factors, known as the five Cs of credit, are commonly used to evaluate a
A. account document. borrower’s creditworthiness:
B. sales draft. - Character (trustworthiness)
C. credit instrument. - Capacity (ability to repay)
D. commercial paper. - Capital (financial strength)
E. letter of debt. - Collateral (assets to secure the loan)
Answer: C - Conditions (economic and industry factors)
A credit instrument is any written document that serves as proof a customer owes money for
goods or services provided. It legally represents the debt owed. 11. Roger’s Home Appliances offers credit to customers it deems worthy of this
privilege. To determine if a customer is worthy, the firm computes a numerical value
8. You are viewing a graph which compares costs with the amount of credit extended. which is used to estimate the probability that the customer will default if credit is
Both the carrying costs and the opportunity costs of credit are depicted. What is the granted to them. The process of computing this numerical value is referred to as:
function called that represents the summation of these carrying and opportunity costs? A. credit scoring.
A. opportunity cost curve B. credit capacity.
B. credit extension curve C. receipts assessment.
C. credit cost curve D. conditions for credit.
D. terms of sale graph E. consumer analysis.
E. optimal sales graph Answer: A
Answer: C Credit scoring is the process of calculating a numerical value based on customer data to
The credit cost curve shows the total cost of extending credit, combining both carrying costs estimate the likelihood of default. Roger’s Home Appliances uses this method to decide if a
(costs of holding accounts receivable) and opportunity costs (potential income lost by customer is worthy of credit.
extending credit). It represents the sum of these costs as credit increases.
12. You have recently been hired as an accounting intern for Jefferson Mills. The job
9. Assume that RSF is a wholly-owned subsidiary of the Rolled Steel Company. RSF that you have been assigned for today is to compile a spreadsheet that has six columns.
provides credit financing solely for large ticket items purchased from the Rolled Steel The column headings are: Invoice #; Customer name; < 30 days; 31-60 days; 61-90
Company. Which one of the following terms describes RSF? days; > 90 days. You are to list every unpaid invoice by customer name with the amount
A. credit department owed entered into the appropriate column for the number of days between the sale date
B. parent company and today. Once you have completed that, you are to sort the report by customer name
C. captive finance company and then total the amounts listed in each column. What is this report called?
D. credit union A. credit report
E. service unit B. aging schedule
Answer: C C. risk assessment report
A captive finance company is a subsidiary created by a parent company to provide financing D. turnover delineation
exclusively for the parent company’s customers, often for large purchases. Since RSF E. receivables consolidation report
finances only items bought from Rolled Steel Company, it fits this definition. Answer: B
An aging schedule is a report that categorizes unpaid invoices based on the length of time
10. The basic factors to be evaluated in the credit evaluation process, the five Cs of they have been outstanding, such as less than 30 days, 31-60 days, and so on. The description
credit, are: matches this type of report perfectly.
A. conditions, control, cessation, capital, and capacity.
B. conditions, character, capital, control, and capacity. 13. Bill is in charge of the inventory for Home Builder’s Supply. As an inventory item
C. capital, collateral, control, character, and capacity. gets low, he is to restock the item by a quantity that minimizes the total inventory costs
D. character, capacity, control, cessation, and collateral. for that item. What is this restocking quantity called?
E. character, capacity, capital, collateral, and conditions. A. short order quantity
B. refill unit quantity Answer: E
C. economic order quantity The terms of sale specify the conditions under which goods are sold on credit. They include
D. minimum stock level the type of credit instrument, which is the written document formalizing the credit agreement.
E. re-order limit They also cover the cash discount, which incentivizes early payment, the credit period, or the
Answer: C total time allowed to pay, and the discount period, which is the timeframe within which the
Economic order quantity is the optimal order size that minimizes the total costs of inventory, cash discount applies.
including ordering and holding costs. Bill’s task to restock at this quantity matches the
economic order quantity concept. 17. What is the primary purpose of credit analysis?
A. determine the optimal credit period
14. Allison has developed a set of procedures for determining the amount of each raw B. establish the effectiveness of granting a cash discount
material that she needs to have in inventory if she is to keep her firm’s assembly lines C. determine the optimal discount period, if any
operating efficiently. These procedures are commonly referred to by which one of the D. access the frequency and amount of sales by customer
following terms? E. evaluate whether or not a customer will pay
A. first-in, first-out method Answer: E
B. the Baumol model The primary purpose of credit analysis is to assess the creditworthiness of a customer by
C. net working capital planning determining the likelihood that the customer will repay the amount owed. This helps
D. economic order procedures businesses decide whether to grant credit and under what terms.
E. materials requirements planning
Answer: E 18. The period of time that extends from the day a credit sale is made until the day the
Materials requirements planning is a system used to calculate the amount of raw materials bank credits a firm’s account with the payment for that sale is known as the
needed to keep production running smoothly. Allison’s procedures for determining raw period.
material inventory fit this definition. A. float
B. cash collection
15. Which one of the following is a system for managing demand-dependent inventories C. sales
that minimizes the inventory levels of a firm? D. accounts receivable
A. just-in-time inventory E. discount
B. turnover planning Answer: D
C. net working capital planning The accounts receivable period refers to the total time between the credit sale and the receipt
D. inventory scoring of payment credited to the firm’s account. It covers the entire duration the payment is
E. inventory ranking outstanding before being collected and processed by the bank.
Answer: A
Just-in-time inventory is a system designed to minimize inventory levels by receiving goods 19. Which one of the following will increase a firm’s investment in accounts receivables?
