B3

Question 1

How do you compute the after-tax cash flows?

Answer 1

Multiply pretax cash flow by (1 - Tax rate)

multiply noncash tax shield items (such as depreciation) by the tax rate as a component of total after-tax cash flows.

Question 2

Cash Flow at the beginning of the first year for capital budgeting analysis:
The Net cash outflow at the beginning of the first year is calculated how?

Answer 2

by adding the purchase price + $ to put into service + $ instillation + $ training.

Question 3

Step 2 is Net cash flow for years 1-n for capital budgeting analysis. (inflows)

Answer 3

Net cash flow from sales less taxes (1-rate) +Net indirect effect of depreciation on machine

Question 4

Step 3 is the final year: Net cash flow for the final year for capital udgeting analysis

Answer 4

Net cash flow from sales less taxes on net sales + net indirect effect of depreciation on machine + salvage value

Question 5

If the NPV is greater than zero then what does that mean for the IRR?

Answer 5

Then the IRR is > Hurdle Rate

Question 6

If the NPV = 0 what does this mean about the IRR?

Answer 6

NPV=0 means we are breaking even, then the IRR = Hurdle Rate.

Question 7

if the NPV < 0 what does this mean about the IRR?

Answer 7

if NPV is less than 0, then IRR is less than Hurdle rate

Question 8

Which can be adjusted NPV or IRR?

Answer 8

NPV can be adjusted, IRR cannot

Question 9

why is NPV superior to the IRR?

Answer 9

it is flexible enough to consistently handle either uneven cash flows or inconsistent rates of return for each year of the project

Question 10

What is the equation for Profitability Index?

Answer 10

= Present Value of net future cash inflow (PVFCF) divided by Present value of net initial investment (cost)

only accept is PI > $1

Question 11

What is the Payback Period

Answer 11

= Net initial investment (outflow) divided by the increase in annual net after-tax cash flow

Question 12

what is the Degree of Operating Leverage?

Answer 12

= % Δ EBITA divided by % Δ Sales

Question 13

The discount rate is determined in advance for which of the following capital budgeting techniques?

a. Net present value.
b. Payback.
c. Accounting rate of return.
d. Internal rate of return.

Answer 13

Net Present Value.
The discount or hurdle rate is determined in advance for computations of net present value. Project cash flows are discounted based upon a predetermined rate and compared to the investment in the project to arrive at a positive or negative net present value. Advance determination of management’s required return is integral to the development and evaluation of net present value.
Choice “b” is incorrect. The payback method computes the period of time required to recover the cost of an investment and does not require a predetermined discount rate.
Choice “c” is incorrect. The accounting rate of return computes a percentage return based upon accrual basis data and does not require a predetermined discount rate.
Choice “d” is incorrect. The internal rate of return computes a rate of return that produces a net present value of zero and does not require a predetermined rate. The computed internal rate of return is evaluated in relation to management’s required hurdle rate after the computation is done.

Question 14

In equipment-replacement decisions, which one of the following does not affect the decision-making process?

a. Current disposal price of the old equipment.
b. Cost of the new equipment.
c. Operating costs of the new equipment.
d. Original fair market value of the old equipment.

Answer 14

Choice “d” is correct. The original FMV of the old equipment is a sunk cost that does not affect equipment-replacement decisions.
All of the following items affect the decision process:
a. Current disposal price of the old equipment.
b. Cost of the new equipment.
c. Operating costs of the new equipment.

Question 15

Which of the following is an advantage of net present value modeling?

a. It uses the accounting rate of return.
b. It accounts for compounding of returns.
c. It is measured in time, not dollars.
d. It uses accrual basis, not cash basis accounting for a project.

Answer 15

Choice “b” is correct. The net present value method assumes that positive cash flows are reinvested at the hurdle rate thereby considering compounding.
Choice “c” is incorrect. The net present value method measures the value of capital investments in dollars and considers the time value of money.
Choice “d” is incorrect. Net present value uses the cash basis not the accrual basis.
Choice “a” is incorrect. The accounting rate of return is a method of capital budgeting evaluation separate and apart from the net present value method.

