Test Prep Test Prep Certifications BUSINESS-ENVIRONMENT-AND-CONCEPTS Questions & Answers

• Question 151:

  In inventory management, the safety stock will tend to increase if the:

  A. Carrying cost increases.

  B. Cost of running out of stock decreases.

  C. Variability of lead-time increases.

  D. Fixed order cost decreases.

  Correct Answer: C

  Choice "c" is correct. If lead times became more variable, the amount of safety stock needed to reduce the risk of stock outs will increase.

  Choice "a" is incorrect. A high carrying cost would decrease safety stock.

  Choice "b" is incorrect. A lower stockout cost would decrease safety stock.

  Choice "d" is incorrect. If order costs decrease, then inventory will be ordered more frequently and less

  safety stock will be needed.

• Question 152:

  As a company becomes more conservative with respect to working capital policy, it would tend to have a (n):

  A. Increase in the ratio of current liabilities to noncurrent liabilities.

  B. Decrease in the operating cycle.

  C. Decrease in the quick ratio.

  D. Increase in the ratio of current assets to noncurrent assets.

  Correct Answer: D

  RULE: Working capital policy is deemed to be more conservative as an increasing portion of an organization's long-term assets, permanent current assets, and temporary current assets are funded by long-term financing.

  Choice "d" is correct. An increase in the ratio of current assets to non-current assets would be indicative of an increasingly conservative working capital policy. With no other information, an increase in current assets would indicate that a growing percentage of current assets are financed by non current liabilities and that, nominally, the absolute amount of working capital and the current ratio is improving.

  Choice "a" is incorrect. An increase in the ratio of current liabilities to noncurrent liabilities would indicate that an increasing portion of our assets are funded by current liabilities, a more aggressive approach to working capital management.

  Choice "b" is incorrect. A decrease in the operating cycle implies that the time to convert inventory into sales (receivables) and receivables into cash has decreased. Assuming no change in liabilities or sales, a decreased operating cycle infers declining current asset balances, greater funding of assets by current liabilities and a more aggressive rather than conservative working capital policy.

  Choice "c" is incorrect. A decrease in the quick ratio would indicate that either temporary current assets are decreasing (and are therefore increasingly funded by current liabilities, indicating a more aggressive working capital policy) or that current liabilities are increasing, signaling a decrease in the amount of noncurrent liabilities used to fund temporary current assets, a sign of an increasingly aggressive working capital policy.

• Question 153:

  During 1990, Mason Company's current assets increased by $120, current liabilities decreased by $50, and net working capital:

  A. Increased by $70.

  B. Decreased by $170.

  C. Increased by $170.

  D. Decreased by $70.

  Correct Answer: C

  Choice "c" is correct. Net working capital is the difference between current assets and current liabilities. Because current assets went up $120 and current liabilities down by $50, the net effect is an increase in net working capital of $170.

  

  Therefore, working capital has increased $170,000.

  Choices "a", "b", and "d" are incorrect, per the above calculation.

• Question 154:

  The optimal level of inventory would be affected by all of the following, except the:

  A. Cost per unit of inventory.

  B. Current level of inventory.

  C. Cost of placing an order for merchandise.

  D. Lead time to receive merchandise ordered.

  Correct Answer: B

  Choice "b" is correct. The current level of inventory has no impact on the optimal level of inventory. Choices "a", "c", and "d" are incorrect. The optimal level of inventory is affected by:

  1.

  The inventory usage rate.

  2.

  The cost per unit of inventory - which will have a direct impact on inventory carrying costs.

  3.

  The cost of placing on order impacts order frequency, which affects order size and optimal inventory levels.

• Question 155:

  Assume that each day a company writes and receives checks totaling $10,000. If it takes five days for the checks to clear and be deducted from the company's account, and only four days for the deposits to clear, what is the float?

  A. $10,000

  B. $0

  C. $(10,000)

  D. $25,000

  Correct Answer: A

  Choice "a" is correct. $10,000. Float is the difference between the balance of checks outstanding, which have not cleared the bank and deposits made but which have not yet cleared the bank here.

  

  Choices "b", "c", and "d" are incorrect, per the above calculation.

• Question 156:

  A company has daily cash receipts of $150,000. The treasurer of the company has investigated a lockbox service whereby the bank that offers this service will reduce the company's collection time by four days at a monthly fee of $2,500. If money market rates average four percent during the year, the additional annual income (loss) from using the lockbox service would be:

  A. $6,000

  B. $(6,000)

  C. $12,000

  D. $(12,000)

  Correct Answer: B

  Choice "b" is correct. $(6,000). A company's decision to commit to a lockbox plan is an example of marginal analysis. In other words, do the marginal benefits exceed the marginal costs of the plan?

  

  Choices "a", "c", and "d" are incorrect, per the above calculation.

• Question 157:

  If a firm borrows $500,000 at 10 percent and is required to maintain $50,000 as a minimum compensating balance at the bank, what is the effective interest rate on the loan?

  A. 11.1 percent.

  B. 9.1 percent.

  C. 12.2 percent.

  D. 11.0 percent.

  Correct Answer: A

  Choice "a" is correct. 11.1% effective interest rate on loan.

  

  This question pertains to the computation of the effective rate of interest on a $500,000 note with a 10% stated rate that requires a $50,000 compensating balance. The answer computes the effective rate at 11.1% by taking the ratio of the amount paid $50,000 to the funds available $450,000 ($500,000 -$50,000). Why would the $50,000 in interest payments not also be deducted in arriving at the effective rate? The simple answer is that the note is not discounted by the interest. It is only subject to the compensating balance. The borrower receives $500,000 in proceeds but must hold out $50,000 and pay back $550,000, principal

  + interest, to the lender. At the conclusion of the loan, the compensating balance requirement is removed.

• Question 158:

  If a retailer's terms of trade are 3/10, net 45 with a particular supplier, what is the cost on an annual basis of not taking the discount? Assume a 360-day year.

  A. 37.11 percent.

  B. 36.00 percent.

  C. 24.74 percent.

  D. 31.81 percent.

  Correct Answer: D

  

  Choice "d" is correct. 31.81% annual cost of not taking the discount. Choices "a", "b", and "c" are incorrect, per the above calculation.

• Question 159:

  Jackson Distributors sells to retail stores on credit terms of 2/10, net 30. Daily sales average 150 units at a price of $300 each. Assuming that all sales are on credit and 60 percent of customers take the discount and pay on Day 10 while the rest of the customers pay on Day 30, the amount of Jackson's accounts receivable is:

  A. $990,000

  B. $900,000

  C. $810,000

  D. $450,000

  Correct Answer: C

  Choice "c" is correct. $810,000 accounts receivable.

  

  Choices "a", "b", and "d" are incorrect, per the above calculation.

• Question 160:

  Average daily cash outflows are $3 million for Evans Inc. A new cash management system can add two days to the disbursement schedule. Assuming Evans earns 10 percent on excess funds, how much should the firm be willing to pay per year for this cash management system?

  A. $3,000,000

  B. $1,500,000

  C. $600,000

  D. $150,000

  Correct Answer: C

  Choice "c" is correct. $600,000 allowed for new cash management system.