only as they are needed in the production process, reducing holding costs and waste. A. a decrease in the number of days for which credit is granted
B. a decrease in credit sales
16. The terms of sale generally include which of the following? C. an increase in cash sales
I. type of credit instrument D. a decrease in the average collection period
II. cash discount E. an increase in average daily credit sales
III. credit period Answer: E
IV. discount period When average daily credit sales increase, the total amount of accounts receivable typically
A. I and III only rises because more sales are made on credit, which increases the outstanding balances owed
B. II and IV only to the firm.
C. III and IV only
D. II, III, and IV only 20. A firm’s total investment in receivables depends primarily on the firm’s:
E. I, II, III, and IV A. total sales and cash discount period.
B. cash to credit sales ratio. B. store B
C. bad debt ratio. C. store C
D. average collection period and amount of credit sales. D. store D
E. amount of credit sales and cash discount percentage. E. store E
Answer: D Answer: E
A firm’s total investment in receivables mainly depends on how much credit sales it makes
and how long on average it takes to collect those receivables. These two factors determine the 24. You are doing some comparison shopping. Five stores offer the product you want at
total outstanding receivables at any time. basically the same price. Which one of the following stores offers the best credit terms if
you plan to forego the discount?
21. Which one of the following time periods is included in the accounts receivable period
but not in the cash collection period?
A. the period of time between the receipt of a check and the availability of those funds
B. time it takes a firm to process incoming receipts
C. period of time a check is in the mail
D. the amount of time that it takes a bank to credit a firm’s account for a deposit made
E. period of time it takes an invoice to reach a customer by mail
Answer: E A. store A
The accounts receivable period starts from the date of the sale, including the time it takes for B. store B
the invoice to reach the customer. The cash collection period, however, begins when the C. store C
customer receives the invoice and starts the payment process. D. store D
E. store E
22. Which one of the following statements is correct if you purchase an item with credit Answer: D
terms of 1/5, net 15?
A. If you pay within 1 day, you will receive a 5 percent discount. 25. Which one of the following statements is correct?
B. If you pay within 5 days, you will receive a 1 percent discount. A. The credit period begins when the discount period ends.
C. If you do not pay within 15 days, you will be charged interest at a 1.5 percent monthly B. The discount period is the length of time granted to a customer to pay for a purchase.
rate. C. The credit period begins on the invoice date.
D. If you pay within 15 days, you will receive a 1/5th percent discount. D. With terms of 2/10, net 30, the net credit period is 20 days.
E. You must pay the discounted amount within 15 days. E. With EOM dating, all sales are assumed to have occurred on the 15th of each month.
Answer: B Answer: C
The credit terms 1/5, net 15 mean that the buyer gets a 1 percent discount if payment is made The credit period starts from the date the invoice is issued. It includes the discount period and
within 5 days. Otherwise, the full amount is due within 15 days. the remaining time after the discount period to pay the full amount. This means both the
discount period and the full payment period count from the invoice date, not starting after the
23. You are doing some comparison shopping. Five stores offer the product you want at discount period ends.
basically the same price. Which one of the following stores offers the best credit terms if
you plan on taking the discount? 26. Which two of the following are the key considerations for a seller who is establishing
the length of the credit period being offered to a customer?
I. seller’s operating cycle
II. customer’s operating cycle
III. seller’s inventory period
IV. customer’s inventory period
A. I and II
B. II and III
A. store A C. III and IV
D. II and IV B. take the 5 percent discount and pay immediately.
E. I and IV C. take the discount and pay on the day following the day of sale.
Answer: D D. either take the discount or pay on the 15th day.
When setting the length of the credit period, the seller must consider the customer’s operating E. both take the discount and pay on the 15th day.
cycle (II) and the customer’s inventory period (IV). These factors help the seller understand Answer: D
the customer’s ability to pay and their working capital needs, allowing the seller to offer Under the terms 1/5, net 15, customers can either pay within 5 days to get a 1% discount or
appropriate credit terms. pay the full amount by the 15th day without any discount.

27. Which one of the following factors tends to favor longer credit periods? 31. A 2/10, net 30 credit policy:
A. high consumer demand A. is an expensive form of short-term credit if a buyer foregoes the discount.
B. lower priced merchandise B. provides cheap financing to the buyer for 30 days.
C. increased credit risk C. is an inexpensive means of reducing the seller’s collection period if every customer takes
D. merchandise with low collateral value the discount.
E. increased competition D. tends to have little effect on the seller’s collection period.
Answer: E E. tends to increase a firm’s investment in receivables as compared to a straight net 30 policy.
Increased competition often leads sellers to offer longer credit periods to attract more Answer: A
customers. Longer credit terms make the purchase more appealing compared to competitors. If a buyer foregoes the discount, the credit becomes an expensive form of short-term credit
This strategy helps sellers maintain or grow their market share. because the buyer misses the opportunity to save money by paying early. This means the
buyer ends up paying more by waiting until the full payment is due.
