Question 1

Since defaults can be costly,it is cost-effective to undertake a full credit analysis of all customers.

Accepted Answer

A) True 
 B)False  False

Question 2

The decision to offer credit depends on the probability of payment.You should grant credit if the expected profit from doing so is greater than the profit from refusing.

Accepted Answer

A) True 
 B)False  True

Question 3

Money market securities usually have a maturity of:

Accepted Answer

A)  more than 1 year. 
B)  less than 1 year. 
C)  1 to 3 years. 
D)  less than a week. 
A)  more than 1 year. 
B)  less than 1 year. 
C)  1 to 3 years. 
D)  less than a week. B

Question 4

The Automated Clearing House (ACH)

Accepted Answer

A)  arranges for checks to be cleared. 
B)  serves as an accounting system for credit cards. 
C)  provides a mechanism for banks to transfer money directly to a firms' suppliers or employees. 
D)  is a system for making large-value international cash payments. 
A)  arranges for checks to be cleared. 
B)  serves as an accounting system for credit cards. 
C)  provides a mechanism for banks to transfer money directly to a firms' suppliers or employees. 
D)  is a system for making large-value international cash payments.

Question 5

Checks that have been mailed but not yet cleared result in float.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following is not a current asset?

Accepted Answer

A)  an investment in a money market mutual fund. 
B)  money due to suppliers. 
C)  inventory of raw materials 
D)  unpaid customer bills. 
A)  an investment in a money market mutual fund. 
B)  money due to suppliers. 
C)  inventory of raw materials 
D)  unpaid customer bills.

Question 7

A revolving line of credit is:

Accepted Answer

A)  a secured loan to be amortized over three to five years. 
B)  a one-time short-term, unsecured, amortized loan. 
C)  an agreement allowing the firm to borrow up to a specific total amount on demand from a bank. 
D)  a long-term, permanent source of funding. 
A)  a secured loan to be amortized over three to five years. 
B)  a one-time short-term, unsecured, amortized loan. 
C)  an agreement allowing the firm to borrow up to a specific total amount on demand from a bank. 
D)  a long-term, permanent source of funding.

Question 8

Lock-box systems allow local banks to collect and process the firm's remittances from that area.

Accepted Answer

A) True 
 B)False

Question 9

A firm that is located in New York receives on average 2,000 checks a day from its customers in the Twin Cities area.Average payment per check is $1,500.A bank in the Twin Cities is offering a lock-box arrangement for collection and processing of these checks at a cost of $0.50 per check.This arrangement will reduce the float by 2 days.The daily interest rate for the firm is 0.02%.What is the net saving from the lock-box arrangement?

Accepted Answer

A)  $200 
B)  $400 
C)  $1,000 
D)  $1,200 
A)  $200 
B)  $400 
C)  $1,000 
D)  $1,200

Question 10

As the number of inventory orders per year increases,the total order costs decrease.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements is false?

Accepted Answer

A)  Optimal inventory levels involve a trade-off between carrying costs and order costs. 
B)  Carrying costs include the cost of storing goods as well as the cost of capital tied up in inventory. 
C)  Optimal inventory levels are lower when storage or interest costs are high and are higher when restocking costs are high. 
D)  Inventory levels do not rise in direct proportion to sales. As sales increase, the optimal inventory level rises, but more than proportionately. 
A)  Optimal inventory levels involve a trade-off between carrying costs and order costs. 
B)  Carrying costs include the cost of storing goods as well as the cost of capital tied up in inventory. 
C)  Optimal inventory levels are lower when storage or interest costs are high and are higher when restocking costs are high. 
D)  Inventory levels do not rise in direct proportion to sales. As sales increase, the optimal inventory level rises, but more than proportionately.

Question 12

The set of rules that determines whether or not credit should be extended is known as:

Accepted Answer

A)  credit analysis. 
B)  credit policy. 
C)  multiple discriminate analysis. 
D)  the terms of trade credit. 
A)  credit analysis. 
B)  credit policy. 
C)  multiple discriminate analysis. 
D)  the terms of trade credit.

