Question 1

The goal of managing working capital, such as inventory, should be to minimize the:

Accepted Answer

A)  costs of carrying inventory. 
B)  opportunity cost of capital. 
C)  aggregate of carrying and shortage costs. 
D) amount of spoilage or pilferage. 
A)  costs of carrying inventory. 
B)  opportunity cost of capital. 
C)  aggregate of carrying and shortage costs. 
D) amount of spoilage or pilferage. C

Question 2

When a firm finances long-term assets with short-term sources of funding, it:

Accepted Answer

A)  reduces the risk of cash shortage. 
B)  will generally have lower interest expense. 
C)  improves the leverage ratio. 
D) violates the principle of matched maturities. 
A)  reduces the risk of cash shortage. 
B)  will generally have lower interest expense. 
C)  improves the leverage ratio. 
D) violates the principle of matched maturities. D

Question 3

A firm has $50 million and $60 million credit sales during the first two quarters of the year. Eighty percent of the receivables are collected in the same quarter and the balance in the next quarter. What will be the total collection for the firm in the second quarter?

Accepted Answer

A)  $55 million 
B)  $58 million 
C)  $88 million 
D) $98 million 
A)  $55 million 
B)  $58 million 
C)  $88 million 
D) $98 million B

Question 4

Which one of these will decrease net working capital?

Accepted Answer

A)  Cash sale of inventory at a loss 
B)  Receipt of a cash payment on account from a customer 
C)  Cash payment of an account payable 
D) Cash sale of inventory at cost 
A)  Cash sale of inventory at a loss 
B)  Receipt of a cash payment on account from a customer 
C)  Cash payment of an account payable 
D) Cash sale of inventory at cost

Question 5

If the statement of sources and uses of cash shows a decrease in the cash balance, an increase in which one of the following might have eliminated that decrease?

Accepted Answer

A)  Cash dividends paid 
B)  Accounts payable 
C)  Accounts receivable 
D) Inventory 
A)  Cash dividends paid 
B)  Accounts payable 
C)  Accounts receivable 
D) Inventory

Question 6

A firm can reduce the cash conversion cycle by selling fewer goods on credit and more for cash.

Accepted Answer

A) True 
 B)False

Question 7

What is the cash conversion cycle for a firm with a receivables period of 40 days, a payables period of 30 days, and an inventory period of 60 days?

Accepted Answer

A)  10 days 
B)  50 days 
C)  70 days 
D) 130 days 
A)  10 days 
B)  50 days 
C)  70 days 
D) 130 days

Question 8

Ignoring defaults, what is the approximate effective cost of factoring if receivables are sold at a 4% discount and the average collection period is 2 months?

Accepted Answer

A)  19.40% 
B)  24.00% 
C)  26.53% 
D) 27.75% 
A)  19.40% 
B)  24.00% 
C)  26.53% 
D) 27.75%

Question 9

The principle of matched maturities in finance refers to:

Accepted Answer

A)  finding sources of funds with the longest maturity, in order to avoid liquidity crises. 
B)  funding long-term assets with long-term sources and short-term assets with short-term financing. 
C)  using as much short-term financing as possible due to the lower cost of interest. 
D) buying marketable securities when demand is high and borrowing short-term when demand is low. 
A)  finding sources of funds with the longest maturity, in order to avoid liquidity crises. 
B)  funding long-term assets with long-term sources and short-term assets with short-term financing. 
C)  using as much short-term financing as possible due to the lower cost of interest. 
D) buying marketable securities when demand is high and borrowing short-term when demand is low.

Question 10

Which one of the following situations should provide managers with the most comfort if accounts receivable balances are increasing each quarter?

Accepted Answer

A)  The sales level has decreased. 
B)  The sales level has increased. 
C)  The rate of collections has decreased. 
D) The rate of collections has increased. 
A)  The sales level has decreased. 
B)  The sales level has increased. 
C)  The rate of collections has decreased. 
D) The rate of collections has increased.

Question 11

Why do firms need to invest in net working capital?

Accepted Answer

Short-term financial planning is concern

Question 12

A company that pays $5,000 previously owed to one of its suppliers will see a $5,000 decrease in cash.

