Question 1

Which of the following statements is correct?

Accepted Answer

A)  The cash balances of most firms consist of transactions,compensating,precautionary,and speculative balances.The total desired cash balance can be determined by calculating the amount needed for each purpose and then summing them together. 
B)  The easier a firm's access to borrowed funds the higher its precautionary balances will be,in order to protect against sudden increases in interest rates. 
C)  For some firms,holding highly liquid marketable securities is a substitute for holding cash because the marketable securities accomplish the same objective as cash. 
D)  Firms today are more likely to rely on cash than on reserve borrowing power or marketable securities for speculative purposes because of the need to move quickly. 
E)  Each of the above statements is false. 
A)  The cash balances of most firms consist of transactions,compensating,precautionary,and speculative balances.The total desired cash balance can be determined by calculating the amount needed for each purpose and then summing them together. 
B)  The easier a firm's access to borrowed funds the higher its precautionary balances will be,in order to protect against sudden increases in interest rates. 
C)  For some firms,holding highly liquid marketable securities is a substitute for holding cash because the marketable securities accomplish the same objective as cash. 
D)  Firms today are more likely to rely on cash than on reserve borrowing power or marketable securities for speculative purposes because of the need to move quickly. 
E)  Each of the above statements is false. C

Question 2

Long-term debt which is coming due in the next accounting period is defined as a current liability but is not considered a working capital decision variable.

Accepted Answer

A) True 
 B)False  True

Question 3

A lockbox plan is one method of speeding up the check-clearing process for customer payments and decreasing the firm's net float position.

Accepted Answer

A) True 
 B)False  False

Question 4

The three major elements in a firm's credit policy are (1)credit standards, (2)credit terms,and (3)collection policy.

Accepted Answer

A) True 
 B)False

Question 5

Factoring involves the outright sale of accounts receivable.

Accepted Answer

A) True 
 B)False

Question 6

When the current ratio is ____ than one and current liabilities ____ by the same dollar amount as current assets,the current ratio ____.

Accepted Answer

A)  less;decrease;increases 
B)  greater;increase;increases 
C)  greater;increase;decreases 
D)  less;increase;decreases 
A)  less;decrease;increases 
B)  greater;increase;increases 
C)  greater;increase;decreases 
D)  less;increase;decreases

Question 7

An increase in a current asset account must be accompanied by a corresponding increase in a liability account.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following statements is correct?

Accepted Answer

A)  The factoring of accounts receivable consists of a series of individual cycles as opposed to a continuous process. 
B)  Once a factoring agreement is in force,funds from this source are spontaneous in the sense that an increase in sales will automatically generate additional credit from the factor. 
C)  One of the main disadvantages of pledging or factoring is the significant lack of flexibility. 
D)  One disadvantage of factoring is that it reduces the need of the selling firm to maintain a credit department. 
E)  The cost of pledging and factoring generally is very low and the risk bearing fee is incorporated into the interest rate charged on the unpaid balance of the funds advanced by the factor,which is usually one half of one percent above the prime rate. 
A)  The factoring of accounts receivable consists of a series of individual cycles as opposed to a continuous process. 
B)  Once a factoring agreement is in force,funds from this source are spontaneous in the sense that an increase in sales will automatically generate additional credit from the factor. 
C)  One of the main disadvantages of pledging or factoring is the significant lack of flexibility. 
D)  One disadvantage of factoring is that it reduces the need of the selling firm to maintain a credit department. 
E)  The cost of pledging and factoring generally is very low and the risk bearing fee is incorporated into the interest rate charged on the unpaid balance of the funds advanced by the factor,which is usually one half of one percent above the prime rate.

Question 9

If the current ratio is equal to four and we double the current liabilities and half the current assets,what will the new current ratio equal?

Accepted Answer

A)  1 
B)  2 
C)  8 
D)  16 
A)  1 
B)  2 
C)  8 
D)  16

Question 10

The ____ is the average length of time between the purchase of raw materials and labor and the payment of cash for them.

