Liquidity And Risk Exam

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Liquidity And Risk Exam - Quiz

Liquidity and Risk Exam


Questions and Answers
  • 1. 

    Which of the following items is incorrectly categorised as a Current Asset?

    • A.

      Trade receivables

    • B.

      Marketable securities

    • C.

      Short term borrowings

    • D.

      Cash

    Correct Answer
    C. Short term borrowings
    Explanation
    Short term borrowings are incorrectly categorized as a current asset because they represent a liability rather than an asset. Current assets are resources that are expected to be converted into cash or used up within one year, while short term borrowings represent debts that are expected to be repaid within one year. Therefore, short term borrowings should be classified as a current liability rather than a current asset.

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  • 2. 

    Which of the following items is incorrectly categorised as a Current Liability?

    • A.

      2020 Debentures

    • B.

      Trade payables

    • C.

      Other payables due within one year

    • D.

      YE Accrual

    Correct Answer
    A. 2020 Debentures
    Explanation
    2020 Debentures are incorrectly categorized as a Current Liability because debentures are long-term liabilities that are typically due for repayment after one year. Current liabilities, on the other hand, are obligations that are expected to be settled within one year. Trade payables, other payables due within one year, and YE Accrual are all examples of current liabilities as they are expected to be settled within the next year.

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  • 3. 

    What is mean by the term overtrading? (check all that apply)

    • A.

      A company is growing its sales faster than it can finance them.

    • B.

      Enormous accounts payable or receivable.

    • C.

      Lack of working capital to finance operations.

    • D.

      Overtrading can happen even in profitable circumstances.

    • E.

      Many businesses became insolvent because they try to accommodate everyone who wishes to purchase their products.

    • F.

      Business tries to engage in more business than its working capital will allow.

    • G.

      Short cash conversion cycle.

    Correct Answer(s)
    A. A company is growing its sales faster than it can finance them.
    B. Enormous accounts payable or receivable.
    C. Lack of working capital to finance operations.
    D. Overtrading can happen even in profitable circumstances.
    E. Many businesses became insolvent because they try to accommodate everyone who wishes to purchase their products.
    F. Business tries to engage in more business than its working capital will allow.
    Explanation
    Overtrading refers to a situation where a company is expanding its sales at a rate that exceeds its ability to finance them. This can lead to a lack of working capital to finance day-to-day operations and result in enormous accounts payable or receivable. Overtrading can occur even in profitable circumstances, as businesses may try to accommodate everyone who wishes to purchase their products, leading to insolvency. It is essentially when a business engages in more business than its working capital will allow, which can be indicated by a short cash conversion cycle.

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  • 4. 

    What are some of the classic signs of overtrading (or under-capitalisation)? (check all that apply)

    • A.

      Cash flow problems.

    • B.

      Bank overdraft is growing rapidly.

    • C.

      High receivables.

    • D.

      Too much money is tied up in stock and trade debtors.

    • E.

      Cash is not coming in quickly enough to meet debts as they fall due.

    • F.

      Firm failed to obtain sufficient equity finance when it was established to support its trading level.

    • G.

      Managers are bad at managing the working capital resources.

    • H.

      Not able to pay short-term bills.

    • I.

      Not able to pay long-term debts.

    Correct Answer(s)
    A. Cash flow problems.
    B. Bank overdraft is growing rapidly.
    C. High receivables.
    D. Too much money is tied up in stock and trade debtors.
    E. Cash is not coming in quickly enough to meet debts as they fall due.
    F. Firm failed to obtain sufficient equity finance when it was established to support its trading level.
    G. Managers are bad at managing the working capital resources.
    H. Not able to pay short-term bills.
    Explanation
    The signs of overtrading or under-capitalization include cash flow problems, a rapidly growing bank overdraft, high receivables, too much money tied up in stock and trade debtors, cash not coming in quickly enough to meet debts, failure to obtain sufficient equity finance, poor management of working capital resources, and inability to pay short-term bills. These signs indicate that the company is facing financial difficulties and may not have enough capital to support its trading activities and meet its financial obligations.

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  • 5. 

    What is advantage of keeping receivables high?

    • A.

      To get the business going.

    • B.

      More cash flow into the business.

    • C.

      Take less time to collect them.

    • D.

      Less chance of bad debts.