Accepted Answer

A) True 
 B)False

Question 13

An increase in short-term interest rates will increase the carrying costs of the firm.

Accepted Answer

A) True 
 B)False

Question 14

Firms that continually invest in nontrivial amounts of marketable securities may be guilty of:

Accepted Answer

A)  excessive short-term borrowing. 
B)  not matching their sources and uses of cash. 
C)  incurring excessive shortage costs. 
D) not maximizing shareholder returns. 
A)  excessive short-term borrowing. 
B)  not matching their sources and uses of cash. 
C)  incurring excessive shortage costs. 
D) not maximizing shareholder returns.

Question 15

Once the firm has sold its receivables, the factor bears all the responsibility for collecting on the account.

Accepted Answer

A) True 
 B)False

Question 16

Net working capital will decrease when a firm buys raw materials on credit.

Accepted Answer

A) True 
 B)False

Question 17

Which one of the following is least likely to be correct about the factoring of receivables?

Accepted Answer

A)  The selling firm bears the risk of default. 
B)  The higher the perceived quality of the receivables, the lower the discount rate. 
C)  The discount is paid by the selling firm in the form of a reduced sales price. 
D) Factoring may be the cheapest method of avoiding a cash flow problem. 
A)  The selling firm bears the risk of default. 
B)  The higher the perceived quality of the receivables, the lower the discount rate. 
C)  The discount is paid by the selling firm in the form of a reduced sales price. 
D) Factoring may be the cheapest method of avoiding a cash flow problem.

Question 18

A company that borrows $1 million short term and invests the proceeds in inventory will see no change in its net working capital.

Accepted Answer

A) True 
 B)False

Question 19

A company that receives a customer's payment of $2,500 for a previous sale will see no change in its net working capital.

Accepted Answer

A) True 
 B)False

Question 20

Currently, receivables account for the majority of the current assets of retail firms. Cash and short-term securities are more important for oil companies, and inventory makes up the bulk of the current assets of electronic companies.

Accepted Answer

A) True 
 B)False

Exam 19: Short-Term Financial Planning

The goal of managing working capital, such as inventory, should be to minimize the:

When a firm finances long-term assets with short-term sources of funding, it:

A firm has $50 million and $60 million credit sales during the first two quarters of the year. Eighty percent of the receivables are collected in the same quarter and the balance in the next quarter. What will be the total collection for the firm in the second quarter?

Which one of these will decrease net working capital?

If the statement of sources and uses of cash shows a decrease in the cash balance, an increase in which one of the following might have eliminated that decrease?

A firm can reduce the cash conversion cycle by selling fewer goods on credit and more for cash.

What is the cash conversion cycle for a firm with a receivables period of 40 days, a payables period of 30 days, and an inventory period of 60 days?

Ignoring defaults, what is the approximate effective cost of factoring if receivables are sold at a 4% discount and the average collection period is 2 months?

The principle of matched maturities in finance refers to:

Which one of the following situations should provide managers with the most comfort if accounts receivable balances are increasing each quarter?

Why do firms need to invest in net working capital?

A company that pays $5,000 previously owed to one of its suppliers will see a $5,000 decrease in cash.

An increase in short-term interest rates will increase the carrying costs of the firm.

Firms that continually invest in nontrivial amounts of marketable securities may be guilty of:

Once the firm has sold its receivables, the factor bears all the responsibility for collecting on the account.

Net working capital will decrease when a firm buys raw materials on credit.

Which one of the following is least likely to be correct about the factoring of receivables?

A company that borrows $1 million short term and invests the proceeds in inventory will see no change in its net working capital.

A company that receives a customer's payment of $2,500 for a previous sale will see no change in its net working capital.

Currently, receivables account for the majority of the current assets of retail firms. Cash and short-term securities are more important for oil companies, and inventory makes up the bulk of the current assets of electronic companies.

Goals and Governance of the Corporation

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash-Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing

How Corporations Raise Venture Capital and Issue Securities

Debt Policy

Payout Policy

Long-Term Financial Planning

Working Capital Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

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