Question 1

Which of the following statements is correct?

Accepted Answer

A)  A lockbox system is an example of concentration banking. 
B)  For a firm that has many divisions or plants operating over a wide geographic area,payables centralization offers little benefit. 
C)  If a firm increases its disbursement float,its net float will also increase,other things held constant. 
D)  There are no actions a firm can take to improve its synchronization of cash flows. 
E)  A lockbox system does not affect collections float. 
A)  A lockbox system is an example of concentration banking. 
B)  For a firm that has many divisions or plants operating over a wide geographic area,payables centralization offers little benefit. 
C)  If a firm increases its disbursement float,its net float will also increase,other things held constant. 
D)  There are no actions a firm can take to improve its synchronization of cash flows. 
E)  A lockbox system does not affect collections float.

Question 2

Trade credit and accrual accounts are always costless sources of spontaneous financing for the firm.

Accepted Answer

A) True 
 B)False

Question 3

The ____ is the average length of time required to convert materials into finished goods and then to sell those goods.

Accepted Answer

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

Question 4

Bass Boats Inc.currently has sales of $1,000,000,and its days sales outstanding is 30 days.The financial manager estimates that offering longer credit terms would (1)increase the days sales outstanding to 50 days and (2)increase sales to $1,200,000.However,bad debt losses,which were 2 percent on the old sales,would amount to 5 percent on the incremental sales only (bad debts on the old sales would stay at 2 percent).Variable costs are 80 percent of sales,and Bass has a 15 percent receivables financing cost.What would the annual incremental pre-tax profit be if Bass extended its credit period?

Accepted Answer

A)  −$20,000 
B)  −$10,000 
C)  $0 
D)  $10,000 
E)  $20,000 
A)  −$20,000 
B)  −$10,000 
C)  $0 
D)  $10,000 
E)  $20,000

Question 5

If easing a firm's credit policy lengthens the collection period and results in a worsening of the aging schedule then why do firms take such actions?

Accepted Answer

A)  It normally stimulates sales. 
B)  To meet competitive pressures. 
C)  To increase the firm's deferral period for payables. 
D)  All of the above. 
E)  Both a and b above. 
A)  It normally stimulates sales. 
B)  To meet competitive pressures. 
C)  To increase the firm's deferral period for payables. 
D)  All of the above. 
E)  Both a and b above.

Question 6

The maturity matching or "self-liquidating" approach involves the financing of permanent current assets with combinations of long-term capital and short-term capital depending on the level of interest rates.When short-term rates are high,short-term assets will be financed with long-term debt to reduce cost and risk.

Accepted Answer

A) True 
 B)False

Question 7

If the unit sales of a firm double,the optimal order quantity as determined by the EOQ model will also double.

Accepted Answer

A) True 
 B)False

Question 8

Trade credit is an inexpensive source of short-term financing if no discounts are offered.

Accepted Answer

A) True 
 B)False

Question 9

East Lansing Appliances
East Lansing Appliances (ELA) expects to have sales this year of $15 million under its current credit policy. The present terms are net 30; the days sales outstanding (DSO) is 60 days; and the bad debt loss percentage is 5 percent. Because ELA wants to improve its profitability, the treasurer has proposed that the credit period be shortened to 15 days. This change would reduce expected sales by $500,000, but it would also shorten the DSO on the remaining sales to 30 days. Expected bad debt losses on the remaining sales would fall to 3 percent. The variable cost percentage is 60 percent, and the cost of capital is 15 percent.
-Refer to East Lansing Appliances.What would be the incremental cost of carrying receivables if this change were made?

Accepted Answer

A)  $108,750 
B)  −$116,250 (carrying costs would decline) 
C)  $157,900 
D)  −$225,000 (carrying costs would decline) 
E)  $260,500 
A)  $108,750 
B)  −$116,250 (carrying costs would decline) 
C)  $157,900 
D)  −$225,000 (carrying costs would decline) 
E)  $260,500

Question 10

Exchange rates influence a multinational firm's inventory policy because changing currency values can affect the value of inventory.

Accepted Answer

A) True 
 B)False

Question 11

Fullerton Wine Company is a retailer which sells vintage wines.The company has established a policy of reordering inventory every 30 days.A recently employed MBA has considered Fullerton's inventory problem from the EOQ model viewpoint.If the following constitute the relevant data,how does the current policy compare with the optimal policy?
Ordering cost= $10 per order
Carrying cost= 20% of purchase price
Purchase price= $10 per unit
Total sales for year= 1,000 units

Accepted Answer

A)  Total costs will be the same,since the current policy is optimal. 
B)  Total costs under the current policy will be less than total costs under the EOQ by $10. 
C)  Total costs under the current policy exceed those under the EOQ by $3. 
D)  Total costs under the current policy exceed those under the EOQ by $10. 
E)  Cannot be determined due to insufficient information. 
A)  Total costs will be the same,since the current policy is optimal. 
B)  Total costs under the current policy will be less than total costs under the EOQ by $10. 
C)  Total costs under the current policy exceed those under the EOQ by $3. 
D)  Total costs under the current policy exceed those under the EOQ by $10. 
E)  Cannot be determined due to insufficient information.

Question 12

Which of the following is a net working capital decision variable in the current period?