    Correct Answer
    A. To get the business going.
    Explanation
    Keeping receivables high can be advantageous for getting the business going because it means that there are more outstanding invoices or payments due from customers. This indicates that the business has a higher level of sales or services provided, which can contribute to its growth and success. By having more cash flow into the business, it can have the necessary funds to cover expenses, invest in new opportunities, and expand its operations. Additionally, having a higher level of receivables can also reduce the risk of bad debts, as it implies that customers are more likely to pay their outstanding balances on time.

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  • 6. 

    Advantages of keeping inventory high?(check all that apply)

    • A.

      Allow customers to be serve quickly.

    • B.

      Allow a company to buy in bulk and get discount.

    • C.

      Less admin cost.

    • D.

      Lower storage cost.

    • E.

      Less cash tied up in inventory.

    • F.

      Avoid risk of obsolescence.

    Correct Answer(s)
    A. Allow customers to be serve quickly.
    B. Allow a company to buy in bulk and get discount.
    C. Less admin cost.
    Explanation
    Keeping inventory high has several advantages. Firstly, it allows customers to be served quickly as there is readily available stock to fulfill their orders. Secondly, it enables a company to buy in bulk and negotiate discounts from suppliers, resulting in cost savings. Additionally, having high inventory levels can lead to lower administrative costs as there is less need for frequent ordering and monitoring of stock levels. Lastly, it reduces the risk of obsolescence as products are less likely to become outdated or unsellable.

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  • 7. 

    Which is the correct way to calculate Current Ratio?

    • A.

      CA - Inventory / Current Liabilities

    • B.

      CA / CL

    • C.

      CL / CA

    • D.

      CA - Receivables / CL

    Correct Answer
    B. CA / CL
    Explanation
    The correct way to calculate the Current Ratio is by dividing the Current Assets (CA) by the Current Liabilities (CL). This ratio helps in assessing a company's ability to pay off its short-term obligations using its current assets. By dividing the total current assets by the total current liabilities, we get a ratio that indicates the company's liquidity position and its ability to meet its short-term financial obligations.

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  • 8. 

    Which is the correct way to calculate the Quick Ratio?

    • A.

      CA / CL

    • B.

      CA - Inventory / CL

    • C.

      CA - Receivables / CL

    • D.

      CL / CA

    Correct Answer
    B. CA - Inventory / CL
    Explanation
    The correct way to calculate the Quick Ratio is by subtracting the inventory from the current assets and then dividing it by the current liabilities. This ratio helps determine a company's ability to cover its short-term liabilities using its most liquid assets, excluding inventory. By excluding inventory, it provides a more conservative measure of a company's liquidity position.

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  • 9. 

    A company should we be more concerned about the Quick Ratio than the Current Ratio then: if QR is above 1 its good for banks when they check how good the company is managing its assets. For shareholders QR abov 1 mean that company doesn`t use whole its opportunity. Also, QR will not show the difference in time. e.g. debtors pay you every 11 month, but you have to pay every month on this basis you will not meet your creditors. 

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    A company should be more concerned about the Quick Ratio than the Current Ratio because a Quick Ratio above 1 indicates that the company is effectively managing its assets, which is beneficial for banks when assessing the company's financial health. However, for shareholders, a Quick Ratio above 1 means that the company is not utilizing its full potential. Additionally, the Quick Ratio does not take into account the difference in time between when debtors pay the company and when the company has to pay its creditors, which can create cash flow issues.

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  • 10. 

    Under what circumstances should we be more concerned about the Quick ratio than the current ratio?

    • A.

      When the Inventory days are high and therefore it takes a long time to turn inventory into cash it is more important to consider the Quick ratio. When the Inventory days are high and therefore it takes a long time to turn inventory into cash it is more important to consider the Quick ratio. When the Inventory days are high and therefore it takes a long time to turn inventory into cash it is more important to consider the Quick ratio. Whet the inventory days are high and therefore it takes a long time to turn inventory into cash it is more important to consider the .

    • B.

      When the Inventory days are low and therefore it takes a long time to turn inventory into cash it is more important to consider the Quick ratio.

