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Wiley CPA Exam Review Problems And Solutions Vol 2 2011-2012 38th Edition O. Ray Whittington, Patrick R. Delaney - Solutions
Which of the following statements is correct when comparing bond-financing alternatives?a. A bond with a call provision typically has a lower yield to maturity than a similar bond without a call provision.b. A convertible bond must be converted to common stock prior to its maturity.c. A call
On January 1, Scott Corporation received a $300,000 line of credit at an interest rate of 12% from Main Street Bank and drew down the entire amount on February 1.The line of credit agreement requires that an amount equal to 15% of the loan be deposited into a compensating balance account. What is
A compensating balancea. Compensates a financial institution for services rendered by providing it with deposits of funds.b. Is used to compensate for possible losses on a marketable securities portfolio.c. Is a level of inventory held to compensate for variations in usage rate and lead time.d. Is
The prime rate is thea. Size of the commitment fee on a commercial bank loan.b. Effective cost of a commercial bank loan.c. Rate charged on business loans to borrowers with high credit ratings.d. Rate at which a bank borrows from the Federal Reserve central bank.
Which of the following financial instruments generally provides the largest source of short-term credit for small firms?a. Installment loans.b. Commercial paper.c. Trade credit.d. Mortgage bonds.
The Red Company has a revolving line of credit of$300,000 with a one-year maturity. The terms call for a 6%interest rate and a 1/2% commitment fee on the unused portion of the line of credit. The average loan balance during the year was $100,000. The annual cost of this financing arrangement isa.
Elan Corporation is considering borrowing $100,000 from a bank for one year at a stated interest rate of 9%.What is the effective interest rate to Elan if this borrowing is in the form of a discount note?a. 8.10%b. 9.00%c. 9.81%d. 9.89%
A manufacturing firm wants to obtain a short-term loan and has approached several lending institutions. All of the potential lenders are offering the same nominal interest rate, but the terms of the loans vary. Which of the following combinations of loan terms will be most attractive for the
A company obtained a short-term bank loan of$250,000 at an annual interest rate of 6%. As a condition of the loan, the company is required to maintain a compensating balance of $50,000 in its checking account. The company’s checking account earns interest at an annual rate of 2%. Ordinarily, the
With respect to the use of commercial paper by an industrial firm, which one of the following statements is most likely to be true?a. The commercial paper is issued through a bank.b. The commercial paper has a maturity of 60-270 days.c. The commercial paper is secured by the issuer’s assets.d.
Should CyberAge use trade credit and continue paying at the end of the credit period?a. Yes, if the cost of alternative short-term financing is less.b. Yes, if the firm’s weighted-average cost of capital is equal to its weighted-average cost of trade credit.c. No, if the cost of alternative
Assuming a 360-day year and that CyberAge continues paying on the last day of the credit period, the company’s weighted-average annual interest rate for trade credit(ignoring the effects of compounding) for these two vendors isa. 27.0%b. 25.2%c. 28.0%d. 30.2%
Hagar Company’s bank requires a compensating balance of 20% on a $100,000 loan. If the stated interest on the loan is 7%, what is the effective cost of the loan?a. 5.83%b. 7.00%c. 8.40%d. 8.75%
Which form of asset financing involves the public offering of debt collateralized by a firm’s accounts receivables?a. Trust receipts.b. Warehousing.c. Blanket inventory liens.d. Securitization of assets.
The chief financial officer of Smith Glass Inc. follows the policy of matching the maturity of assets with the maturity of financing. The implications of this policy include all of the following except thata. The seasonal expansion of cash, receivables, and inventory should be financed by
An advantage of the use of long-term debt as opposed to short-term debt to finance current assets isa. It decreases the risk of the firm.b. It generally is less costly than short-term debt.c. It generally places fewer restrictions on the firm.d. It is easy to repay.
The London Interbank Offered Rate (LIBOR) represents an example of aa. Risk-free rate.b. Nominal rate.c. Credit risk adjusted rate.d. Long-term rate.
Which of the following is not related to loans involving inventory?a. Factoring.b. Blanket liens.c. Trust receipts.d. Warehousing.
