TEST BANK: WORKING CAPITAL MANAGEMENT

(Difficulty: E = Easy, M = Medium, and T = Tough)

Multiple Choice: Problems

Easy:
Sales collections
1

$55,000
$47,400
$38,000
$32,800
$30,000

Accounts receivable balance

.

Diff: E

$194,444
$ 57,143
$ 5,556
$ 97,222
$212,541

Cash conversion cycle

.

Answer: a

If Hot Tubs Inc. had sales of $2,027,773 per year (all credit) and its
days sales outstanding was equal to 35 days, what was its average amount
of accounts receivable outstanding? (Assume a 365-day year.)
a.
b.
c.
d.
e.

Diff: E

The Danser Company expects to have sales of $30,000 in January, $33,000

in February, and $38,000 in March. If 20 percent of sales are for cash,
40 percent are credit sales paid in the month following the sale, and 40
percent are credit sales paid 2 months following the sale, what are the
cash receipts from sales in March?
a.
b.
c.
d.
e.

Answer: d

Answer: d

Diff: E

Spartan Sporting Goods has $5 million in inventory and $2 million in

accounts receivable.
Its average daily sales are $100,000.
The
companys payables deferral period (accounts payable divided by daily
purchases) is 30 days.
What is the length of the companys cash
conversion cycle?
a. 100 days
b. 60 days
c. 50 days
d. 40 days
e. 33 days

Chapter 22 - Page 1

Cash conversion cycle

4

Answer: a

Diff: E

For the Cook County Company, the average age of accounts receivable is
60 days, the average age of accounts payable is 45 days, and the average
age of inventory is 72 days.
Assuming a 365-day year, what is the
length of the firms cash conversion cycle?
a.
b.
c.
d.
e.

87
90
65
48
66

days
days
days
days
days

Medium:
Cash budget
5

Answer: c

Diff: M

Chadmark Corporations budgeted monthly sales are $3,000. Forty percent

of its customers pay in the first month and take the 2 percent discount.
The remaining 60 percent pay in the month following the sale and dont
receive a discount.
Chadmarks bad debts are very small and are
excluded from this analysis.
Purchases for next months sales are
constant each month at $1,500.
Other payments for wages, rent, and
taxes are constant at $700 per month. Construct a single months cash
budget with the information given.
What is the average cash gain or
(loss) during a typical month for Chadmark Corporation?
a.
b.
c.
d.
e.

$2,600
$ 800
$ 776
$ 740
$ 728

Chapter 22 - Page 2

CHAPTER 22
ANSWERS AND SOLUTIONS

Chapter 22 - Page 3

1.

Sales collections

Answer: d

Diff: E

March
receipts = (0.20)($38,000) + (0.40)($33,000) + (0.40)($30,000) = $32,800.
2
.
3
.

Accounts receivable balance

Answer: a

Diff: E

Accounts receivables = DSO Sales per day = 35($2,027,773/365) = $194,444.

Cash conversion cycle

Answer: d

Diff: E

Facts given: Payables deferral period = 30 days; Inv = $5,000,000; Rec. =

$2,000,000; ADS = $100,000.

Cash conversion
Inv. conversion
Rec. collection
Pay. deferral
=
+

.
cycle
period
period
period

4.

Step 1:

Determine the inventory conversion period:

Inventory conversion period = Inventory/Daily sales
= $5,000,000/$100,000
= 50 days.

Step 2:

Determine the receivables collection period:

Receivables collection period = Receivables/Daily sales
= $2,000,000/$100,000
= 20 days.

Step 3:

Given data and information calculated above, determine the firms

cash conversion cycle:
Cash conversion cycle = 50 + 20 - 30
= 40 days.

Cash conversion cycle

Cash conversion
cycle

Answer: a

Diff: E

Inv. conversion
Rec. collection
Pay. deferral
+

period
period
period

= 72 + 60 - 45 = 87 days.
5.

Cash budget
Construct a simplified cash budget:
Sales
Collections (same months sales)
Collections (last months sales)
Total collections
Purchases payments
Other payments
Total payments
Net cash gain (loss)

Answer: c
$3,000
1,176
1,800
2,976
1,500
700
2,200
$ 776

Diff: M

(0.98 0.40 $3,000)

(1.00 0.60 $3,000)