    Correct Answer
    A. When the Inventory days are high and therefore it takes a long time to turn inventory into cash it is more important to consider the Quick ratio. When the Inventory days are high and therefore it takes a long time to turn inventory into cash it is more important to consider the Quick ratio. When the Inventory days are high and therefore it takes a long time to turn inventory into cash it is more important to consider the Quick ratio. Whet the inventory days are high and therefore it takes a long time to turn inventory into cash it is more important to consider the .
    Explanation
    When the inventory turnover is slow and it takes a longer time for a company to convert its inventory into cash, it becomes more crucial to focus on the Quick ratio. The Quick ratio, also known as the acid-test ratio, measures a company's ability to pay off its current liabilities using its most liquid assets. Since the Quick ratio excludes inventory from its calculation, it provides a clearer picture of a company's short-term liquidity when inventory turnover is slow. Therefore, in such circumstances, the Quick ratio becomes a more reliable indicator of a company's financial health compared to the current ratio.

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  • 11. 

     If we distinguish between the Operating Cycle (Working Capital Cycle) and the Cash Conversion Cycle, how do we calculate the Operating Cycle?

    • A.

      Inventory days + receivables days.

    • B.

      Receivable days - payable days.

    • C.

      Receivable days - payables days.

    • D.

      Inventory days + receivable days + payable days.

    Correct Answer
    A. Inventory days + receivables days.
    Explanation
    The operating cycle is a measure of the time it takes for a company to convert its inventory into cash through the sale of goods and the collection of receivables. It consists of two components: the inventory days, which represents the average number of days it takes for a company to sell its inventory, and the receivables days, which represents the average number of days it takes for a company to collect payment from its customers. By adding these two components together, we can calculate the total length of the operating cycle.

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  • 12. 

    Cash cycle is the length of time between when the firm pays cash to purchase its initial inventory and when it receives cash from the sale of the output produced from that inventory.

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    The explanation for the given correct answer is that the cash cycle represents the time it takes for a company to convert its cash investment in inventory back into cash through the sale of the produced output. It starts when the company pays cash to purchase inventory and ends when it receives cash from the sale of the output. Therefore, the statement is true.

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  • 13. 

    How do we calculate the Cash Conversion Cycle?

    • A.

      Inventory days + receivables days + payables days

    • B.

      Inventory days + receivables days - payables days

    • C.

      Inventory days + receivables days

    • D.

      Receivables days - payables days

    Correct Answer
    B. Inventory days + receivables days - payables days
    Explanation
    The cash conversion cycle is calculated by adding the inventory days and receivables days, and then subtracting the payables days. This calculation helps measure the amount of time it takes for a company to convert its investments in inventory and accounts receivable into cash, while also considering the time it takes to pay its suppliers. By subtracting the payables days, the calculation takes into account the time it takes for the company to pay its suppliers, which affects its cash flow.

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  • 14. 

    How to calculate Inventory days?

    • A.

      = (inventory / COS)* 365

    • B.

      = (inventory / Credit Sale)* 365

    • C.

      = (inventory / Credit Purchase)*365

    Correct Answer
    A. = (inventory / COS)* 365
    Explanation
    The correct answer is = (inventory / COS) * 365. This formula is used to calculate the number of days it takes for a company to sell its entire inventory. It is derived by dividing the inventory by the cost of goods sold (COS) and then multiplying the result by 365 to convert it into days. This metric is important for businesses to track as it helps them assess the efficiency of their inventory management and identify any potential issues with slow-moving or obsolete inventory.

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  • 15. 

    What are advantages of keeping receivable low? (check all what applays)

    • A.

      Less chance of bad debts.

    • B.

      Less cash tied up in debtors.

    • C.

      Take less time to collect debtors.

    • D.

      To get business going.

    Correct Answer(s)
    A. Less chance of bad debts.
    B. Less cash tied up in debtors.
    C. Take less time to collect debtors.
    Explanation
    Keeping receivables low has several advantages. First, it reduces the chance of bad debts, as the lower the receivables, the lower the risk of customers defaulting on payments. Second, it means less cash is tied up in debtors, allowing the company to have more liquidity and flexibility in using its funds. Lastly, with lower receivables, it takes less time to collect the debts, improving cash flow and allowing the company to reinvest or use the funds for other purposes.

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  • 16. 

    Which of the following is an example of a conservative approach to the size of a firm’s investment in Current Assets?

    • A.

      Large balances of cash, large inventories, high receivables.

    • B.