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. 24.00%b. 37.11%c. 36.00%d. 31.81%
If a firm borrows $500,000 at 10% and is required to maintain $50,000 as a minimum compensating balance at the bank, what is the effective interest rate on the loan?a. 10.0%b. 11.1%c. 9.1%d. 12.2%
A company obtaining short-term financing with trade credit will pay a higher percentage financing cost, everything else being equal, whena. The discount percentage is lower.b. The items purchased have a higher price.c. The items purchased have a lower price.d. The supplier offers a longer discount
The following forms of short-term borrowings are available to a firm:• Floating lien• Factoring• Revolving credit• Chattel mortgages• Bankers’ acceptances• Lines of credit• Commercial paper The forms of short-term borrowing that are unsecured credit area. Floating lien, revolving
If a firm is offered credit terms of 2/10, net 30 on its purchases. Sound cash management practices would mean that the firm would pay the account on which of the following days?a. Day 2 and 30.b. Day 2 and 10.c. Day 10.d. Day 30.
Assume that Williams Corp is financed with a heavy reliance on short-term debt and short-term rates have increased.How do these facts impact the interest expense, net income, and financial risk for Williams Corp? Interest expense Net income Financial risk PEOP a. Decreases Decreases Decreases b.
Newton Corporation is offered trade credit terms of 3/15, net 45.The firm does not take advantage of the discount, and it pays the account after 67 days. Using a 365-day year, what is the nominal annual cost of not taking the discount?a. 18.2%b. 21.71%c. 23.48%d. 26.45%
Gild Company has been offered credit terms of 3/10, net 30.Using a 365-day year, what is the nominal cost of not taking advantage of the discount if the firm pays on the 35th day after the purchase?a. 14.2%b. 32.2%c. 37.6%d. 45.2%
A company with $4.8 million in credit sales per year plans to relax its credit standards, projecting that this will increase credit sales by $720,000. The company’s average collection period for new customers is expected to be 75 days, and the payment behavior of the existing customers is not
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% of the face value of
The sales manager at Ryan Company feels confident that if the credit policy at Ryan’s were changed, sales would increase ancd consequently, the company would utilize excess capacity. The two credit proposals being considered are as follows:Proposal A Proposal B Increase in sales $500,000 $600,000
What effect would the implementation of this new credit policy have on income before taxes?a. $2,500,000 decrease.b. $2,166,667 decrease.c. $ 83,334 increase.d. $ 33,334 increase.
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. $ 3,819,445 decrease.b. $ 6,500,000 decrease.c. $ 3,333,334 decrease.d. $18,749,778 increase.
Which of the following describes a firm’s credit criteria?a. The length of time a buyer is given to pay for his/her purchases.b. The percentage of discount allowed for early payment.c. The diligence to collect slow-paying accounts.d. The required financial strength of acceptable customers.
Which of the following describes the appropriate formula for days’ sales outstanding?a. Average receivables/Sales per dayb. Receivables balance/Sales per dayc. Sales/Average receivablesd. Receivables balance/Total sales
For sales after the initiation of the seasonal dating policy on September 1, total collections on or before January 11 will bea. $0b. $6,370c. $6,860d. $7,000
For the selling firm, which of the following is not an expected advantage to initiating seasonal dating?a. Reduced storage costs.b. Reduced credit costs.c. Attractive credit terms for customers.d. Reduced uncertainty about sales volume.
The procedures followed by the firm for ensuring payment of its accounts receivables are called itsa. Discount policy.b. Credit policy.c. Collection policy.d. Payables policy.
An appropriate technique for planning and controlling manufacturing inventories, such as raw materials, components, and subassemblies, whose demand depends on the level of production, isa. Materials requirements planning.b. Regression analysis.c. Capital budgeting.d. Linear programming.
The amount of inventory that a company would tend to hold in stock would increase as thea. Sales level falls to a permanently lower level.b. Cost of carrying inventory decreases.c. Variability of sales decreases.d. Cost of running out of stock decreases.
At what rate of short-term interest rate would the two alternatives have the same cost?a. 6%b. 9%c. 10%d. 12%
Which alternative should be accepted and how much is saved over the other alternative?a. Alternative 1 with $500,000 in savings.b. Alternative 2 with $50,000 in savings.c. Alternative 2 with $10,000 in savings.d. Alternative 1 with $10,000 in savings.