28. Which one of the following statements is correct in regards to credit periods?
A. Perishable items tend to have longer credit periods. 32. The Green Hornet offers a trade discount with terms of 2/5, EOM. Assume you
B. Items with low markups tend to have longer credit periods. purchase an item on credit from The Green Hornet on Monday, November 3. What is
C. Smaller accounts tend to have longer credit periods. the invoice date for this purchase?
D. Different customers may be offered different credit periods by the same firm. A. November 3
E. Newer products tend to have shorter credit periods. B. November 5
Answer: D C. November 7
Different customers may be offered different credit periods by the same firm. This is because D. November 8
credit terms are often customized based on the customer’s creditworthiness, relationship with E. November 30
the seller, and payment history. Firms adjust credit periods to manage risk and encourage Answer: E
sales. With terms 2/5, EOM, buyers get a 2% discount if payment is made within 5 days after the
end of the month in which the invoice is dated. When a purchase is made on Monday,
29. A cash discount of 2/5, net 30: November 3, the invoice date is moved to November 30 under the EOM rule.
A. grants customers 30 days to pay after the discount period expires.
B. offers customers a maximum of 30 days credit. 33. Which one of the following credit instruments is commonly used in international
C. grants free credit for a period of 30 days. commerce?
D. charges a higher price to a cash customer than to a customer who pays in 2 days. A. open account
E. grants customers 2 days to pay if they want the 5 percent discount. B. sight draft
Answer: B C. time draft
The term 2/5, net 30 means a 2% discount is available if the customer pays within 5 days. If D. banker’s acceptance
the discount is not taken, the full invoice amount is due within 30 days. Therefore, the E. promissory note
maximum credit period offered is 30 days. Answer: D
A banker’s acceptance is a credit instrument commonly used in international trade. It is a
30. Under credit terms of 1/5, net 15, customers should: time draft guaranteed by a bank, which provides assurance of payment to the exporter. This
A. always pay on the 15th day. makes transactions safer and more reliable across different countries.
 immediate access to the full amount of your monthly sales, representing a negative cash flow
34. A conditional sales contract: equal to - (total monthly sales).
A. passes title to the goods sold to the buyer at the time the contract is signed.
B. normally calls for one lump sum payment on the contract payment date. 37. The optimal amount of credit equates the incremental costs of carrying the increase
C. generally has a built-in interest cost. in accounts receivable to the incremental:
D. is payable immediately upon receipt. A. decrease in the cash cycle.
E. is a formal bid for a project. B. benefit from decreasing the inventory level.
Answer: C C. cash flows from increased sales.
A conditional sales contract allows the buyer to take possession of goods but the title passes D. increase in bad debts.
only after full payment, and it usually includes interest as part of the payment terms. E. gain in net profits.
Answer: C
35. Which of the following statements correctly reflect the effects of granting credit to The optimal credit amount is reached when the incremental costs of carrying more accounts
customers? receivable, like financing costs and bad debts, equal the incremental cash flows that come
I. Total revenues may increase if both the quantity sold and the price per unit increase when from the increase in sales because of offering credit.
credit is granted.
II. A firm’s cash cycle generally increases if credit is granted, all else equal. 38. When credit policy is at the optimal point, the:
III. Both the cost of default and the cost of discounts must be considered before granting A. total costs of granting credit will be maximized.
credit. B. carrying costs of credit will be equal to zero.
IV. A firm may have to increase its long-term borrowing if it decides to grant credit to its C. opportunity cost of credit will be equal to zero.
customers. D. carrying costs will equal the opportunity costs.
A. I, II, and III only E. total costs will equal the opportunity costs.
B. II, III, and IV only Answer: D
C. I, III, and IV only At the optimal credit policy, the cost of carrying credit (such as financing and bad debts)
D. I, II, and IV only balances exactly with the opportunity cost of not extending more credit (such as lost sales),
E. I, II, III, and IV meaning these two costs are equal.
Answer: E
Granting credit can increase total revenue by boosting sales volume and price. It also 39. If you extend credit for a one-time sale to a new customer you risk an amount equal
lengthens the firm’s cash cycle because payments are delayed. The firm must consider costs to:
from customer defaults and discounts before offering credit. Additionally, more credit sales A. the sales price of the item sold.
may require increased long-term borrowing to finance higher receivables. B. the variable cost of the item sold.
C. the fixed cost of the item sold.
36. You are considering switching from an all cash credit policy to a net 30 credit policy. D. the profit margin on the item sold.
You do not expect the switch to affect either your sales quantity or your sales price. E. zero.
Ignoring interest and assuming that every month has 30 days, your net present value of Answer: B
the switch will be equal to: When you extend credit for a one-time sale, the risk is losing the variable cost of the item
A. zero. because fixed costs are already incurred regardless of the sale. The lost profit margin is not a
B. your selling price per unit. cash outflow, but the variable cost represents the actual out-of-pocket loss if the customer
C. your selling price per unit multiplied by -1. does not pay.
D. your selling price per unit multiplied by -30.
E. your total monthly sales multiplied by -1. 40. Which one of the following statements is correct?
Answer: E A. If the majority of a firm’s new customers become repeat customers then there is a strong
Switching from an all-cash policy to net 30 delays your cash inflows by 30 days, which argument against extending credit even if the default rate is low.
means your cash is tied up in accounts receivable equal to your total monthly sales. Even if B. A customer’s past payment history reveals little information in relation to his or her future
sales volume and price remain unchanged and interest is ignored, you effectively lose tendency to pay.