      Large balances of cash, small inventories, high receivables.

    • C.

      Large inventories, high receivables, small cash reserves.

    • D.

      Large inventories, small receivables, large cash reserves.

    Correct Answer
    A. Large balances of cash, large inventories, high receivables.
    Explanation
    A conservative approach to the size of a firm's investment in current assets involves holding large balances of cash, large inventories, and high receivables. This approach prioritizes maintaining a strong liquidity position and ensuring that the firm has enough cash on hand to meet its short-term obligations. By holding large inventories and high receivables, the firm aims to minimize the risk of stockouts and bad debts. This conservative approach helps to mitigate liquidity and operational risks, but it may also result in higher holding costs and lower profitability.

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  • 17. 

    Which of the following could be an examples of carrying costs?

    • A.

      The cost of ordering inventories.

    • B.

      The return that could have been made on an investment in something other than inventory.

    • C.

      The loss of goodwill due to not meeting customer’s demands.

    • D.

      The brokerage cost on ordering an adjustment to cash balances d) The brokerage cost on ordering an adjustment to cash balances The brokerage cost on ordering an adjustment to cash balances.

    Correct Answer
    B. The return that could have been made on an investment in something other than inventory.
    Explanation
    Definition of 'Carrying Cost Of Inventory'

    This is the cost a business incurs over a certain period of time, to hold and store its inventory. Businesses use this figure to help them determine how much profit can be made on current inventory. It also helps them find out if there is a need to produce more or less, in order to keep up with expenses or maintain the same income stream.

    Also referred to as carry cost of inventory.

    Investopedia explains 'Carrying Cost Of Inventory'

    Carrying cost of inventory is often described as a percentage of the inventory value. This percentage could include taxes, employee costs, depreciation, insurance, cost to keep items in storage, opportunity cost, cost of insuring and replacing items, and cost of capital that help produce income for a business.

    Also referred to as inventory cost.

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  • 18. 

    If a firm were taking a conservative approach to financing their assets which of the following would be likely to be an action of the firm?

    • A.

      Make an investment in marketable securities during periods when current asset balances were low due to seasonality.

    • B.

      Take out long term finance to cover noncurrent assets and permanent current assets and short term financing to cover the rest.

    • C.

      Borrow short term funds to cover high inventories during peak periods of seasonality.

    • D.

      Minimise the amount of long term finance as much as possible.

    Correct Answer
    A. Make an investment in marketable securities during periods when current asset balances were low due to seasonality.
    Explanation
    A conservative approach to financing assets involves minimizing the amount of long-term finance and relying more on short-term financing. By making an investment in marketable securities during periods when current asset balances are low due to seasonality, the firm is effectively using its excess cash to generate additional income. This action aligns with a conservative approach as it avoids taking on additional long-term debt and instead utilizes the available funds in a low-risk investment.

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  • 19. 

    Costs of holding inventory consist of: (check all that applays)

    • A.

      Acquisition costs (costs of inventory itself over the period being analyzed).

    • B.

      Order costs (the total costs of placing an order over the period being analyzed).

    • C.

      Carryng costs (costs include storage costs, insurance, taxes, spoilage, obsolence, and the opportunity costs of the funds tied up in the inventory).

    Correct Answer(s)
    A. Acquisition costs (costs of inventory itself over the period being analyzed).
    B. Order costs (the total costs of placing an order over the period being analyzed).
    C. Carryng costs (costs include storage costs, insurance, taxes, spoilage, obsolence, and the opportunity costs of the funds tied up in the inventory).
    Explanation
    The costs of holding inventory consist of acquisition costs, order costs, and carrying costs. Acquisition costs refer to the costs of the inventory itself over the period being analyzed. Order costs are the total costs associated with placing an order over the same period. Carrying costs include various expenses such as storage costs, insurance, taxes, spoilage, obsolescence, and the opportunity costs of the funds tied up in the inventory. These costs collectively contribute to the overall expenses incurred in holding inventory.

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  • 20. 

    Reasons why a firm holds cash? (chack all that applays)

    • A.

      To meet its day-to-day needs.

    • B.

      To compensate for the uncertanty associated with its cash flows.

    • C.

      To satisfy bank requirements.

    • D.

      To earn persentage on cash deposits.

