Working Capital Management

Question 1

LIFO uses lower of cost or _______

FIFO & Weighted Average use lower of cost or _______

Answer 1

LIFO - Lower of cost or Market

FIFO & WA - Lower of cost of NRV

Question 2

What represents the median value of the item’s replacement cost, market ceiling and market floor?

Answer 2

Market value

Question 3

What is the market ceiling and what is the market floor?

Answer 3

Ceiling - NRV

Floor - NRV - Profit

Question 4

What is the net selling price minus the cost to complete and dispose?

Answer 4

Net Realizable Value

Question 5

What type of system has inventory quantities determined by physical counts performed at least annually?

Answer 5

Periodic inventory systems

Question 6

What type of system has inventory balances updated for each purchases and each sales and is always current?

Answer 6

Perpetual inventory system

Question 7

What type of system has the cost of each item in inventory uniquely identified?

Answer 7

Specific identification

Question 8

If using the FIFO method and prices are rising, what happens to COGS and Ending Inventory?

Answer 8

COGS goes down and Ending Inventory goes up

Question 9

If using the LIFO method and prices are rising, what happens to COGS and Ending Inventory?

Answer 9

COGS goes up and Ending Inventory goes down

Question 10

Formula to calculate the Average Cost Per Unit that is used in the weighted average method:

Answer 10

COGAFS / # of Units

Question 11

The weighted average method only works with what type of inventory system?

Answer 11

Periodic

Question 12

The moving average method only works with what type of inventory system?

Answer 12

Perpetual

Question 13

If COGS increases, what happens to Net Income?

Answer 13

Net Income decreases

Question 14

What is the most important factor to influencing inventory levels?

Answer 14

Accuracy of sales forecasts

Question 15

Too much inventory results in______

Too little inventory results in ______

Answer 15

Too much = increase in carrying costs

Too little = loss of sales

Question 16

To ensure that manufacturing or customer supply requirements are met, companies maintain what?

Answer 16

A safety stock

Question 17

Formula for calculating the reorder point:

Answer 17

Safety stock + (lead time X sales during lead time)

Question 18

Formula for calculating the Economic Order Quantity (EOC):

Answer 18

Order Size = square root of (2 X Sales in units X Cost per Purchase Order) / Carrying Cost per unit

Question 19

The Economic Order Quantity (EOC) attempts to do what?

Answer 19

Minimize total ordering and carrying costs

Question 20

Just in time inventory model was developed to:

Answer 20

Reduce the lag time between inventory arrival and use. It resulted the need of manufacturers to carry large inventory’s and requires a considerable degree of coordination between manufacturer and supplier.

Question 21

Kansan inventory control techniques give:

Answer 21

Visual signals that it is time to reorder

Question 22

Integrated supply chain management (ISCM) exists when:

Answer 22

A firm and the entire supply chain are able to reasonably predict the expected demand of consumers for a product and then plan accordingly to meet that demand

Question 23

What are the four key core activities pertaining to SCOR (Supply Chain Operations Reference Model):

Answer 23

Plan
Source
Make
Deliver

Question 24

What generally provide the largest source of short-term credit for small firms?

Answer 24

Trade Credits (or accounts payable)

Question 25

Wha represent routine transactions that remain unpaid at the end of an accounting period purely asa result of timing?

Answer 25

Accruals

Question 26

How to calculate the APR of quick payment discounts:

Answer 26

(360 / (Pay Period - Discount Period)) X (Discount % / (100% - Discount %))

Question 27

What are some motives for holding cash?

Answer 27

Transaction motive: meet payments arising from ordinary course of business
Speculative motive: take advantage of temporary opportunities
Precautionary motive: maintain a safety cushion to meet unexpected needs

Question 28

A disadvantage for holding on to cash could be:

Answer 28

Negative arbitrage: interest obligations exceed interest income

Question 29

What’s the primary method for increase cash levels:

Answer 29

Reducing the operating cycle (selling and collecting quickly) by either speeding up cash inflows or slowing down cash outflows

Question 30

One of the major determinants of demand fora firm’s products or services along with price, product quality, and advertising is:

Answer 30

Credit Policy

Question 31

Credit policy variables include:

Answer 31

Credit period: length of time buyers are given to pay for their purchases
Credit standards: financial strength of credit customers
Collection policy: stringency or laxity in collecting delinquent accounts
Discounts: percentage and period

Question 32

Method to speed up cash collections include:

Answer 32

Customer screening ad credit policy
Prompt billing
Payment discounts

Question 33

2 ways to expedited credit sales in a timely manner are through the use of:

Answer 33

Electronic funds transfers

Lockbox systems

Question 34

Turning over the collection of accounts receivable to a third-party facto in exchange for a discounted short-term loan is called:

Answer 34

Factoring

Cash is then collected immediately from the factor rather than from the customer

Question 35

An external credit enhancement used by a company issuing otherwise unsecured debt to enhance its credit or can be required by a creditor to ensure payment is a:

Answer 35

Letter of credit

Question 36

A revolving loan with a bank that is up to a specific dollar maximum amount for a defined term and is renewable upon the maturity date is a:

Answer 36

Line of credit

Question 37

A company’s borrowing capacity goes up when

Answer 37

Debt goes down an equity goes up

Question 38

What protects borrower’s credit rating and reduce the cost of borrowing?

Answer 38

Debt covenants

Question 39

Advantages to Short-Term financing are:

Answer 39

Increased profitability

Decreased financing costs: interest rates are lower

Question 40

Disadvantages to Short-Term financing:

Answer 40

Increased interest rate risk: interest rates may abruptly change
Decreased capital availability: lender evaluation of credit worthiness may change and make financing impossible or less favorable.

Question 41

Advantages to Long-Term financing:

Answer 41

Decreased interest rate risk

Increased capital availability

Question 42

Disadvantages to Long-Term financing:

Answer 42

Decreased profitability: higher financing costs

Increased financing costs: LT debt generally carries higher interest rates