Question 16

In making capital budgeting decisions, management considers factors that are far broader than costs alone. Which one of the following factors is least likely to be considered a non-financial or qualitative factor?

a. Reduction in new product development time.
b. Less scrap and rework.
c. Increase in manufacturing flexibility.
d. Improved product delivery and service.

Answer 16

Choice “b” is correct. Less scrap and rework is least likely to be considered a non-financial or qualitative factor because it is the most easily quantifiable of the selections and therefore most likely to be included as a relevant avoidable cost in the capital budgeting analysis.
Choices “c”, “d”, and “a” are incorrect. All are important factors in a capital budgeting decision, but they can be difficult to quantify and therefore are more likely to be considered non-financial or qualitative factors.

Question 17

Management at MDK Corp. is deciding whether to replace a delivery van. A new delivery van costing $40,000 can be purchased to replace the existing delivery van, which cost the company $30,000 and has accumulated depreciation of $20,000. An employee of MDK has offered $12,000 for the old delivery van. Ignoring income taxes, which of the following correctly states relevant costs when making the decision whether to replace the delivery vehicle?

a. Purchase price of new van, purchase price of old van, and gain on sale of old van.
b. Purchase price of new van, disposal price of old van.
c. Purchase price of new van, purchase price of old van, accumulated depreciation of old van, gain on sale of old van, disposal price of old van.
d. Purchase price of new van, disposal price of old van, and gain on sale of old van.

Answer 17

Choice “b” is correct. Costs are deemed to be relevant if they change as a result of selecting different alternatives. The decision to replace the old van will result in the company paying the purchase price of the new van and receiving the disposal price of the old van. Neither the purchase price of the new van nor the disposal price of the old van will be incurred if the van is not replaced. Ignoring income taxes, the book value of the old van and any potential gain is not relevant.
Choice “d” is incorrect. The gain on the sale of the old van is not relevant absent any consideration of taxation.
Choice “a” is incorrect. Neither the purchase price of the old van (a sunk cost) nor the gain on the sale of the old van (ignoring tax consequences) are relevant to our decision.
Choice “c” is incorrect. Neither the purchase price/accumulated depreciation of the old van (a sunk cost) nor the gain on the sale of the old van (ignoring tax consequences) are relevant to our decision.

Question 18

Do we want a High or low WACC (Weighted Average Cost of Capital)?

Answer 18

a low WACC maximizes the value of the firm

Question 19

What is the equation of WACC?

Answer 19

= Cost of equity multiplied by the % equity in capital structure + weighted average cost of debt multiplied by the % debt in capital structure

Question 20

what is the equation for Cost of Retained Earnings (CAPM)?

Answer 20

=Risk free rate + (beta X (market return - risk free rate))

Question 21

A depreciation tax shield is:

a. An after-tax cash outflow.
b. Caused by the fact that depreciation does not affect cash flow.
c. A reduction in income taxes.
d. The expense caused by depreciation.

Answer 21

Choice “c” is correct. Whenever depreciation protects income from taxation, it is known as a depreciation tax shield.
Choice “a” is incorrect. A depreciation tax shield may result in after-tax cash inflow, but not outflow.
Choice “d” is incorrect, per above.
Choice “b” is incorrect. A depreciation tax shield is caused by the tax deductibility of the depreciation expense, not by the fact that depreciation does not affect cash flow.

Question 22

The benefits of debt financing over equity financing are likely to be highest in which of the following situations?

a. High marginal tax rates and many noninterest tax benefits.
b. High marginal tax rates and few noninterest tax benefits.
c. Low marginal tax rates and many noninterest tax benefits.
d. Low marginal tax rates and few noninterest tax benefits.