C. A suggested policy for offering credit to new customers is to limit the amount of their In the five Cs of credit, capital refers to a firm’s financial reserves or net worth, indicating the
initial credit purchase. borrower’s investment and financial strength.
D. The risk of issuing credit is the same for a new customer as it is for an existing customer.
E. The recommended credit policy for new customers is to extend the maximum amount of 44. Which one of the five Cs of credit refers to the general economic situation in the
credit you will ever be willing to offer as an enticement to get their business. customer’s line of business?
Answer: C A. capacity
Limiting the initial credit amount for new customers helps reduce risk while building trust B. character
and payment history before extending larger credit lines. C. conditions
D. capital
41. Which of the following are frequently used as sources of information when trying to E. collateral
ascertain the creditworthiness of a customer? Answer: C
I. payment history with similar firms In the five Cs of credit, conditions refer to the overall economic environment and specific
II. credit reports industry factors that can affect the customer’s ability to repay.
III. financial statements
IV. information provided by a bank 45. Which one of the following statements is correct?
A. I and III only A. An aging schedule helps identify those customers who are the most delinquent.
B. II and IV only B. The percentage of total receivables that falls within a certain time period on an aging
C. I and II only schedule will remain constant over time even if the firm has seasonal sales.
D. I, II, and III only C. Normally firms call their delinquent customers prior to sending them a past due letter.
E. I, II, III, and IV D. A constant average collection period over a period of time is cause for concern.
Answer: E E. It is common practice when a customer files for bankruptcy to sell that customer’s
All these sources including payment history with similar firms, credit reports, financial receivable at face value.
statements, and information provided by a bank are commonly used to assess a customer’s Answer: A
creditworthiness. Using multiple sources helps form a more complete evaluation of the An aging schedule categorizes accounts receivable based on how long invoices have been
customer’s ability and willingness to pay. outstanding, helping firms spot customers with overdue payments and prioritize collection
efforts.
42. When evaluating the creditworthiness of a customer, the term character refers to
the: 46. Which one of the following inventory items is probably the least liquid?
A. nature of the cash flows of the customer's business. A. plywood held in inventory by a home builder
B. customer’s financial resources. B. a wheel barrow held in inventory by a garden center
C. types of assets the customer wants to pledge as collateral. C. a partially assembled interior for a new vehicle
D. customer’s willingness to pay bills in a timely fashion. D. a set of tires owned by an automobile manufacturer
E. nature of the customer's line of work. E. a toy owned by a retail toy store
Answer: D Answer: C
In credit evaluation, character refers to the customer’s reputation and reliability, specifically A partially assembled vehicle interior is less liquid because it is more specialized, harder to
their willingness and track record of paying debts on time. sell quickly, and cannot be easily converted to cash compared to finished goods or common
inventory items like plywood, tires, or toys.
43. Which one of the five Cs of credit refers to a firm’s financial reserves?
A. character 47. Which one of the following inventory items is probably the most liquid?
B. capacity A. a custom made set of kitchen cabinets
C. collateral B. metal cabinets for dishwashers
D. conditions C. wheat stored in a grain silo
E. capital D. a customized drilling press
Answer: E E. a partially built modular home
Answer: C E. carrying costs equal the restocking costs.
Wheat is a standard commodity with a broad market, making it easy to sell quickly and Answer: E
convert into cash. This makes it the most liquid compared to specialized or customized At the economic order quantity, the cost of holding (carrying) inventory is exactly balanced
inventory items. with the cost of placing orders (restocking), minimizing the total inventory cost.

48. Which one of the following inventory-related costs is considered a shortage cost? 52. The EOQ model is designed to minimize:
A. storage costs A. production costs.
B. insurance cost B. inventory obsolescence.
C. cost of safety reserves C. the carrying costs of inventory.
D. obsolescence cost D. the costs of replenishing inventory.
E. opportunity cost of capital used for inventory purchases E. the total costs of holding inventory.
Answer: C Answer: E
Safety reserves (or safety stock) are held to prevent stockouts, so the cost associated with The EOQ model aims to minimize the total inventory costs, which include both carrying
maintaining these reserves is related to avoiding shortages, thus considered a shortage cost. (holding) costs and ordering (replenishing) costs.

49. The ABC approach to inventory management is based on the concept that: 53. Which one of the following items is most likely a derived-demand inventory item?
A. inventory should arrive just in time to be used. A. cereal ready to be bagged and shipped to stores
B. the inventory period should be constant for all inventory items. B. tires held in inventory by an auto maker
C. basic inventory items that are essential to production and also inexpensive should be C. shoes on display in a retail store
ordered in small quantities only. D. toys ready to be shipped to toy stores
D. a small percentage of the inventory items probably represents a large percentage of the E. wheat harvested by a farmer
inventory cost. Answer: B
E. one-third of a year’s inventory need should be on hand, another third should be on order, Derived demand means the demand for an item depends on the demand for another related
and the last third should not be ordered yet. product. Tires are demanded because cars are being made, so their demand is derived from
Answer: D the demand for automobiles.
The ABC approach classifies inventory into categories based on importance, where a small
number of items (A items) typically account for a large portion of the total inventory cost, 54. Inventory needs under a derived-demand inventory system are:
allowing managers to focus control efforts on these critical items. A. primarily dependent upon the competitive demands placed on a firm’s suppliers.
