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

• Question 41:

  Clauson Inc. grants credit terms of 1/15, net 30 and projects gross sales for next year of $2,000,000. The credit manager estimates that 40 percent of their customers pay on the discount date, 40 percent on the net due date, and 20 percent pay 15 days after the net due date. Assuming uniform sales and a 360-day year, what is the projected days sales outstanding (rounded to the nearest whole day)?

  A. 20 days.

  B. 24 days.

  C. 27 days.

  D. 30 days.

  Correct Answer: C

  Choice "c" is correct. 27 days projected days sales outstanding.

  

• Question 42:

  Which of the following represents a firm's average gross receivable balance?

  I. Days' sales in receivables x accounts receivable turnover.

  II. Average daily sales x average collection period.

  III.

  Net sales ÷ average gross receivables.

  A.

  I only.

  B.

  I and II only.

  C.

  II only.

  D.

  II and III only.

  Correct Answer: C

  Choice "c" is correct. II only - Average daily sales ($27,397) ?Average collection period (36.5) =

  $1,000,000 Avg gross A/R

  Not I - Days' sales in receivables (36.5) ?AR turnover 10 = 365 days in year.

  Not III - Net sales ($10,000,000) ?Avg gross receivables ($1,000,000) = 10 AR turnover.

• Question 43:

  Gartshore Inc. is a mail-order book company. The Company recently changed its credit policy in an attempt to increase sales. Gartshore's variable cost ratio is 70 percent and its required rate of return is 12 percent. The company projects that annual sales will increase from the current level of $360,000 to $432,000, but the average collection period on receivables will go from 30 days to 40 days. Ignoring any tax implications, what is the cost of carrying the additional investment in accounts receivable, using a 360day year?

  A. $1,512

  B. $2,000

  C. $2,160

  D. $12,600

  Correct Answer: A

  Choice "a" is correct. The cost of carrying accounts receivable now is the variable cost of creating the account receivable times the cost of that capital during the collection period. The cost of the investment in accounts receivable is now:

  

  Choice "c" is incorrect. This considers the entire account receivable as a cost. Choices "b" and "d" are incorrect, per the above calculation.

• Question 44:

  A company enters into an agreement with a firm who will factor the company's accounts receivable. The

  factor agrees to buy the company's receivables, which average $100,000 per month and have an average collection period of 30 days. The factor will advance up to 80 percent of the face value of receivables at an annual rate of 10 percent and charge a fee of 2 percent on all receivables purchased. The controller of the company estimates that the company would save $18,000 in collection expenses over the year. Fees and interest are not deducted in advance. Assuming a 360-day year, what is the annual cost of financing?

  A. 12.0 percent.

  B. 14.0 percent.

  C. 16.0 percent.

  D. 17.5 percent.

  Correct Answer: D

  Choice "d" is correct. 17.5% annual cost of financing.

  

• Question 45:

  A company plans to tighten its credit policy. The new policy will decrease the average number of days in

  collection from 75 to 50 days and will reduce the ratio of credit sales to total revenue from 70 to 60 percent.

  The company estimates that projected sales would be five percent less if the proposed new credit policy is

  implemented. If projected sales for the coming year are $50 million, calculate the dollar impact on accounts

  receivable of this proposed change in credit policy.

  Assume a 360-day year.

  A. $3,817,445 decrease.

  B. $6,500,000 decrease.

  C. $3,333,334 decrease.

  D. $18,749,778 increase.

  Correct Answer: C

  

  Choice "c" is correct. $3,333,334 decrease in accounts receivable.

• Question 46:

  A firm averages $4,000 in sales per day and is paid, on an average, within 30 days of the sale. After they receive their invoice, 55 percent of the customers pay by check, while the remaining 45 percent pay by credit card. Approximately how much would the company show in accounts receivable on its balance sheet on any given date?

  A. $120,000

  B. $48,000

  C. $54,000

  D. $21,600

  Correct Answer: A

  

  Choice "a" is correct. $120,000 accounts receivable approximation. There is no effect on total A/R based on how (i.e., check or credit card) the customers actually pay their A/R.

• Question 47:

  When purchasing temporary investments, which one of the following best describes the risk associated with the ability to sell the investment in a short period of time without significant price concessions?

  A. Interest rate risk.

  B. Purchasing power risk.

  C. Financial risk.

  D. Liquidity risk.

  Correct Answer: D

  Choice "d" is correct. Liquidity risk is associated with the ability to sell the temporary investment in a short period of time without significant price concessions. Choice "a" is incorrect. Interest rate risk is the fluctuation in the value of a "financial asset" when interest rates change. Choice "b" is incorrect. Purchasing power risk is the risk that price levels will change and affect asset values (mostly real estate). Choice "c" is incorrect. Financial risk is a general category of risk that includes:

  ?Interest rate risk ?Market risk ?Purchasing power risk ?Liquidity risk ?Default risk

• Question 48:

  The marketable securities with the least amount of default risk are:

  A. Federal government agency securities.

  B. U.S. treasury securities.

  C. Repurchase agreements.

  D. Bankers' acceptances.

  Correct Answer: B

  Choice "b" is correct. Default risk is the risk that the security will not be repaid because the issuing entity is insolvent or illiquid. U.S. Treasury securities are issued by the Treasury Department, which has virtually no risk of being insolvent or illiquid. Choice "a" is incorrect. Securities issued by certain federal government agencies carry slightly more default risk than U.S. treasuries because these agencies are (usually) not as large or liquid as the U.S. Treasury. Choice "c" is incorrect. Repurchase agreements are sales by dealers in government securities who agree to repurchase these securities at a specific time and price. The risk of default is high because it is based upon the ability of the dealer to repurchase the securities. Choice "d" is incorrect. Bankers' acceptances are drafts drawn on a bank, which guarantees payment at maturity. The default risk is higher because the execution of the acceptance is based upon the solvency of the bank.

• Question 49:

  All of the following are valid reasons for a business to hold cash and marketable securities, except to:

  A. Satisfy compensating balance requirements.

  B. Maintain adequate cash needed for transactions.

  C. Maintain a precautionary balance.

  D. Earn maximum returns on investment assets.

  Correct Answer: D

  Choice "d" is correct. There are three primary motives for holding cash:

  1.

  Transactions demand

  2.

  Precautionary demand

  3.

  Speculative demand

  However, cash is generally held in very short-term liquid investments which are low risk, low return.

• Question 50:

  Corbin Inc. can issue three-month commercial paper with a face value of $1,000,000 for $980,000. Transaction costs would be $1,200. The effective annualized percentage cost of the financing, based on a 360-day year, would be:

  A. 2.16%

  B. 8.48%

  C. 8.65%

  D. 8.00%

  Correct Answer: C

  Choice "c" is correct. The cost to issue the commercial paper is the $20,000 original issue discount ($1

  million - $980,000), plus transaction costs of $1,200 for a total of $21,200. Therefore, it costs $21,200 to

  borrow $980,000 for 3 months.

  The 3-month interest cost is 2.16% ($21,200 / $980,000).

  The annual interest cost is 8.65%

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