Answer 22

Choice “b” is correct. The benefits of debt financing over equity financing are likely to be highest if marginal tax rates are high (because interest on debt is deductible for tax purposes) and if there are few noninterest tax benefits (because there is little or no reason to depart from debt financing).
Choice “d” is incorrect. The benefits of debt financing over equity financing are likely to be highest if marginal tax rates are high, not low (because interest on debt is deductible for tax purposes), and if there are few noninterest tax benefits.
Choice “a” is incorrect. The benefits of debt financing over equity financing are likely to be highest if marginal tax rates are high (because interest on debt is deductible for tax purposes) and if there are few, not many, noninterest tax benefits.
Choice “c” is incorrect. The benefits of debt financing over equity financing are likely to be highest if marginal tax rates are high, not low (because interest on debt is deductible for tax purposes), and if there are few, not many, noninterest tax benefits.

Question 23

Using the Capital Asset Pricing Model (CAPM), the required rate of return for a firm with a beta of 1.25 when the market return is 14 percent and the risk-free rate is 6 percent is:

a. 17.5 percent.
b. 7.5 percent.
c. 14.0 percent.
d. 16.0 percent.

Answer 23

16% 
The CAPM holds that:
C = R + ß(M − R)
Where
C = Cost of capital
R  = Risk free rate
ß = Beta
M = Market rate of return
Substituting
C=6% + 1.25 (14% − 6%)
=6% + 10%
=16% (Choice "d")

Question 24

Which one of the following factors might cause a firm to increase the debt in its financial structure?
a.
Increased economic uncertainty.
b.
A decrease in the times interest earned ratio.
c.
An increase in the corporate income tax rate.
d.
An increase in the price/earnings ratio.

Answer 24

Choice “c” is correct. An increase in the corporate income tax rate might cause a firm to increase the debt in its financial structure because interest is tax deductible, while dividends are not tax deductible.
Choice “a” is incorrect. Increased economic uncertainty would cause a firm to decrease debt (and interest cost).
Choice “d” is incorrect. An increase in the price/earnings ratio would encourage the issuance of equity rather than debt.
Choice “b” is incorrect. A decrease in the times interest earned ratio indicates that earnings have declined compared with interest, and that more debt would be unwise (and more difficult to negotiate).

Question 25

What is the equation for the Return on Investment (ROI)?

Answer 25

=income divided by investment capital

=Profit margin X Investment turnover

Question 26

what is the return on assets equation?

Answer 26

=Net income divided by AVERAGE total assets

Question 27

What is the return on Equity equation?

Answer 27

= Net income divided by Total equity

Question 28

A company has two divisions. Division A has operating income of $500 and total assets of $1,000. Division B has operating income of $400 and total assets of $1,600. The required rate of return for the company is 10%. The company's residual income would be which of the following amounts?
	a.	
$900
	b.	
$0
	c.	
$640
	d.	
$260

Answer 28

$640
Residual income is the difference between net income and the required return. The required return is net book value (total assets) times the hurdle rate (required rate of return). The calculations are as follows:
Division
Operating Income
Total Assets × Required Rate
= Residual income
A
$500
$1,000 × .10 = $100
$400
B
$400
$1,600 × .10 = $160
$240
Total
$900
$260
$640
Choice "b" is incorrect. Residual income would certainly not be $0 in this question because the operating income is greater than the required return for both Division A and Division B.
Choice "d" is incorrect. The $260 is the total required return, not the total residual income.
Choice "a" is incorrect. The $900 is the total operating income, not the total residual income.

Question 29

What is the primary disadvantage of using return on investment (ROI) rather than residual income (RI) to evaluate the performance of investment center managers?
a.
ROI does not reflect all economic gains.
b.
ROI may lead to rejecting projects that yield positive cash flows.
c.
ROI is a percentage, while RI is a dollar amount.
d.
ROI does not necessarily reflect the company’s cost of capital.