B. based on the anticipated demand for the finished product.
50. The EOQ model is designed to determine how much: C. based on minimizing the cost of restocking inventory.
A. total inventory a firm needs in any one year. D. held constant over time.
B. total inventory costs will be for any one given year. E. determined by a kanban system.
C. inventory should be purchased at a time. Answer: B
D. inventory will be sold per day. In a derived-demand inventory system, inventory needs depend on the expected demand for
E. a firm loses in sales per day when an inventory item is depleted. the final product because the demand for components or raw materials is derived from that
Answer: C finished product’s demand.
The economic order quantity (EOQ) model helps determine the optimal order size that
minimizes the total cost of inventory, including ordering and holding costs. 55. A just-in-time inventory system:
I. when implemented properly reduces the cost of inventory to zero.
51. At the optimal order quantity size, the: II. increases the inventory turnover rate.
A. total cost of holding inventory is fully offset by the restocking costs. III. is sufficient to handle immediate production needs.
B. carrying costs are equal to zero. IV. minimizes the costs of holding inventory.
C. restocking costs are equal to zero. A. I and III only
D. total costs equal the carrying costs. B. II and IV only
C. I, II, and IV only D. I and IV only
D. II, III, and IV only E. III and IV only
E. I, II, III, and IV Answer: B
Answer: D These two factors are key in deciding whether to switch from a no-credit policy to a credit
A just-in-time inventory system increases the inventory turnover rate by keeping inventory policy because the cash discount percentage affects the cost of offering credit and incentives
levels low and replenishing stock frequently. It ensures that inventory is sufficient to handle for early payment, while the default rate measures the risk of customers not paying. Together,
immediate production needs, avoiding delays in manufacturing. Additionally, this system they help determine if offering credit is financially worthwhile despite potential risks.
minimizes the costs of holding inventory by reducing storage and related expenses.
59. On average, your firm sells $38,700 of items on credit each day. The firm's average
56. The incremental investment in receivables under the accounts receivable approach is operating cycle is 49 days and it acquires and sells inventory, on average, every 17 days.
equal to: What is the average accounts receivable balance?
A. P - vQ′. A. $657,900
B. PQ′. B. $848,000
C. PQ + v(Q′ - Q). C. $1,238,400
D. P(Q′ - Q). D. $1,315,500
E. PQ(Q′ - Q). E. $1,896,300
Answer: C Answer: C
The incremental investment in receivables equals the selling price per unit (P) multiplied by Accounts receivable balance = $38,700 × (49 - 17) = $1,238,400
the increase in quantity sold on credit (Q′ - Q). This represents the additional amount tied up
in accounts receivable due to extending credit. 60. The Winter Store just purchased $48,300 of goods from its supplier with credit
terms of 2/10, net 25. What is the discounted price?
57. The accounts receivable approach to credit policy supports the theory that: A. $43,470
A. a firm’s risk of offering credit to a new customer is limited to the variable cost of the sold B. $46,209
items. C. $47,334
B. the best credit policy is an all-cash policy. D. $47,929
C. the cost of offering credit to a new customer is the same as the cost of offering credit to an E. $48,300
existing customer. Answer: C
D. foregoing cash discounts is a method of obtaining inexpensive short-term financing. Discounted price = $48,300 × (1 - 0.02) = $47,334
E. the default risk of a credit policy is the same as the default risk under an all cash-policy if
your customers remain the same. 61. Today, October 12, Nadine’s Fashions purchased $511 worth of merchandise from a
Answer: A supplier. The credit terms are 1/5, net 20. By what day does Nadine’s have to make the
The accounts receivable approach assumes that if a customer defaults, the firm only loses the payment to receive the discount? Note: October has 31 days.
variable cost, which is the direct cost of the product. Fixed costs are incurred whether or not A. October 13
the sale happens, so they are not part of the credit risk. B. October 15
C. October 17
58. Which two of the following are the key elements in determining whether or not a D. October 27
switch from a no-credit policy to a credit policy is advisable? E. November 1
I. variable cost per unit Answer: C
II. cash discount percentage The credit terms 1/5, net 20 mean Nadine’s Fashions can take a 1% discount if they pay
III. credit price within 5 days of the purchase date. Since the purchase was made on October 12, Nadine’s
IV. default rate must pay by October 17 to receive the discount.
A. I and III only
B. II and IV only
C. II and III only
62. A supplier grants your firm credit terms of 2/10, net 40. What is the effective annual D. $1,287,520
rate of the discount if the firm purchases $4,800 worth of merchandise? E. $1,768,680
A. 27.24 percent Answer: E
B. 26.57 percent NPV = - [($729 × 280) + ($480 × 40)] + [($729 - $480) × 40]/0.005 = $1,768,680
C. 28.80 percent
D. 29.03 percent 66. Currently, The Toy Box sells 465 units a month at an average price of $42 a unit.
E. 29.27 percent The company thinks it can increase sales by an additional 130 units a month if it
Answer: B switches to a net 30 credit policy. The monthly interest rate is 0.4 percent and the
Days in period = 40 - 10 = 30; Periods per year = 365/30 = 12.166667 variable cost per unit is $21. What is the incremental cash inflow of the proposed credit
Interest rate for 30 days = [0.02 × $4,800]/[(1 - 0.02) × $4,800] = 0.0195578 policy switch?
