DSST Prep Financial Accounting Exam Questions & Answers 2026 (21–30)

Question 1

The cash conversion cycle is calculated as:

TheoryPractice · Accepted Answer

Operating cycle minus accounts payable period. The cash conversion cycle equals the operating cycle minus the accounts payable period. It represents the time from when cash is paid for inventory until cash is collected from customers.

Question 2

A firm has an average collection period of 40 days, an average inventory period of 60 days, and an average payment period of 35 days. What is the firm's cash conversion cycle?

TheoryPractice · Accepted Answer

65 days. Cash conversion cycle = Inventory period + Collection period - Payment period = 60 + 40 - 35 = 65 days.

Question 3

Which of the following represents a use of cash in working capital management?

TheoryPractice · Accepted Answer

An increase in accounts receivable. An increase in accounts receivable means the firm has extended more credit to customers, tying up cash in receivables. This is a use of cash.

Question 4

A company offers credit terms of 2/10, net 30. What is the approximate annualized cost of not taking the discount?

TheoryPractice · Accepted Answer

37.2%. The discount is 2% for paying 20 days early (30-10). Annualized cost = (2/98) x (365/20) = approximately 37.2%.

Question 5

Which of the following is NOT a component of the operating cycle?

TheoryPractice · Accepted Answer

Accounts payable period. The operating cycle includes the inventory period and accounts receivable period. The accounts payable period is not part of the operating cycle; it is subtracted from the operating cycle to calculate the cash conversion cycle.

Question 6

A firm adopts a more aggressive working capital policy. Which of the following is most likely to occur?

TheoryPractice · Accepted Answer

Lower levels of current assets relative to sales. An aggressive working capital policy involves maintaining lower levels of current assets relative to sales, which increases risk but may improve returns.

Question 7

The quick ratio differs from the current ratio in that it:

TheoryPractice · Accepted Answer

Excludes inventory from current assets. The quick ratio (acid-test ratio) excludes inventory from current assets because inventory is less liquid than other current assets like cash and receivables.

Question 8

Which short-term financing source typically has the lowest explicit cost?

TheoryPractice · Accepted Answer

Accrued expenses. Accrued expenses (wages, taxes) represent spontaneous financing with no explicit interest cost, making them the lowest-cost source of short-term financing.

Question 9

A company is preparing a cash budget. Which of the following would appear as a cash inflow?

TheoryPractice · Accepted Answer

Collection of accounts receivable. Collection of accounts receivable converts credit sales into cash, representing a cash inflow in the cash budget.

Question 10

Float refers to the difference between:

TheoryPractice · Accepted Answer

The firm's book balance and the bank's available balance. Float is the difference between the cash balance shown on a firm's books and the cash balance shown on the bank's books, arising from delays in processing checks and deposits.

DSST Prep Financial Accounting Exam Questions & Answers 2026 (21–30)

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