Answer 29

Choice “b” is correct. The primary disadvantage of using return on investment (ROI) rather than residual income (RI) to evaluate the performance of investment center managers is that ROI may lead to rejecting projects that yield positive cash flows. Profitable investment center managers might be reluctant to invest in projects that might lower their ROI (especially if their bonuses are based only on their investment center’s ROI), even though those projects might generate positive cash flows for the company as a whole. This characteristic is often known as the “disincentive to invest.”
Choice “c” is incorrect. The primary disadvantage of using return on investment (ROI) rather than residual income (RI) to evaluate the performance of investment center managers is that ROI may lead to rejecting projects that yield positive cash flows, not that ROI is a percentage and RI is a dollar amount. The fact that one is a percentage and one is a dollar amount might make them a little harder to interpret, but this interpretation difficulty would certainly not seem to be the “primary” disadvantage.
Choice “d” is incorrect. The primary disadvantage of using return on investment (ROI) rather than residual income (RI) to evaluate the performance of investment center managers is that ROI may lead to rejecting projects that yield positive cash flows, not that ROI does not necessarily reflect the cost of capital.
Choice “a” is incorrect. The primary disadvantage of using return on investment (ROI) rather than residual income (RI) to evaluate the performance of investment center managers is that ROI may lead to rejecting projects that yield positive cash flows, not that ROI does not reflect all economic gains.

Question 30

Galax, Inc. had operating income of $5,000,000 before interest and taxes. Galax’s net book value of plant assets at January 1 and December 31 were $22,000,000 and $18,000,000, respectively. Galax achieved a 25 percent return on investment for the year, with an investment turnover of 2.5. What were Galax’s sales for the year?

a. $55,000,000
b. $20,000,000
c. $45,000,000
d. $50,000,000

Answer 30

50,000,000
Choice “d” is correct. Sales are a component of the investment turnover ratio. The investment turnover formula is:
Investment turnover = sales / average investment
The fact pattern provides beginning and ending asset values and the amount of the investment turnover. The solution involves populating the variables in the investment turnover formula and solving for “×” (sales) as follows:
2.5 = sales / (($22,000,000 + $18,000,000) / 2)
2.5 = sales / $20,000,000
Sales = $20,000,000 × 2.5
Sales = $50,000,000

Question 31

Wexford Co. has a subunit that reported the following data for Year 1:
Asset (investment) turnover
1.5 times
Sales
$750,000
Return on sales
8%
The imputed interest rate is 12%. What is the division residual income for Year 1?
	a.	$30,000
	b.	$60,000
	c.	$0
	d.	$20,000

Answer 31

0
he residual income method measures the excess of actual income earned by an investment over the amount required to achieve a target or hurdle rate of return. The computation is simple; however, the fact pattern hides the basic information needed. Required data are computed as follows. Actual income earned is $60,000 (given sales of $750,000 times an 8% return on sales). The amount required to achieve the target rate of return is $60,000 (assets of $500,000 times 12%). Assets are computed to be $500,000 (sales of $750,000 divided by the asset turnover of 1.5). The imputed interest rate is the cost of capital or required return and is given at 12% of assets.
Based on the above, division residual income is $0 (actual income of $60,000 minus required income of $60,000).

Question 32

Which one of the following statements pertaining to the return on investment (ROI) as a performance measurement is incorrect?
a.
The use of ROI can make it undesirable for a skillful manager to take on trouble-shooting assignments such as those involving turning around unprofitable divisions.
b.
ROI relies on financial measures that are capable of being independently verified while other forms of performance measures are subject to manipulation.
c. When the average age of assets differs substantially across segments of a business, the use of ROI may not be appropriate.
d. The use of ROI may lead managers to reject capital investment projects that can be justified by using discounted cash flow models.

Answer 32

Choice “b” is correct. ROI is no more and no less capable of being independently verified or manipulated than other performance measures.
Choice “c” is incorrect. Old fixed assets may be undervalued and make comparison with a segment with newer assets inappropriate.
Choice “d” is incorrect. Investment projects with positive present value may be rejected because ROI is too low.
Choice “a” is incorrect. Turning around an unprofitable division would be good for the company but would probably lower a manager’s ROI.