Effective annual rate = (1 + 0.01955780195578)^12.166667 - 1 = 26.57 percent A. $2,120
B. $2,730
63. Cape May Products currently sells 650 units a month at a price of $59 a unit. The C. $2,760
firm believes it can increase its sales by an additional 125 units if it switches to a net 30 D. $2,810
credit policy. The monthly interest rate is 0.35 percent and the variable cost per unit is E. $5,070
$38. What is the incremental cash inflow from the proposed credit policy switch? Answer: B
A. $774 Incremental cash flow = ($42 - $21) (130) = $2,730
B. $2,625
C. $4,750 67. Preston Milled Products currently sells a product with a variable cost per unit of $21
D. $5,690 and a unit selling price of $40. At the present time, the firm only sells on a cash basis
E. $7,375 with monthly sales of 2,800 units. The monthly interest rate is 0.5 percent. What is the
Answer: B switch break- even point if the firm switched to a net 30 credit policy? Assume the
Incremental cash flow = ($59 - $38) (125) = $2,625 selling price per unit and the variable costs per unit remain constant.
A. 2,830 units
64. Polly's Home Accents currently sells 320 units a month at a price of $59 a unit. Polly B. 2,910 units
thinks she can increase her sales by an additional 55 units if she switches to a net 30 C. 3,333 units
credit policy. The monthly interest rate is 0.4 percent and the variable cost per unit is D. 3,414 units
$32. What is the net present value of the proposed credit policy switch? E. 3,526 units
A. $350,610 Answer: A
B. $350,895 Break-even point = Q′ - 2,800 = ($40 × 2,800)/{[($40 - $21)/0.005] - $21} = 30 units
C. $426,507 Q′ = 2,800 + 30 = 2,830 units
D. $621,929
E. $821,135 68. Saucier & Co. currently sells 2,100 units a month for total monthly sales of $86,500.
Answer: A The company is considering replacing its current cash only credit policy with a net 30
NPV of switch = - [($59 × 320) + ($32 × 55)] + [($59 - $32) × 55]/0.004 = $350,610 policy. The variable cost per unit is $18 and the monthly interest rate is 1.2 percent.
What is the switch break-even level of sales? Assume the selling price per unit and the
65. Currently, Glasgow Importers sells 280 units a month at a price of $729 a unit. The variable costs per unit remain constant.
firm believes it can increase its sales by an additional 40 units if it switches to a net 30 A. 1,943 units
credit policy. The monthly interest rate is 0.5 percent and the variable cost per unit is B. 2,117 units
$480. What is the net present value of the proposed credit policy switch? C. 2,145 units
A. - $213,360 D. 2,406 units
B. - $9,240 E. 2,548 units
C. $190,200 Answer: C
Break-even point = Q′ - 2,100 = ($86,500)/{[(($86,500/2,100) - $18)/0.012] - $18} = 45 units 72. You are trying to attract new customers that you feel could become repeat
Q′ = 2,100 + 45 = 2,145 units customers. The average selling price of your products is $69 each with a $41 per unit
variable cost. The monthly interest rate is 1.5 percent. Your experience tells you that 8
69. The Cellar Door currently sells 9,620 units a month for total monthly sales of percent of these customers will never pay their bill. What is the value of a new customer
$316,000. The company is considering replacing its current cash only credit policy with who does not default on his or her bill?
a net 30 policy. The variable cost per unit is $15 and the monthly interest rate is 1.5 A. $1,733
percent. What is the switch break-even level of sales? B. $1,867
A. 9,711 units C. $2,617
B. 9,779 units D. $4,817
C. 9,814 units E. $8,867
D. 9,957 units Answer: B
E. 9,889 units PV = ($69 - $41)/0.015 = $1,867
Answer: E
Break-even point = Q′ - 9,620 = ($316,000)/{[(($316,000/9,620) - $15)/0.015] - $15} = 269 73. You are trying to attract new customers that you feel could become repeat
units; customers. The average price of your product is $619 per unit with a $435 variable cost
Q′ = 9,620 + 269 = 9,889 units per unit. The monthly interest rate is 1.8 percent. Your experience tells you that 9
percent of these customers will never pay their bill. Should you offer credit terms of net
70. You have the opportunity to make a one-time sale if you will give a new customer 30 30 to attract these potential customers? Why or why not?
days to pay. You suspect there is a 10 percent chance this person will never pay you. The A. yes; because the NPV of extending credit is $8,867
sales price of the item the customer wants to buy is $289. Your variable cost on that item B. yes; because the NPV of extending credit is $9,787
is $156 and your monthly interest rate is 1.75 percent. Should you grant credit to this C. yes; because the NPV of extending credit is $128
customer? Why or why not? D. no; because the NPV of extending credit is - $459
A. yes; because the NPV of the potential sale is $113.05 E. It doesn't matter because the NPV of extending credit is zero.
B. yes; because the NPV of the potential sale is $99.63 Answer: A
C. no; because the NPV of the potential sale is - $133.00 NPV = -$435 + {[1 - 0.09] × [($619 - $435)/0.018]} = $8,867
D. no; because the NPV of the potential sale is - 113.05
E. no; because the NPV of the potential sale is - $89.65 74. A firm sells 4,500 units of an item each year. The carrying cost per unit is $2.15 and
Answer: B the fixed costs per order are $69. What is the economic order quantity?