To evaluate the efficiency of purchase transactions, management decides to calculate the economic order quantity for a sample of the company’s products. To calculate the economic order quantity, management would need data for all of the following except:a. The volume of product sales.b. The
Which of the following is a characteristic of just-intime(JIT) inventory management systems?a. JIT users determine the optimal level of safety stocks.b. JIT is applicable only to large companies.c. JIT does not really increase overall economic efficiency because it merely shifts inventory levels
An example of a carrying cost isa. Disruption of production schedules.b. Quantity discounts lost.c. Handling costs.d. Obsolescence.
Firms that maintain very low or no inventory levelsa. Have higher ordering costs.b. Have higher carrying costs.c. Have higher ordering and carrying costs.d. Have lower ordering and carrying costs.
The following information pertains to material X that is used by Sage Co.:Annual usage in units 20,000 Working days per year 250 Safety stock in units 800 Normal lead time in working days 30 Units of material X will be required evenly throughout the year. The order point isa. 800b. 1,600c. 2,400d.
Ral Co. sells 20,000 radios evenly throughout the year.The cost of carrying one unit in inventory for one year is $8, and the purchase order cost per order is $32. What is the economic order quantity?a. 625b. 400c. 283d. 200
The economic order quantity formula assumes thata. Periodic demand for the good is known.b. Carrying costs per unit vary with quantity ordered.c. Costs of placing an order vary with quantity ordered.d. Purchase costs per unit differ due to quantity discounts.
As a consequence of finding a more dependable supplier, Dee Co. reduced its safety stock of raw materials by 80%. What is the effect of this safety stock reduction on Dee’s economic order quantity?a. 80% decrease.b. 64% decrease.c. 20% increase.d. No effect.
Bell Co. changed from a traditional manufacturing philosophy to a just-in-time philosophy. What are the expected effects of this change on Bell’s inventory turnover and inventory as a percentage of total assets reported on Bell’s balance sheet?Inventory turnover Inventory percentagea. Decrease
The benefits of a just-in-time system for raw materials usually includea. Elimination of non-value-added operations.b. Increase in the number of suppliers, thereby ensuring competitive bidding.c. Maximization of the standard delivery quantity, thereby lessening the paperwork for each delivery.d.
Which of the following is not a correct comparison of a just-in-time system with a traditional system?Traditional Just-in-timea. Longer lead times Shorter lead timesb. Inventory is an asset Inventory is a liabilityc. Some scrap tolerated Zero defects desiredd. Lot size based on immediate need Lot
To determine the inventory reorder point, calculations normally include thea. Ordering cost.b. Carrying cost.c. Average daily usage.d. Economic order quantity.
Which changes in costs are most conducive to switching from a traditional inventory ordering system to a just-intime ordering system?Cost per Inventory unit purchase order carrying costsa. Increasing Increasingb. Decreasing Increasingc. Decreasing Decreasingd. Increasing Decreasing
Which one of the following is not a characteristic of a negotiable certificate of deposit? Negotiable certificates of deposita. Have a secondary market for investors.b. Are regulated by the Federal Reserve System.c. Are usually sold in denominations of a minimum of $100,000.d. Have yields
Which of the following investments generally pay the highest return?a. Money market accounts.b. Treasury bills.c. Treasury notes.d. Commercial paper.
All of the following are alternative marketable securities suitable for investment except:a. US treasury bills.b. Eurodollars.c. Commercial paper.d. Convertible bonds.
The most important considerations with respect to short-term investments area. Return and value.b. Risk and liquidity.c. Return and risk.d. Growth and value.
Cleveland Masks and Costumes Inc. (CMC) has a majority of its customers located in the states of California and Nevada. Keystone National Bank, a major west coast bank, has agreed to provide a lockbox system to CMC at a fixed fee of $50,000 per year and a variable fee of $.50 for each payment
A firm has daily receipts of $100,000. A bank has offered to reduce the collection time on the firm’s deposits by two days for a monthly fee of $500. If money market rates are expected to average 6% during the year, the net annual benefit from having this service isa. $0b. $ 3,000c. $ 6,000d.