    Correct Answer(s)
    A. To meet its day-to-day needs.
    B. To compensate for the uncertanty associated with its cash flows.
    C. To satisfy bank requirements.
    Explanation
    A firm holds cash to meet its day-to-day needs, such as paying for expenses and operating costs. It also holds cash to compensate for the uncertainty associated with its cash flows, as unexpected expenses or fluctuations in revenue may arise. Additionally, holding cash allows the firm to satisfy bank requirements, such as maintaining a certain level of liquidity or meeting minimum balance requirements.

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  • 21. 

    What are shortage cost consist of? (check all that applay)

    • A.

      Order costs (inv), brokerage costs (cash).

    • B.

      Loss of custom (e.g. above).

    • C.

      Overtime for extra production.

    • D.

      Paying a premium for last minute inventories.

    • E.

      Insurance.

    Correct Answer(s)
    A. Order costs (inv), brokerage costs (cash).
    B. Loss of custom (e.g. above).
    C. Overtime for extra production.
    D. Paying a premium for last minute inventories.
    Explanation
    The shortage cost consists of order costs (inv), brokerage costs (cash), loss of custom (e.g. above), overtime for extra production, and paying a premium for last minute inventories.

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  • 22. 

    What are curring cost consist of?

    • A.

      Storage cost.

    • B.

      Opportunity cost.

    • C.

      Insurance.

    • D.

      Damage, theft, obsolete inventory.

    • E.

      Overtime for extra production.

    Correct Answer(s)
    A. Storage cost.
    B. Opportunity cost.
    C. Insurance.
    Explanation
    Curring costs consist of storage cost, opportunity cost, and insurance. Storage cost refers to the expenses incurred for storing goods or inventory. Opportunity cost is the potential loss of income or benefits that could have been gained from an alternative use of resources. Insurance is the cost of insuring the goods against any potential risks or damages.

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  • 23. 

    Conservative approach can be more costly at times because of the opportunity cost and cost of storage etc it can also lead to higher sales as customers prefer the more generous credit terms and lack of stock outs. 

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    A conservative approach in business refers to being cautious and risk-averse. While it may seem like a safe option, it can also be more costly. This is because being conservative often involves missed opportunities for growth and expansion, which can result in higher opportunity costs. Additionally, maintaining excess inventory or storage can lead to increased costs. On the other hand, being more generous with credit terms and ensuring no stock outs can attract more customers and potentially lead to higher sales. Therefore, the statement is true.

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  • 24. 

    What is aggressive financing policy?

    • A.

      It is financing part or all of the permanent working capital with short-term debt.

    • B.

      It is financing even some of the PPE with short-term sources of funds.

    Correct Answer
    A. It is financing part or all of the permanent working capital with short-term debt.
    Explanation
    Aggressive financing policy refers to the practice of funding a portion or the entirety of the permanent working capital using short-term debt. This approach aims to maximize the use of short-term funds to finance long-term assets, such as inventory and accounts receivable. By relying on short-term debt, the company can benefit from lower interest rates and greater flexibility in managing its working capital needs. However, this strategy also carries higher risks, as the company may face challenges in refinancing the short-term debt when it matures.

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  • 25. 

    Funding risk is the risk of incurring financial distress cost, should the firm not be able to refinance its debt in a timely manner or at a reasonable rate.

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    The statement is true because funding risk refers to the potential financial difficulties a company may face if it is unable to secure new financing or refinance its existing debt. This risk arises when a firm is unable to obtain funds at a reasonable interest rate or within the required timeframe, leading to financial distress costs. Therefore, the statement accurately describes the concept of funding risk.

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  • 26. 

    Conservative financing policy consist of: (check all that applays)

    • A.

      A firm finance its short-term needs with long-term debt.

    • B.

      A firm will use long-term sources of funds to finance its fixed assets.

    • C.

      A firm will use short-term debt very sparingly to meet its peak seasonal needs.

    • D.

      A firm will finance its PPE with short-term sources of funds.