NPV = -$156 + {[1 - 0.10] × [$289/(1 + 0.0175)]} = $99.63 A. 374 units
B. 421 units
71. You are considering renting a kiosk in the local mall for a period of three months. C. 497 units
Any sale you make will be a one-time sale. There is only a 79 percent chance you will D. 537 units
collect payment on a credit sale. The product you want to sell has a variable cost of E. 623 units
$3.88 and a sales price of $4.99. The monthly interest rate is 1.5 percent. Should you Answer: D
offer people 30 days to pay? Why or why not? EOQ = [(2 × 4,500 × $69)/$2.15]^1/2 = 537 units
A. yes; because the NPV of a credit sale is $0.09.
B. yes; because the NPV of a credit sale is $0.03. 75. The best-selling pair of roller skates The Teen Store offers sells for $79.99 a pair. The
C. no; because the NPV of a credit sale is - $0.08. store consistently sells 5,700 pairs of these roller skates every year. The fixed costs to
D. no; because the NPV of a credit sale is - $0.02. order more skates is $68 and the carrying costs are $1.95 per pair. What is the economic
E. It doesn't matter because the NPV of a credit sale is approximately zero. order quantity?
Answer: E A. 446 pairs
NPV = -$3.88 + {0.79 × [$4.99/(1 + 0.015)]} = $0 B. 515 pairs
C. 529 pairs
D. 631 pairs
E. 648 pairs units per month if it offers a net 30 credit policy. What is the net present value of the
Answer: D switch using the one-shot approach?
EOQ = [(2 × 5,700 × $68)/$1.95]^1/2 = 631 pairs A. $212,806
B. $231,543
76. One of the best selling items L.T. Ten offers sells for $9.99 a unit. The variable cost C. $235,479
per unit is $6.38 and the carrying cost per unit is $1.12. The firm sells 6,500 of these D. $248,946
units each year. The fixed cost to order this item is $75. What is the economic order E. $251,118
quantity? Answer: C
A. 690 units Monthly benefit = {[$469 × (215 + 36)]/(1 + 0.017)} - {$305 × (215 + 36)} - {($469 - $305)
B. 747 units × 215} = $3,936.23
C. 933 units NPV of switch = $3,936.23 + ($3,936.23/0.017) = $235,479
D. 1,157 units
E. 1,260 units 80. Under your current cash sales only policy you sell 132 units a month for a total sales
Answer: C value of $9,900. Your variable cost per unit is $44 and your monthly interest rate is 1
EOQ = [(2 × 6,500 × $75)/$1.12]^1/2 = 933 units percent. Based on a recent survey, you believe that you can sell an additional 25 units
per month if you offer a net 30 credit policy. What is the net present value of the
77. Each year you sell 950 units of a product at a price of $899 each. The variable cost proposed switch using the accounts receivable approach?
per unit is $575 and the carrying cost per unit is $16.90. You have been buying 100 units A. $65,976
at a time. Your fixed cost of ordering is $60. What is the economic order quantity? B. $66,500
A. 82 units C. $69,081
B. 95 units D. $70,224
C. 105 units E. $73,566
D. 113 units Answer: B
E. 124 units P = $9,900/132 = $75
Answer: A
EOQ = [(2 × 950 × $60)/$16.90]^1/2 = 82 units

78. Weisbrough United currently has a cash sales only policy. Under this policy, the firm
sells 410 units a month at a price of $219 a unit. The variable cost per unit is $140 and
81. You are currently selling 72 units a month at a price of $210 a unit. Your variable
the carrying cost per unit is $3.30. The monthly interest rate is 1.3 percent. The firm
cost of each unit is $130. If you switch from your current cash sales only policy to a net
believes it can increase its sales to 475 units a month if it institutes a net 30 credit policy.
30 policy you think your sales will increase to a total of 95 units per month. The monthly
What is the net present value of the switch using the one-shot approach?
interest rate is 1.5 percent. What is the net present value of this proposed switch using
A. $255,590
the accounts receivable approach?
B. $296,110
A. $104,557
C. $298,470
B. $114,829
D. $302,233
C. $134,822
E. $305,902
D. $136,516
Answer: B
E. $141,520
Monthly benefit = [($219 × 475)/1.013] - [$140 × 475] - [($219 - $140) × 410] = $3,800.03
Answer: A
NPV of switch = $3,800.03 + ($3,800.03/0.013) = $296,110

79. Under the current cash sales only policy Blue Bird, Inc., will sell 215 units a month
at a price of $469 each. The variable cost per unit is $305 and the monthly interest rate
is 1.7 percent. Based on a recent survey, the firm believes it can sell an additional 36
82. Your current sales consist of 32 units per month at a price of $225 a unit. You are 85. A firm offers terms of 2/9, net 41. What effective annual interest rate does the firm
weighing the pros and cons of switching to a net 30 credit policy from your current cash earn when a customer does not take the discount?
only policy. If you decide to switch your credit policy you also plan to increase the sales A. 18.67 percent
price to $240 a unit. If you make the switch you do not expect your total monthly sales B. 20.45 percent
quantity to change but you do expect a 3 percent default rate. The monthly interest rate C. 23.37 percent
is 1.5 percent. What is the net present value of the proposed credit policy switch? D. 25.34 percent
A. $6,727 E. 25.92 percent
B. $6,893 Answer: E
C. $7,965
D. $9,440
E. $9,481
Answer: D 86. Music City, Inc. has an average collection period of 62 days. Its average daily
d = ($240 - $225)/$240 = 0.0625
investment in receivables is $50,000. What are the annual credit sales?