Question 33

A working capital technique, which delays the outflow of cash, is:

a. Factoring.
b. A lock-box system.
c. A draft.
d. Compensating balances.

Answer 33

Choice “c” is correct. The use of a draft delays a cash disbursement and increases payable float.
Choice “a” is incorrect. Factoring is the sale of accounts receivable to a factor. This has no effect on cash disbursements.
Choice “b” is incorrect. A lock-box system is used to accelerate the inflow of funds.
Choice “d” is incorrect. Compensating balances are a bank requirement related to a loan. The bank will require a certain balance be maintained in cash. This amount cannot be used for working capital purposes.

Question 34

What is the equation for Economic Value Added (EVA)?

Answer 34

Investment X cost of capital = required return

Question 35

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. $10,000
c. $25,000
d. $0

Answer 35

10,000
Choice “b” 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.
$10,000/day checks drawn but not cleared × 5 days = $ 50,000
Less $10,000/day checks received but not cleared × 4 days = (40,000)
Positive “float” $ 10,000

Question 36

Which one of the following would increase the working capital of a firm?
a.
Cash collection of accounts receivable.
b.
Refinancing of accounts payable with a two-year note payable.
c.
Payment of a thirty-year mortgage payable with cash.
d.
Cash payment of accounts payable.

Answer 36

Choice “b” is correct. Working capital (WC) increases only if current assets are increased or current liabilities are decreased. Exchanging accounts payable (current liability) for a two-year note payable (long-term liability) would decrease current liabilities and increase working capital.
Choice “a” is incorrect. This would not impact WC.
Choice “d” is incorrect. This would not have an impact on WC (decrease of both CA and CL).
Choice “c” is incorrect. This would decrease WC.

Question 37

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

a. Cost of placing an order for merchandise.
b. Lead time to receive merchandise ordered.
c. Current level of inventory.
d. Cost per unit of inventory.

Answer 37

Choice “c” is correct. The current level of inventory has no impact on the optimal level of inventory.
Choices “d”, “a”, and “b” are incorrect. The optimal level of inventory is affected by:
The time required to receive inventory.
The cost per unit of inventory, which will have a direct impact on inventory carrying costs.
The cost of placing on order impacts order frequency, which affects order size and optimal inventory levels.

Question 38

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. $12,000
b. $6,000
c. $(12,000)
d. $(6,000)

Answer 38

6000
Choice "d" 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?
Marginal revenue equals:
Increase cash
$150,000  per day Receipts available
× 4 days
For investment
$600,000  Can be invested for yr:
at 4% x .04 
MR $24,000
Less: marginal costs Mo. Lockbox fee x 12 
$2,500 x 12 = (30,000)
equals: Loss on plan ($6,000)

Question 39

What is the Current Ratio

Answer 39

=Current Assets divided by Current Liabilities

Question 40

A company has cash of $100 million, accounts receivable of $600 million, current assets of $1.2 billion, accounts payable of $400 million, and current liabilities of $900 million. What is its acid-test (quick) ratio?

a. 	 2. 11
b. 	 1. 75
c. 	 0. 78
d. 	 0. 11

Answer 40

Choice “c” is correct. The acid-test or quick ratio is the ratio of the most liquid assets to current liabilities and provides an even more rigorous test of liquidity than the current ratio. The quick ratio excludes less liquid current assets from the numerator (e.g., prepaid expenses and inventory) and includes only such line items as cash and accounts receivable as provided in the problem. The quick ratio would be computed as follows:
Cash
$ 100
Accounts receivable
600
Quick assets
$ 700
Current liabilities
÷ 900
Quick ratio
0.78
Choice “d” is incorrect. The quick ratio does not limit assets to cash only.
Choice “b” is incorrect. The quick ratio is not the ratio of the most liquid assets to the most current liabilities.
Choice “a” is incorrect. The quick ratio is computed in the manner shown in response “c” above.