Accepted Answer

A)  inventory conversion period 
B)  receivables collection period 
C)  payables deferral period 
D)  cash conversion cycle 
A)  inventory conversion period 
B)  receivables collection period 
C)  payables deferral period 
D)  cash conversion cycle

Question 11

A firm's collection policy and the procedures it follows to collect accounts receivable play an important role in keeping its deferrables period short,although too strict a collection policy can result in outright losses due to non-payment.

Accepted Answer

A) True 
 B)False

Question 12

The cash conversion cycle is the length of time from

Accepted Answer

A)  the payment of accrued wages to manufacture a product until the sale of that product. 
B)  the payment of accrued wages to manufacture a product until the collection of accounts receivable associated with the sale of that product. 
C)  the payment for the purchase of raw materials to manufacture a product until the sale of that product. 
D)  the payment for the purchase of raw materials to manufacture a product until the collection of accounts receivable associated with the sale of that product. 
A)  the payment of accrued wages to manufacture a product until the sale of that product. 
B)  the payment of accrued wages to manufacture a product until the collection of accounts receivable associated with the sale of that product. 
C)  the payment for the purchase of raw materials to manufacture a product until the sale of that product. 
D)  the payment for the purchase of raw materials to manufacture a product until the collection of accounts receivable associated with the sale of that product.

Question 13

Generally,the longer the normal inventory holding period of a customer the longer the credit period.One effect of extending the credit period to match the customer's merchandise holding period is to increase the customer's payables deferral period,which actually serves to shorten the customer's cash conversion cycle.

Accepted Answer

A) True 
 B)False

Question 14

What is the inventory conversion period for a firm that has inventory of $1.5 million,a tax rate of 35 percent,daily cost of goods sold of $300,000,and profit margin of 12 percent?

Accepted Answer

A)  3.25 days 
B)  0.60 days 
C)  5.00 days 
D)  6.75 days 
A)  3.25 days 
B)  0.60 days 
C)  5.00 days 
D)  6.75 days

Question 15

If a firm is offered credit terms of 2/10,net 30,it is in the firm's financial interest to pay as early during the discount period as possible.

Accepted Answer

A) True 
 B)False

Question 16

A firm adopting an aggressive working capital approach is more sensitive to unexpected changes in the term structure of interest rates than is a firm with a conservative policy.

Accepted Answer

A) True 
 B)False

Question 17

If the forecasted sales or usage rate is not accurate,the EOQ model may not lead to efficient inventory management.

Accepted Answer

A) True 
 B)False

Question 18

The Lasser Company needs to finance an increase in its working capital for the coming year.Lasser is reviewing the following three options: (1)The firm can borrow from its bank on a simple interest basis for one year at 13 percent.(2)It can borrow on a 3-month,but renewable,loan at a 12 percent simple rate.The loan is a simple interest loan,completely paid off at the end of each quarter,then renewed for another quarter.(3)The firm can increase its accounts payable by not taking discounts.Lasser buys on credit terms of 1/30,net 60 days.What is the effective annual cost (not the approximate cost)of the least expensive type of credit,assuming 360 days per year?

Accepted Answer

A)  13.0% 
B)  12.82% 
C)  11.46% 
D)  12.12% 
E)  12.55% 
A)  13.0% 
B)  12.82% 
C)  11.46% 
D)  12.12% 
E)  12.55%

Question 19

Two of the primary motives for a firm to hold cash are the transaction motive and the precautionary motive.

Accepted Answer

A) True 
 B)False

Question 20

Working capital policy involves

Accepted Answer

A)  The level of current assets. 
B)  The financing of current assets. 
C)  Current maturities of long-term debt. 
D)  All of the above. 
E)  Only answers a and b above. 
A)  The level of current assets. 
B)  The financing of current assets. 
C)  Current maturities of long-term debt. 
D)  All of the above. 
E)  Only answers a and b above.

Which of the following statements is correct?