    Correct Answer(s)
    A. A firm finance its short-term needs with long-term debt.
    B. A firm will use long-term sources of funds to finance its fixed assets.
    C. A firm will use short-term debt very sparingly to meet its peak seasonal needs.
    Explanation
    Conservative financing policy involves a firm using long-term debt to finance its short-term needs, as this provides stability and reduces the risk of default. The firm also uses long-term sources of funds to finance its fixed assets, which aligns with the conservative approach of maintaining a stable capital structure. Additionally, the firm uses short-term debt sparingly to meet its peak seasonal needs, minimizing the risk of liquidity problems. However, financing the firm's PPE (Property, Plant, and Equipment) with short-term sources of funds contradicts the conservative financing policy, as it introduces more risk and instability.

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  • 27. 

    Payable days?

    • A.

      Payables / Credit Purchase * 365

    • B.

      Payables / Credit Sales * 365

    • C.

      Payables / Inventory * 365

    Correct Answer
    A. Payables / Credit Purchase * 365
    Explanation
    The formula for payable days is calculated by dividing payables by credit purchases and then multiplying the result by 365. This formula is used to determine the average number of days it takes for a company to pay its suppliers for credit purchases. By dividing payables by credit purchases, we get the average amount owed to suppliers for each credit purchase. Multiplying this result by 365 gives us the average number of days it takes to pay off these credit purchases.

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  • 28. 

    Receivable days?

    • A.

      Receivables / Credit Sales * 365

    • B.

      Receivables / Credit Purchese * 365

    Correct Answer
    A. Receivables / Credit Sales * 365
    Explanation
    The formula for receivable days is calculated by dividing the receivables by the credit sales and then multiplying the result by 365. This formula helps in determining the average number of days it takes for a company to collect its accounts receivable. By using credit sales instead of credit purchases, it accurately reflects the time it takes for customers to pay for the goods or services they have purchased on credit.

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  • 29. 

    For a company trading in animal feed pellets will the pellets of the animal feed be categorised:

    • A.

      Raw material.

    • B.

      Finish Good.

    • C.

      Cost of Sale.

    • D.

      Work in Progress

    Correct Answer
    B. Finish Good.
    Explanation
    The pellets of the animal feed will be categorized as Finish Goods because they are the final product that is ready for sale to customers. Raw materials are the basic materials used in production, and work in progress refers to partially completed products. Cost of sale refers to the expenses directly related to the sale of goods, not the categorization of the goods themselves. Therefore, the correct categorization for the animal feed pellets would be Finish Goods.

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  • 30. 

    What reasons do companies have for holding inventory? (check all taht applys)

    • A.

      Customer demand.

    • B.

      Production scheduling.

    • C.

      Cost of ordering.

    Correct Answer(s)
    A. Customer demand.
    B. Production scheduling.
    Explanation
    Companies hold inventory for two main reasons: customer demand and production scheduling. By having inventory available, companies can meet customer demand promptly and avoid losing potential sales. Additionally, holding inventory allows companies to plan their production schedules more efficiently. They can produce goods in advance and have them ready to be shipped when needed, reducing lead times and improving customer satisfaction. The cost of ordering is not a reason for holding inventory, as it refers to the expenses associated with placing orders, not the reasons for holding inventory.

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  • 31. 

    When considering an EOQ with discounts situation which two factors are we comparing:?

    • A.

      The extra cost of buying a large amount and the level of discount realised.

    • B.

      The holding cost and the ordering cost.

    • C.

      The opportunity cost and the ordering cost.

    • D.

      The purchasing cost and discount.

    Correct Answer
    A. The extra cost of buying a large amount and the level of discount realised.
    Explanation
    In an EOQ with discounts situation, we are comparing the extra cost of buying a large amount and the level of discount realized. This means that we need to consider the additional expenses incurred when purchasing a large quantity, such as storage costs or transportation fees, and compare it with the discount offered by the supplier. By comparing these two factors, we can determine the optimal order quantity that minimizes the total cost of inventory management.

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  • 32. 

    Which of the following is correct:?

    • A.

      The re-order level is concerned with when to place an order whereas the EOQ is concerned with how much to order.

    • B.

      The reorder level is the amount which should be ordered each time a new order is placed.

    • C.

      The EOQ is the best quantity to order to keep holding costs as low as possible.

    • D.

      The re-order level is concerned with how many units should be available after ordering.

    Correct Answer
    A. The re-order level is concerned with when to place an order whereas the EOQ is concerned with how much to order.
    Explanation
    The explanation for the given correct answer is that the re-order level refers to the point at which a new order should be placed, indicating when to place an order. On the other hand, the EOQ (Economic Order Quantity) is a calculation that determines the optimal quantity to order in order to minimize holding costs. Therefore, the EOQ is concerned with how much to order.