NPV = - ($225 × 32) + {($240 × 32) × [(0.0625 - 0.03)/0.015]} = $9,440
A. $268,407
B. $277,109
83. Your current sales consist of 45 units per month at a price of $390 a unit. You are C. $294,355
weighing the pros and cons of switching to a net 30 credit policy from your current cash D. $325,893
only policy. If you decide to switch your credit policy you also plan to increase the sales E. $767,123
price to $410 a unit. The monthly interest rate is 1.4 percent. What is the break-even Answer: C
default rate of the proposed switch? Annual credit sales = $50,000 (365/62) = $294,355
A. 3.55 percent
B. 3.68 percent 87. The Turn It Up Corporation sells on credit terms of net 30. Its accounts are, on
C. 4.29 percent
average, 6 days past due. Annual credit sales are $7 million. What is the company's
D. 4.71 percent
balance sheet amount in accounts receivable?
E. 4.88 percent A. $690,411
Answer: A B. $723,333
d = ($410 - $390)/$410 = 0.048780488 C. $851,667
π = 0.048780488 - 0.014 (1 - 0.048780488) = 3.55 percent D. $915,407
E. $923,593
84. The Green Hornet sells earnings forecasts for international securities. Its credit
Answer: A
terms are 2/10, net 30. Based on experience, 55 percent of all customers will take the A/R = $7,000,000 [(30 + 6)/365] = $690,411
discount. The firm sells 2,700 forecasts every month at a price of $1,100 each. What is
the firm's average balance sheet amount in accounts receivable? 88. Keep M Flying is a wholesaler that stocks engine components and test equipment for
A. $940,274
the commercial aircraft industry. A new customer has placed an order for eight
B. $1,408,272
high-bypass turbine engines, which increase fuel economy. The variable cost is $1.7
C. $1,855,233
million per unit, and the credit price is $2.1 million each. Credit is extended for one
D. $1,867,012
period. Based on historical experience, payment for about 1 out of every 240 such
E. $1,915,387
orders is never collected. The required return is 3.2 percent per period. What is the
Answer: C
NPV per unit if this is a one-time order?
Average collection period = 0.55(10 days) + 0.45 (30 days) = 19 days
A. $316,407
Average A/R = 2,700 ($1,100) (12/365) (19) = $1,855,233 B. $321,819
C. $326,405
D. $334,290
E. $351,056 Number of orders per year = 52(150)/150.83 = 51.71
Answer: C
NPV = -$1,700,000 + [1 - (1/240)] [$2,100,000]/(1 + 0.032) = $326,405 92. The Dilana Corporation is considering a change in its cash-only policy. The new
terms would be net one period. The required return is 2 percent per period. What is the
89. Quest, Inc., is considering a change in its cash-only sales policy. The new terms of NPV of the new policy given the following information?
sale would be one month. The required return is 1.6 percent per month. Based on the A. - $230,880
following information, what is the NPV of the new policy? B. - $118,420
C. $311,508
D. $328,997
E. $388,340
Answer: E
Cash flow from old policy = ($71 - $36) (3,500) = $122,500
A. $28,750 Cash flow from new policy = ($74 - $36) (3,560) = $135,280
B. $32,500 Incremental cash flow = $135,280 - $122,500 = $12,780
C. $35,000 NPV of new policy = - [$71(3,500) + $36(3,560 - 3,500)] + $12,780/0.02 = $388,340
D. $38,250
E. $40,000 93. The Cycle Shoppe has decided to offer credit to its customers during the spring
Answer: B selling season. Sales are expected to be 330 bicycles. The average cost to the shop of a
Benefit of switching = ($800 - $425) (1,150 - 1,110) = $15,000 bicycle is $300. The owner knows that only 93 percent of the customers will be able to
Cost of switching = $800 (1,110) + $425 (1,150 - 1,110) = $905,000 make their payments. To identify the remaining 7 percent, she is considering
New policy NPV = $15,000/0.016 - $905,000 = $32,500 subscribing to a credit agency. The initial charge for this service is $540, with an
additional charge of $6 per individual report. What is the amount of the net savings
90. Cohen Industrial Products uses 2,100 switch assemblies per week and then reorders from subscribing to the credit agency?
another 2,100. The relevant carrying cost per switch assembly is $18, and the fixed A. $3,79 0
order cost is $300. What is the EOQ? B. $3,92 0
A. 1,279.84 C. $4,08 0
B. 1,809.97 D. $4,41 0
C. 1,907.88 E. $4,95 0
D. 2,278.42 Answer: D
E. 2,698.15 Net savings = (330 × $300 × 0.07) - $540 - (330 × $6) = $4,410
Answer: C
EOQ = [(2 × 52 × 2,100 × 300)/$18]1⁄2 = 1,907.88

91. Roger's Store begins each week with 150 phasers in stock. This stock is depleted
each week and reordered. The carrying cost per phaser is $48 per year and the fixed
order cost is $70. What is the optimal number of orders that should be placed each
year?
A. 48.69
B. 51.71
C. 54.20
D. 61.10
E. 64.50
Answer: B
EOQ = [(2 × 52 × 150 × $70)/$48]^1/2 = 150.83