Question 13

Credit scoring systems can be used to:

Accepted Answer

A)  reduce the effective cost of trade. 
B)  determine the cost of goods sold. 
C)  evaluate Dun and Bradstreet reports. 
D)  evaluate credit risk based on the borrower's characteristics. 
A)  reduce the effective cost of trade. 
B)  determine the cost of goods sold. 
C)  evaluate Dun and Bradstreet reports. 
D)  evaluate credit risk based on the borrower's characteristics.

Question 14

Extending trade credit can increase the probability of repeat orders.

Accepted Answer

A) True 
 B)False

Question 15

Which one of the following is not a carrying cost to holding inventory?

Accepted Answer

A)  Risk of being short of inventory and unable to satisfy orders 
B)  Lost interest on funds tied up in inventory 
C)  Spoilage 
D)  Possible obsolescence 
A)  Risk of being short of inventory and unable to satisfy orders 
B)  Lost interest on funds tied up in inventory 
C)  Spoilage 
D)  Possible obsolescence

Question 16

With terms of 4/15,net 60,what is the implied interest rate for forgoing a cash discount and paying at the end of the credit period?

Accepted Answer

A)  25.63% 
B)  28.19% 
C)  39.25% 
D)  61.15% 
A)  25.63% 
B)  28.19% 
C)  39.25% 
D)  61.15%

Question 17

Optimal inventory levels are lower when carrying costs are high,and when the cost of restocking inventories is low.

Accepted Answer

A) True 
 B)False

Question 18

Check conversion is the process of:

Accepted Answer

A)  recording all checks electronically for retention purposes. 
B)  displaying a copy of all your checks on your bank statements. 
C)  debiting your bank account at the point of sale when you pay by check. 
D)  converting a one-time payment into repetitive payments of equal amount. 
A)  recording all checks electronically for retention purposes. 
B)  displaying a copy of all your checks on your bank statements. 
C)  debiting your bank account at the point of sale when you pay by check. 
D)  converting a one-time payment into repetitive payments of equal amount.

Question 19

A break-down of accounts receivable according to the length of time outstanding is known as a(n):

Accepted Answer

A)  amortization schedule. 
B)  sources of cash flow statement. 
C)  receivables inventory. 
D)  aging schedule. 
A)  amortization schedule. 
B)  sources of cash flow statement. 
C)  receivables inventory. 
D)  aging schedule.

Question 20

If goods are sold on terms of 5/10,net 90,what effective interest rate is if the purchaser pays on day 90?

Accepted Answer

A)  20.00% 
B)  22.81% 
C)  24.93% 
D)  26.37% 
A)  20.00% 
B)  22.81% 
C)  24.93% 
D)  26.37%

Exam 20: Working Capital Management

Since defaults can be costly,it is cost-effective to undertake a full credit analysis of all customers.

The decision to offer credit depends on the probability of payment.You should grant credit if the expected profit from doing so is greater than the profit from refusing.

Money market securities usually have a maturity of:

The Automated Clearing House (ACH)

Checks that have been mailed but not yet cleared result in float.

Which of the following is not a current asset?

A revolving line of credit is:

Lock-box systems allow local banks to collect and process the firm's remittances from that area.

As the number of inventory orders per year increases,the total order costs decrease.

Which of the following statements is false?

The set of rules that determines whether or not credit should be extended is known as:

Credit scoring systems can be used to:

Extending trade credit can increase the probability of repeat orders.

Which one of the following is not a carrying cost to holding inventory?

With terms of 4/15,net 60,what is the implied interest rate for forgoing a cash discount and paying at the end of the credit period?

Optimal inventory levels are lower when carrying costs are high,and when the cost of restocking inventories is low.

Check conversion is the process of:

A break-down of accounts receivable according to the length of time outstanding is known as a(n):

If goods are sold on terms of 5/10,net 90,what effective interest rate is if the purchaser pays on day 90?

Goals and Governance of the Firm

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 and Governance

Venture Capital, IPOs, and Seasoned Offerings

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Mergers,Acquisitions,and Corporate Control

International Financial Management

Options

Risk Management

Filters