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  • 33. 

    If demand is 50,000 units and the EOQ is 5000 and the lead time for orders is 4 weeks. How frequently will the company place an order?  What is the Re-order level? Q / D * 365days  5000 / 50 000 * 365 = 37 days; 4 weeks / 52 weeks * 50 000 units = 3846 units

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    The company will place an order approximately every 37 days. The reorder level is calculated to be 3846 units.

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  • 34. 

    Identify the element which would not be a useful source of information for a firm to assess the credit worthiness of customers.

    • A.

      Company`s cost of capital.

    • B.

      Bank reference.

    • C.

      Trade references.

    • D.

      Company sales records.

    Correct Answer
    A. Company`s cost of capital.
    Explanation
    The company's cost of capital would not be a useful source of information for assessing the creditworthiness of customers. The cost of capital refers to the cost of financing a company's operations and does not directly provide information about the creditworthiness of customers. On the other hand, bank references, trade references, and company sales records can provide valuable insights into the financial stability, payment history, and creditworthiness of customers.

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  • 35. 

    In what order do the following steps usually occur in a factoring arrangement? i) Supplier sells the right to receive to the factor; ii) Factor pays 20% to supplier less fees and interest; iii) 80% of debt forwarded to the supplier by the factor; iv) Customer pays debt according to their usual terms; v) Supplier sells to Customer

    • A.

      A) i, ii, iii, iv, v

    • B.

      B) ii, iii, v, i, iv

    • C.

      C) v, i, iii, iv, ii

    • D.

      D) v, iii, iv, ii, i

    Correct Answer
    C. C) v, i, iii, iv, ii
    Explanation
    The correct order of steps in a factoring arrangement is as follows: the supplier sells the goods to the customer (v), then sells the right to receive payment to the factor (i), the factor forwards 80% of the debt to the supplier (iii), the customer pays the debt according to their usual terms (iv), and finally, the factor pays 20% of the debt to the supplier after deducting fees and interest (ii). This order ensures that the supplier receives a portion of the payment upfront and the remaining amount when the customer pays.

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  • 36. 

    What is meant by a factoring arrangement that is made on a non-recourse basis?

    • A.

      The factor takes on the risks of the non-payment of the customer firm.

    • B.

      The factor lend money to the customer.

    Correct Answer
    A. The factor takes on the risks of the non-payment of the customer firm.
    Explanation
    A factoring arrangement made on a non-recourse basis means that the factor takes on the risks of the non-payment of the customer firm. This means that if the customer firm fails to pay the factor, the factor cannot seek payment from the customer firm, and instead absorbs the loss. This type of arrangement provides more security for the customer firm, as they are not held personally liable for any non-payment issues.

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  • 37. 

    What is factoring of account receivables?

    • A.

      It is arrangement of the firm to sell receivables to the lender, and the lender agrees to pay the firm the amount due from its customers at the end of firm`s payment period.

    • B.

      It is agreement, the lender reviews the invoices that represent the credit sales of the borrowing firm and decides which credit account it will accept as a collateral for the loan, based on its own credit standards.

    Correct Answer
    A. It is arrangement of the firm to sell receivables to the lender, and the lender agrees to pay the firm the amount due from its customers at the end of firm`s payment period.
    Explanation
    Factoring of accounts receivables refers to the arrangement where a firm sells its receivables to a lender. In this arrangement, the lender agrees to pay the firm the amount due from its customers at the end of the firm's payment period. This allows the firm to receive immediate cash flow by transferring the risk of collecting payments to the lender. The lender reviews the invoices representing the credit sales of the borrowing firm and decides which credit accounts to accept as collateral for the loan, based on their own credit standards.

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  • 38. 

    You are conducting a credit check for a potential customer.  The customer has offered the possession of a machine to your company if they were to default on payment.  Which of the five Cs would this arrangement effect when assessing the customer’s credit worthiness?

    • A.

      Capital

    • B.

      Collateral

    • C.

      Capacity

    • D.