Question 41

Amicable Wireless, Inc. offers credit terms of 2/10, net 30 for its customers. Sixty percent of Amicable's customers take the 2% discount and pay on day 10. The remainder of Amicable's customers pay on day 30. How many days' sales are in Amicable's accounts receivable?
	a.	
18
	b.	
6
	c.	
20
	d.	
12

Answer 41

Choice “a” is correct. Days’ sales in accounts receivable may be calculated as:
Days’ sales = Ending accounts receivable / Average daily sales
That formula will not work in this case because the necessary information is not provided. However, enough information about payments is provided so that the total days’ sales can be determined on a weighted average basis. In this question, nobody pays before the 10th day and 60% of the customers pay on the 10th day, so there are 10 × 0.60, or 6 day’s sales there. The other 40% of the customers pay on the 30th day so there are 30 × 0.40, or 12 day’s sales there. The total is 18 days sales.
Choice “b” is incorrect. This answer is calculated from just the 60% of the customers who pay on the 10th day. The others have to be included also.
Choice “d” is incorrect. This answer is calculated from just the 40% of the customers who pay on the 30th day. The others have to be included also.
Choice “c” is incorrect. This answer is calculated by as the difference between the 30th day and the 10th day. The answer does not take into account how many customers pay when.

Question 42

Foster Inc. is considering implementing a lock-box collection system at a cost of $80,000 per year. Annual sales are $90 million, and the lock-box system will reduce collection time by 3 days. If Foster can invest funds at 8 percent, should it use the lock-box system? Assume a 360-day year.
a.
No, producing a loss of $20,000 per year.
b.
No, producing a loss of $60,000 per year.
c.
No, producing a loss of $140,000 per year.
d.
Yes, producing savings of $60,000 per year.

Answer 42

Choice “a” is correct. No, do not use the lock-box system, which produces a loss of $20,000 per year.
Lock-box cost $ 80,000
Investment income 60,000*
Loss per year $ 20,000
* 60,000 = (3 days / 360 days) × $90,000,000 × .08

Question 43

As a company becomes more conservative with respect to working capital policy, it would tend to have a (n):
a.
Decrease in the operating cycle.
b.
Increase in the ratio of current assets to noncurrent assets.
c.
Decrease in the quick ratio.
d.
Increase in the ratio of current liabilities to noncurrent liabilities.

Answer 43

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 “b” 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 “d” 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 “a” 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 non-current liabilities used to fund temporary current assets, a sign of an increasingly aggressive working capital policy.

Question 44

Which of the following ratios is appropriate for the evaluation of accounts receivable?
	a.	
Days sales outstanding.
	b.	
Collection to debt ratio.
	c.	
Return on total assets.
	d.	
Current ratio.

Answer 44

Choice “a” is correct. Among the ratios listed, the ratio that is appropriate for the evaluation of accounts receivable is the number of days sales are outstanding. Sales are related to accounts receivable, so the more days the sales are outstanding, the longer the receivables are outstanding.
Choice “c” is incorrect. Return on total assets is not appropriate for the evaluation of accounts receivable. It is appropriate for the evaluation of return and of total assets, but not for the evaluation of account receivable specifically.
Choice “b” is incorrect. The collection to debt ratio has nothing to do with the evaluation of accounts receivable.
Choice “d” is incorrect. The current ratio is appropriate for the evaluation of liquidity (one of the ways to evaluate liquidity) but has nothing to do with the evaluation of accounts receivable, other than that accounts receivable is in the numerator of the current ratio.