A minimum checking account balance that a firm must maintain with a commercial bank is aa. Transaction balance.b. Compensating balance.c. Precautionary balance.d. Speculative balance.
A firm has daily cash receipts of $100,000. A bank has offered to reduce the collection time on the firm’s deposits by two days for a monthly fee of $500. If money market rates are expected to average 6% during the year, the net annual benefit (loss) from having this service isa. $ 3,000b.
Newman Products has received proposals from several banks to establish a lockbox system to speed up receipts.Newman receives an average of 700 checks per day averaging $1,800 each, and its cost of short-term funds is 7% per year. Assuming that all proposals will produce equivalent processing
A working capital technique that increases the payable float and therefore delays the outflow of cash isa. Concentration banking.b. A draft.c. Electronic Data Interchange (EDI).d. A lockbox system.
An organization has an opportunity to establish a zero balance account system using four different regional banks.The total amount of the maintenance and transfer fees is estimated to be $6,000 per annum. The organization believes that it will increase the float on its operating disbursements by an
A firm is evaluating whether to establish a lockbox system.The bank will charge $30,000 per year for the lockbox and the firm will save approximately $8,000 in internal processing costs. The firm estimates that the float will be reduced by three days if the lockbox system is put into place.
A firm is evaluating whether to establish a concentration banking system. The bank will charge $5,000 per year for maintenance and transfer fees. The firm estimates that the float will be reduced by two days if the concentration banking is put into place. Assuming that average daily receipts are
Which of the following is true about a firm’s float?a. A firm strives to minimize the float for both cash receipts and cash disbursements.b. A firm strives to maximize the float for both cash receipts and cash disbursements.c. A firm strives to maximize the float for cash receipts and minimize
Management of Radker Corp. is considering a lockbox system. The bank will charge $10,000 annually for the service, which will save the firm approximately $5,000 in processing costs. The lockbox system will reduce the float for cash receipts by three days. Assuming that the average daily receipts
Which of the following is true about electronic funds transfer from a cash flow standpoint?a. It is always beneficial from a cash flow standpoint.b. It is never beneficial from a cash flow standpoint.c. It is beneficial from a cash receipts standpoint but not from a cash disbursements standpoint.d.
Troy Toys is a retailer operating in several cities.The individual store managers deposit daily collections at a local bank in a noninterest-bearing checking account.Twice per week, the local bank issues a depository transfer check (DTC) to the central bank at headquarters. The controller of the
On average, 20 units are sold per day, priced at $10,000 each. The rate of sales is uniform throughout the year. Using a 360-day year, the organization has days’ sales outstanding in accounts receivable, to the nearest full day, ofa. 13 days.b. 15 days.c. 17 days.d. 20 days.
One-third of the customers take the cash discount and the remaining customers pay on day
An organization offers its customers credit terms of 5/10 net
If everything else remains constant and a firm increases its cash conversion cycle, its profitability will likelya. Increase.b. Increase if earnings are positive.c. Decrease.d. Not be affected.
The length of time between the acquisition of inventory and payment for it is called thea. Operating cycle.b. Inventory conversion period.c. Accounts receivable period.d. Accounts payable deferral period.
Jones Company has $5,000,000 of average inventory and cost of sales of $30,000,000. Using a 365-day year, calculate the firm’s inventory conversion period.a. 30.25 days.b. 60.83 days.c. 45.00 days.d. 72.44 days.
Eagle Sporting Goods has $2.5 million in inventory and$2 million in accounts receivable. Its average daily sales are$100,000. The firm’s payables deferral period is 30 days and average daily cost of sales are $50,000. What is the length of the firm’s cash conversion period?a. 100 days.b. 60
Which of the following actions is likely to reduce the length of a firm’s cash conversion cycle?a. Adopting a new inventory system that reduces the inventory conversion period.b. Adopting a new inventory system that increases the inventory conversion period.c. Increasing the average days sales
All of the following statements in regard to working capital are correct except:a. Current liabilities are an important source of financing for many small firms.b. Profitability varies inversely with liquidity.c. The hedging approach to financing involves matching maturities of debt with specific
The payables deferral period is calculated as follows:a. Average payables/Sales per dayb. Beginning payables/Sales per dayc. Average payables/ Purchases per dayd. Average payables/ Cost of goods sold
The inventory conversion period is calculated as follows:a. Average inventory/Cost of sales per dayb. Year-end inventory/Cost of sales per dayc. Average inventory/Accounts receivabled. Year-end inventory/Cost of sales
Which of the following is not a function of financial management?a. Financing.b. Risk-management.c. Internal control.d. Capital budgeting.