      Character

    Correct Answer
    B. Collateral
    Explanation
    This arrangement would affect the "Collateral" aspect when assessing the customer's credit worthiness. Collateral refers to the assets or property that a borrower pledges to a lender as security for a loan. In this case, the customer is offering the possession of a machine as collateral, indicating that they have an asset that can be used to recover the loan amount in case of default. The presence of collateral increases the lender's confidence in the customer's ability to repay the loan, as it provides an additional source of repayment.

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  • 39. 

    What factors would affect the length of the credit period offered by a supplier to a customer?

    • A.

      Credit history.

    • B.

      Nature of idustry.

    • C.

      Understanding of customer’s cashflow.

    • D.

      Cash conversion cycle considerations.

    • E.

      Relationship between customer and suplier.

    Correct Answer(s)
    A. Credit history.
    B. Nature of idustry.
    C. Understanding of customer’s cashflow.
    D. Cash conversion cycle considerations.
    Explanation
    The factors that would affect the length of the credit period offered by a supplier to a customer include credit history, nature of industry, understanding of customer's cash flow, and cash conversion cycle considerations. Credit history is important as it provides information about the customer's past payment behavior. The nature of the industry can determine the level of risk associated with extending credit. Understanding the customer's cash flow helps the supplier assess their ability to make timely payments. Cash conversion cycle considerations involve analyzing the time it takes for the supplier to convert inventory into cash and evaluating if the customer's credit period aligns with this cycle.

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  • 40. 

    What factors would affect the length of the credit period offered by a supplier to a customer?

    • A.

      Credit history.

    • B.

      Nature of idustry.

    • C.

      Understanding of customer’s cashflow.

    • D.

      Cash conversion cycle considerations.

    • E.

      Relationship between customer and suplier.

    Correct Answer(s)
    A. Credit history.
    B. Nature of idustry.
    C. Understanding of customer’s cashflow.
    D. Cash conversion cycle considerations.
    Explanation
    The length of the credit period offered by a supplier to a customer can be influenced by several factors. One such factor is the customer's credit history, as a poor credit history may make the supplier hesitant to offer a longer credit period. The nature of the industry in which the customer operates can also play a role, as some industries may have longer cash conversion cycles or higher risk factors that could affect the credit period. The supplier's understanding of the customer's cash flow is important, as it helps determine the customer's ability to make timely payments. Additionally, the cash conversion cycle considerations, such as the time it takes for the supplier to convert inventory into cash, can impact the credit period. The relationship between the customer and supplier may also influence the credit period, as a long-standing and trustworthy relationship may result in more favorable credit terms.

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  • 41. 

    Which of the following is not a possible cost associated with carrying low cash balances?

    • A.

      Opportunity cost.

    • B.

      Fall in credit rating.

    • C.

      Loss of gain on marketable securities.

    • D.

      Loss of discounts.

    Correct Answer
    C. Loss of gain on marketable securities.
    Explanation
    The correct answer is "Loss of gain on marketable securities." This is because carrying low cash balances does not directly affect the potential gains from investing in marketable securities. The other options, such as opportunity cost, fall in credit rating, and loss of discounts, are all possible costs associated with carrying low cash balances.

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  • 42. 

    Which of the following describes the transactions motive?

    • A.

      Keeping cash to cover day to day spend on items such as paying wages and buying materials.

    • B.

      Keeping cash in order to cover transaction costs such as brokerage fees.

    • C.

      Keeping cash to take advantage of sudden investment opportunities.

    • D.

      Keeping cash in order to ensure the company does not get into trouble as it cannot rely on its cashflow forecasts to be totally accurate.

    Correct Answer
    A. Keeping cash to cover day to day spend on items such as paying wages and buying materials.
    Explanation
    The transactions motive refers to the need for a company to keep cash on hand in order to cover its day-to-day expenses, such as paying wages and buying materials. This is necessary to ensure that the company can continue its operations smoothly without facing any cash shortages. By keeping cash for these purposes, the company can avoid any disruptions in its regular business activities.

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  • 43. 

    EOQ (Economic Order Quantity)                                                            

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    The statement "EOQ (Economic Order Quantity)" is true. EOQ is a formula used in inventory management to determine the optimal order quantity that minimizes total inventory costs. It takes into account factors such as carrying costs, ordering costs, and demand rate to calculate the most cost-effective order quantity. By finding the EOQ, businesses can ensure that they are ordering the right amount of inventory at the right time, reducing costs and improving efficiency.

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