Long-term debt which is coming due in the next accounting period is defined as a current liability but is not considered a working capital decision variable.

A lockbox plan is one method of speeding up the check-clearing process for customer payments and decreasing the firm's net float position.

The three major elements in a firm's credit policy are (1)credit standards, (2)credit terms,and (3)collection policy.

Factoring involves the outright sale of accounts receivable.

When the current ratio is than one and current liabilities by the same dollar amount as current assets,the current ratio .

An increase in a current asset account must be accompanied by a corresponding increase in a liability account.

Which of the following statements is correct?

If the current ratio is equal to four and we double the current liabilities and half the current assets,what will the new current ratio equal?

The ____ is the average length of time between the purchase of raw materials and labor and the payment of cash for them.

A firm's collection policy and the procedures it follows to collect accounts receivable play an important role in keeping its deferrables period short,although too strict a collection policy can result in outright losses due to non-payment.

The cash conversion cycle is the length of time from

What is the inventory conversion period for a firm that has inventory of $1.5 million,a tax rate of 35 percent,daily cost of goods sold of $300,000,and profit margin of 12 percent?

If a firm is offered credit terms of 2/10,net 30,it is in the firm's financial interest to pay as early during the discount period as possible.

A firm adopting an aggressive working capital approach is more sensitive to unexpected changes in the term structure of interest rates than is a firm with a conservative policy.

If the forecasted sales or usage rate is not accurate,the EOQ model may not lead to efficient inventory management.

Two of the primary motives for a firm to hold cash are the transaction motive and the precautionary motive.

Working capital policy involves

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Business Organizations and the Tax Environment

Analysis of Financial Statements

Financial Planning and Control

Time Value of Money

Valuation Concepts

Risk and Rates of Return

The Cost of Capital

Capital Budgeting

Capital Structure and Dividend Policy Decisions

Investment and Securities

Investment Analysis and Valuation Techniques

Filters

Exam 15: Working Capital Management

Which of the following statements is correct?

Long-term debt which is coming due in the next accounting period is defined as a current liability but is not considered a working capital decision variable.

A lockbox plan is one method of speeding up the check-clearing process for customer payments and decreasing the firm's net float position.

The three major elements in a firm's credit policy are (1)credit standards, (2)credit terms,and (3)collection policy.

Factoring involves the outright sale of accounts receivable.

When the current ratio is ____ than one and current liabilities ____ by the same dollar amount as current assets,the current ratio ____.

An increase in a current asset account must be accompanied by a corresponding increase in a liability account.

Which of the following statements is correct?

If the current ratio is equal to four and we double the current liabilities and half the current assets,what will the new current ratio equal?

The ____ is the average length of time between the purchase of raw materials and labor and the payment of cash for them.

A firm's collection policy and the procedures it follows to collect accounts receivable play an important role in keeping its deferrables period short,although too strict a collection policy can result in outright losses due to non-payment.

The cash conversion cycle is the length of time from

What is the inventory conversion period for a firm that has inventory of $1.5 million,a tax rate of 35 percent,daily cost of goods sold of $300,000,and profit margin of 12 percent?

If a firm is offered credit terms of 2/10,net 30,it is in the firm's financial interest to pay as early during the discount period as possible.

A firm adopting an aggressive working capital approach is more sensitive to unexpected changes in the term structure of interest rates than is a firm with a conservative policy.

If the forecasted sales or usage rate is not accurate,the EOQ model may not lead to efficient inventory management.

Two of the primary motives for a firm to hold cash are the transaction motive and the precautionary motive.

Working capital policy involves

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Business Organizations and the Tax Environment

Analysis of Financial Statements

Financial Planning and Control

Time Value of Money

Valuation Concepts

Risk and Rates of Return

The Cost of Capital

Capital Budgeting

Capital Structure and Dividend Policy Decisions

Investment and Securities

Investment Analysis and Valuation Techniques

Filters

When the current ratio is than one and current liabilities by the same dollar amount as current assets,the current ratio .