Question 45

Super Sets, Inc. manufactures and sells television sets. All sales are finalized on credit with terms of 2/10, n/30. Seventy percent of Super Set customers take discounts and pay on day 10, while the remaining 30% pay on day 30. What is the average collection period in days?
	a.	
24
	b.	
40
	c.	
10
	d.	
16

Answer 45

Choice “d” is correct. The average collection period represents the weighted average of the periods that accounts receivable are outstanding and is computed as follows:
Customers paying on day 10 x 70% =
7
Customers paying on day 30 x 30% =
9
Average collection period in days
16
Choice “c” is incorrect. This choice provides no reasonable logic but is inserted to further distract the candidate.
Choice “a” is incorrect. This proposed solution mismatches the percentages and the days and represents the sum of the products of 30 × 70 % and 10 × 30%.
Choice “b” is incorrect. This proposed solution is purely the sum of the two customer payment patterns presented, 10 and 30.

Question 46

What is the equation for Payment Discounts? APR of quick payment discounts?

Answer 46

=360 divided by (pay period - discount period) X Discount % divided by (100 - Discount %)

Question 47

Cash Conversion Cycle equation is?

Answer 47

Cash Conversion cycle = Inventory conversion period + receivables collection period - payables deferral period

Question 48

The amount of inventory that a company would tend to hold in stock would increase as the:
	a.	
Length of time that goods are in transit decreases.
	b.	
Cost of running out of stock decreases.
	c.	
Variability of sales decreases.
	d.	
Cost of carrying inventory decreases.

Answer 48

Choice “d” is correct. The amount of inventory that a company would tend to hold in stock would increase as the cost of carrying inventory decreases.
The amount of inventory that a company would tend to hold in stock would decrease as the:
c.
Variability of sales decreases.
b.
Cost of running out of stock decreases.
a.
Length of time that goods are in transit decreases.

Question 49

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.	
$450,000
	b.	
$990,000
	c.	
$900,000
	d.	
$810,000

Answer 49

Choice "d" is correct. $810,000 accounts receivable.
60%
40%
100%
Unit Sales Price
$300
$300
$300
Daily Sales Average Units
× 90
× 60
× 150
Daily Sales
27,000
18,000
45,000
Days Outstanding
× 10
× 30
$270,000
\+
$540,000
=
$810,000
Choices "b", "c", and "a" are incorrect, per the above calculation.

Question 50

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. 	 36. 00 percent.
b. 	 37. 11 percent.
c. 	 24. 74 percent.
d. 	 31. 81 percent.

Answer 50

Choice "d" is correct. 31.81% annual cost of not taking the discount.
Annual cost of not taking discount
=
360
(Total pay period − Discount period)
×
Discount %
(100% − Discount %)
=
[360 ÷ (45 − 10)] × [3% ÷ (100% − 3%)]
=
31.81%
Choices "b", "a", and "c" are incorrect, per the above calculation.

Question 51

Which of the following inventory management approaches orders at the point where carrying costs equate nearest to restocking costs in order to minimize total inventory cost?
	a.	
Kanban inventory control.
	b.	
Materials requirements planning.
	c.	
Just-in-time.
	d.	
Economic order quantity.

Answer 51

Choice “d” is correct. The economic order quantity (EOQ) method of inventory control anticipates orders at the point where carrying costs are nearest to restocking costs. The objective of EOQ is to minimize total inventory costs. The formula for EOQ is:

Question 52

Which of the following transactions would increase the current ratio and decrease net profit?
a.
Vacant land is sold for less than the net book value.
b.
A dividend is paid.
c.
A long-term bond is retired before maturity at a discount.
d.
A federal income tax payment due from the previous year is paid.

Answer 52

Choice “a” is correct. The current ratio is current assets divided by current liabilities. The sale of land would increase cash and therefore current assets without increasing current liabilities. This would increase the current ratio. Furthermore, the sale of land at a loss would decrease net profit.
Choice “d” is incorrect. The payment of a tax payment would not decrease net profit because the expense was accrued last year.
Choice “c” is incorrect. The use of cash to retire a long-term bond would reduce current assets without reducing current liabilities. This would reduce the current ratio.
Choice “b” is incorrect. As above, this would reduce cash without reducing current liabilities.

Question 53

What is the equation for the reorder point

Answer 53

= safety stock + (lead time X Sales during lead time)