Accepted Answer

A)  The current maturities of long-term debt. 
B)  Financing associated with a construction program that will be funded with the proceeds of a long-term security issue after the project is completed. 
C)  The use of short-term debt to finance long-term assets. 
D)  Purchasing inventory needed to meet current demand on credit. 
E)  None of the above. 
A)  The current maturities of long-term debt. 
B)  Financing associated with a construction program that will be funded with the proceeds of a long-term security issue after the project is completed. 
C)  The use of short-term debt to finance long-term assets. 
D)  Purchasing inventory needed to meet current demand on credit. 
E)  None of the above.

Question 13

Net working capital is defined as current assets divided by current liabilities.

Accepted Answer

A) True 
 B)False

Question 14

The risk of default on pledged accounts receivable is borne by the lender to whom the receivables are pledged.

Accepted Answer

A) True 
 B)False

Question 15

Net working capital is defined as

Accepted Answer

A)  current assets plus current liabilities 
B)  current liabilities 
C)  current assets 
D)  current assets minus current liabilities 
A)  current assets plus current liabilities 
B)  current liabilities 
C)  current assets 
D)  current assets minus current liabilities

Question 16

Determination of a firm's investment in current assets and how that investment is financed are elements of working capital policy.

Accepted Answer

A) True 
 B)False

Question 17

If a firm fails to take trade credit discounts it may cost the firm money,but generally such a policy has a negligible effect on the firm's income statement and no effect on the firm's balance sheet.

Accepted Answer

A) True 
 B)False

Question 18

____ is the management of short-term assets and liabilities.

Accepted Answer

A)  Trend analysis 
B)  Ratio analysis 
C)  Capital budgeting 
D)  Working capital management 
A)  Trend analysis 
B)  Ratio analysis 
C)  Capital budgeting 
D)  Working capital management

Question 19

The inventory conversion period is the length of time from 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.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following statements is correct?

Accepted Answer

A)  Under normal conditions,a firm's expected ROE probably would be higher if it financed with short-term than with long-term debt,but the use of short-term debt would probably increase the firm's risk. 
B)  Conservative firms generally use no short-term debt and thus have zero current liabilities. 
C)  A short-term loan can usually be obtained more quickly than a long-term loan,but the cost of short-term debt is likely to be higher than that of long-term debt. 
D)  If a firm that can borrow from its bank buys on terms of 2/10,net 30,and if it must pay by Day 30 or else be cut off,then we would expect to see zero accounts payable on its balance sheet. 
E)  If one of your firm's customers is "stretching" its accounts payable,this may be a nuisance but does not represent a real financial cost to your firm as long as the firm periodically pays off its entire balance. 
A)  Under normal conditions,a firm's expected ROE probably would be higher if it financed with short-term than with long-term debt,but the use of short-term debt would probably increase the firm's risk. 
B)  Conservative firms generally use no short-term debt and thus have zero current liabilities. 
C)  A short-term loan can usually be obtained more quickly than a long-term loan,but the cost of short-term debt is likely to be higher than that of long-term debt. 
D)  If a firm that can borrow from its bank buys on terms of 2/10,net 30,and if it must pay by Day 30 or else be cut off,then we would expect to see zero accounts payable on its balance sheet. 
E)  If one of your firm's customers is "stretching" its accounts payable,this may be a nuisance but does not represent a real financial cost to your firm as long as the firm periodically pays off its entire balance.

Which of the following statements is correct?

Trade credit and accrual accounts are always costless sources of spontaneous financing for the firm.

The ____ is the average length of time required to convert materials into finished goods and then to sell those goods.

If easing a firm's credit policy lengthens the collection period and results in a worsening of the aging schedule then why do firms take such actions?

If the unit sales of a firm double,the optimal order quantity as determined by the EOQ model will also double.

Trade credit is an inexpensive source of short-term financing if no discounts are offered.

Exchange rates influence a multinational firm's inventory policy because changing currency values can affect the value of inventory.

Which of the following is a net working capital decision variable in the current period?

Net working capital is defined as current assets divided by current liabilities.

The risk of default on pledged accounts receivable is borne by the lender to whom the receivables are pledged.

Net working capital is defined as

Determination of a firm's investment in current assets and how that investment is financed are elements of working capital policy.

If a firm fails to take trade credit discounts it may cost the firm money,but generally such a policy has a negligible effect on the firm's income statement and no effect on the firm's balance sheet.

____ is the management of short-term assets and liabilities.

The inventory conversion period is the length of time from 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.

Which of the following statements is correct?

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?

Trade credit and accrual accounts are always costless sources of spontaneous financing for the firm.

The ____ is the average length of time required to convert materials into finished goods and then to sell those goods.

If easing a firm's credit policy lengthens the collection period and results in a worsening of the aging schedule then why do firms take such actions?

If the unit sales of a firm double,the optimal order quantity as determined by the EOQ model will also double.

Trade credit is an inexpensive source of short-term financing if no discounts are offered.

Exchange rates influence a multinational firm's inventory policy because changing currency values can affect the value of inventory.

Which of the following is a net working capital decision variable in the current period?

Net working capital is defined as current assets divided by current liabilities.

The risk of default on pledged accounts receivable is borne by the lender to whom the receivables are pledged.

Net working capital is defined as

Determination of a firm's investment in current assets and how that investment is financed are elements of working capital policy.

If a firm fails to take trade credit discounts it may cost the firm money,but generally such a policy has a negligible effect on the firm's income statement and no effect on the firm's balance sheet.

____ is the management of short-term assets and liabilities.

The inventory conversion period is the length of time from 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.

Which of the following statements is correct?

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