Probability (risk) analysis isa. Used only for situations involving five or fewer possible outcomes.b. Used only for situations in which the summation of probability weights is greater than one.c. An extension of sensitivity analysis.d. Incompatible with sensitivity analysis.
To assist in an investment decision, Gift Co. selected the most likely sales volume from several possible outcomes.Which of the following attributes would that selected sales volume reflect?a. The midpoint of the range.b. The median.c. The greatest probability.d. The expected value.
Which tool would most likely be used to determine the best course of action under conditions of uncertainty?a. Cost-volume-profit analysis.b. Expected value (EV).c. Program evaluation and review technique (PERT).d. Scattergraph method.
Dough Distributors has decided to increase its daily muffin purchases by 100 boxes. A box of muffins costs $2 and sells for $3 through regular stores. Any boxes not sold through regular stores are sold through Dough’s thrift store for $1. Dough assigns the following probabilities to selling
Under frost-free conditions, Cal Cultivators expects its strawberry crop to have a $60,000 market value. An unprotected crop subject to frost has an expected market value of$40,000. If Cal protects the strawberries against frost, then the market value of the crop is still expected to be $60,000
Polo Co. requires higher rates of return for projects with a life span greater than five years. Projects extending beyond five years must earn a higher specified rate of return.Which of the following capital budgeting techniques can readily accommodate this requirement?Internal rate Net of return
During 2008, Deet Corp. experienced the following power outages:Number of outages per month Number of months 0 3 1 2 2 4 3 3 12 Each power outage results in out-of-pocket costs of $400.For $500 per month, Deet can lease an auxiliary generator to provide power during outages. If Deet leases an
A company uses portfolio theory to develop its investment portfolio. If the company wishes to obtain optimal risk reduction through the portfolio effect, it should make its next investment ina. An investment that correlates negatively to the current portfolio holdings.b. An investment that is
The level of risk that concerns investors who supply capital to a diversified company isa. Project risk (beta).b. Pure play risk (beta).c. The standard deviation of project risk (betas).d. The weighted-average of project risk (betas).
Which of the following is not a technique for considering the risk of an investment?a. Probability analysis.b. Risk-adjusted discount rate.c. Simulation techniques.d. Internal rate of return.
Which of the following techniques recognizes that management often faces a series of decisions that may affect the value of an investment?a. Probability analysis.b. Risk-adjusted discount rate.c. Decision tree.d. Sensitivity analysis.
Assume that the standard deviation of the returns for the project is $150,000. What is the coefficient of variation for the project?a. .2345b. .3191c. .4256d. 1.10
What is the expected return for the project?a. $750,000b. $500,000c. $470,000d. $400,000
Which of the following capital budgeting techniques would allow management to justify investing in a project that could not be justified currently by using techniques that focus on expected cash flows?a. Real options.b. Net present value.c. Accounting rate of return.d. Internal rate of return.
Philip Enterprises, distributor of compact disks (CDs)is developing its budgeted cost of goods sold for 2010.Philip has developed the following range of sales estimates and associated probabilities for the year.Sales Estimate Probability$ 60,000 25%85,000 40%100,000 35%Philip’s cost of goods sold
The Madison Company has decided to introduce a new product. The company estimates that there is a 30%probability that the product will contribute $700,000 to profits, a 30% probability that it will contribute $200,000, and a 40% probability that the contribution will be a negative $400,000. The
What is the net present value of the investment?a. $175,000b. $ 58,000c. $ 1,135d. $ (12,340)
What is the amount of the after-tax cash flows in year 2?a. $140,000b. $125,000c. $ 98,000d. $ 70,000
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