Question 1
McNally Inc. has sales of $1,000,000 per year, all on credit terms calling for payment within 30 days, and its accounts receivable are $200,000. How much capital would be released if McNally could take actions that caused all of its customers to make on-time payments, without affecting sales, i.e., by how much would its accounts receivable decline?
A. $117,808
B. $129,945
C. $135,145
D. $141,546
E. $153,467
Question 2
Feel Good Inc. expects to have sales of $30,000 in January, $33,000 in February, and $38,000 in March. If 20% of all sales are for cash, 40% are on credit and are paid in the month following the sale, and 40% are on credit and are paid 2 months following the sale, what cash flow from sales is expected in March?
A. $28,000
B. $29,200
C. $30,400
D. $31,600
E. $32,800
Question 3
Murtaugh Manufacturing sells on terms of 2/15, net 40. Total annual sales are $950,000. 40% of the customers pay on the 15th day and take discounts, and the remainder pay, on average, 50 days after their purchases. All sales and receivables are recorded net of discounts, regardless of whether or not discounts are actually taken. What is the firm's accounts receivable balance?
A. $82,708
B. $85,123
C. $88,526
D. $90,834
E. $93,699
Question 4
Which of the following statements is CORRECT?
A. Other things held constant, it is better to have a relatively short than a relatively long cash conversion cycle.
B. Other things held constant, it is better to have a relatively long than a relatively short cash conversion cycle.
C. Other things held constant, the length of the cash conversion cycle has no effect on a firm's profitability.
D. Other things held constant, the length of the cash conversion cycle might have an effect on a firm's profitability, but it is impossible to state if that effect is positive or negative.
E. Since firms have no control over their cash conversion cycles, there is little point in studying these cycles.
Question 5
Other things held constant, which of the following would lead to an increase in working capital?
A. Cash is used to buy marketable securities.
B. A cash dividend is declared and paid.
C. Missing inventory is written off against retained earnings.
D. Long-term bonds are retired from the proceeds of a preferred stock issue.
E. Merchandise is sold on credit, but at a profit.
Question 6
Which of the following statements is CORRECT?
A. Net working capital is defined as current assets minus current liabilities.
B. Gross working capital is defined as the current liabilities used in operations.
C. The current ratio is calculated as net working capital divided by current liabilities.
D. Working capital represents the fixed assets a firm uses to support its operations.
E. Its cash budget tells the firm how much cash is in its bank accounts.