Question 1

A conservative approach to working capital will result in all permanent assets being financed using long-term securities.

Accepted Answer

A) True 
 B)False  True

Question 2

A firm constructing a new manufacturing plant and financing it with short-term loans that are scheduled to be converted to bonds when the plant is completed, would want to separate the construction loan from other current liabilities associated with working capital management.

Accepted Answer

A) True 
 B)False  True

Question 3

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 E

Question 4

Which of the following statements is most correct?

Accepted Answer

A)  Net working capital may be defined as current assets minus current liabilities.Any increase in the current ratio will automatically lead to an increase in net working capital. 
B)  Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks of using short-term financing. 
C)  If a company follows a policy of "matching maturities," this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt. 
D)  Each of the above statements is true. 
E)  Each of the above statements is false. 
A)  Net working capital may be defined as current assets minus current liabilities.Any increase in the current ratio will automatically lead to an increase in net working capital. 
B)  Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks of using short-term financing. 
C)  If a company follows a policy of "matching maturities," this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt. 
D)  Each of the above statements is true. 
E)  Each of the above statements is false.

Question 5

As long as a firm is generating positive net income each year it need not be concerned with working capital management because it will always be able to meet all short-term liquidity needs.

Accepted Answer

A) True 
 B)False

Question 6

Inventory management focuses on three basic questions: (1) how many units to hold in stock, (2) how many units of each item to order, and (3) at what point to reorder.

Accepted Answer

A) True 
 B)False

Question 7

____ 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 8

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 9

An unusually high turnover of accounts receivable, which implies a very short days sales outstanding (DSO), could indicate that the firm

Accepted Answer

A)  Is very conservative (tough) in its credit policy. 
B)  Has a very efficient credit and collection department. 
C)  Offers unusually large discounts. 
D)  All of the above. 
E)  Only answers a and b above. 
A)  Is very conservative (tough) in its credit policy. 
B)  Has a very efficient credit and collection department. 
C)  Offers unusually large discounts. 
D)  All of the above. 
E)  Only answers a and b above.

Question 10

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 11

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

Accepted Answer

A) True 
 B)False

Question 12

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.

Question 13

Incremental Profits
Berkeley Prints
Berkeley Prints 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.Also, Berkeley's cost of capital is 15 percent, and its variable costs total 60 percent of sales.Because Berkeley wants to improve its profitability, a proposal has been made to offer a 2 percent discount for payment within 10 days; that is, change the credit terms to 2/10, net 30.The consultants predict that sales would increase by $500,000, and that 50 percent of all customers would take the discount.The new DSO would be 30 days, and the bad debt loss percentage on all sales would fall to 4 percent.
-Refer to Berkeley Prints.What would be the incremental bad debt losses if the change were made?

Accepted Answer

A)  $130,000 
B)  $250,000 
C)  −$250,000 (bad debt losses would decline) 
D)  −$130,000 (bad debt losses would decline) 
E)  $620,000 
A)  $130,000 
B)  $250,000 
C)  −$250,000 (bad debt losses would decline) 
D)  −$130,000 (bad debt losses would decline) 
E)  $620,000

Question 14

Accruals represent a spontaneous source of funding but, unfortunately, due to economic forces, firms have little control over the level of these accounts.

Accepted Answer

A) True 
 B)False

Question 15

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 16

Incremental Profits
Berkeley Prints
Berkeley Prints 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.Also, Berkeley's cost of capital is 15 percent, and its variable costs total 60 percent of sales.Because Berkeley wants to improve its profitability, a proposal has been made to offer a 2 percent discount for payment within 10 days; that is, change the credit terms to 2/10, net 30.The consultants predict that sales would increase by $500,000, and that 50 percent of all customers would take the discount.The new DSO would be 30 days, and the bad debt loss percentage on all sales would fall to 4 percent.
-Refer to Berkeley Prints.What would be the incremental cost of carrying receivables if the change were made?

Accepted Answer

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

Question 17

Synchronization of cash flows is an important cash management technique and effective synchronization can actually increase a firm's profitability.

Accepted Answer

A) True 
 B)False

Question 18

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 19

If you borrow $2,000 from a bank for one year at a stated annual interest rate of 14 percent, but interest is prepaid (a discounted loan), then what is your effective annual rate?

Accepted Answer

A)  14.00% 
B)  8.57% 
C)  16.28% 
D)  21.21% 
E)  28.00% 
A)  14.00% 
B)  8.57% 
C)  16.28% 
D)  21.21% 
E)  28.00%

Question 20

In the text, the "red-line method" refers to

Accepted Answer

A)  The policy of drawing a red line around certain neighborhoods on a map and then refusing to sell on credit to people who live within those areas. 
B)  Restrictions imposed by companies which insure credit risks. 
C)  The use, in Dun & Bradstreet's reports, of a red line to show the maximum amount of credit which should be extended to a given customer; companies using this limit when they screen customers' orders are said to be using the "red-line method." 
D)  A method of controlling inventories by drawing a red line on the inside of a bin. 
E)  A method of controlling receivables by drawing a red line on invoices of companies that are expected to pay late. 
A)  The policy of drawing a red line around certain neighborhoods on a map and then refusing to sell on credit to people who live within those areas. 
B)  Restrictions imposed by companies which insure credit risks. 
C)  The use, in Dun & Bradstreet's reports, of a red line to show the maximum amount of credit which should be extended to a given customer; companies using this limit when they screen customers' orders are said to be using the "red-line method." 
D)  A method of controlling inventories by drawing a red line on the inside of a bin. 
E)  A method of controlling receivables by drawing a red line on invoices of companies that are expected to pay late.

A conservative approach to working capital will result in all permanent assets being financed using long-term securities.

A firm constructing a new manufacturing plant and financing it with short-term loans that are scheduled to be converted to bonds when the plant is completed, would want to separate the construction loan from other current liabilities associated with working capital management.

Which of the following statements is most correct?

As long as a firm is generating positive net income each year it need not be concerned with working capital management because it will always be able to meet all short-term liquidity needs.

Inventory management focuses on three basic questions: (1) how many units to hold in stock, (2) how many units of each item to order, and (3) at what point to reorder.

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

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

An unusually high turnover of accounts receivable, which implies a very short days sales outstanding (DSO), could indicate that the firm

Which of the following statements is correct?

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

Which of the following statements is correct?

Accruals represent a spontaneous source of funding but, unfortunately, due to economic forces, firms have little control over the level of these accounts.

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

Synchronization of cash flows is an important cash management technique and effective synchronization can actually increase a firm's profitability.

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

If you borrow $2,000 from a bank for one year at a stated annual interest rate of 14 percent, but interest is prepaid (a discounted loan), then what is your effective annual rate?

In the text, the "red-line method" refers to

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 Concepts

Security Valuation and Selection

Filters

Exam 15: Working Capital Management

A conservative approach to working capital will result in all permanent assets being financed using long-term securities.

A firm constructing a new manufacturing plant and financing it with short-term loans that are scheduled to be converted to bonds when the plant is completed, would want to separate the construction loan from other current liabilities associated with working capital management.

Which of the following statements is most correct?

As long as a firm is generating positive net income each year it need not be concerned with working capital management because it will always be able to meet all short-term liquidity needs.

Inventory management focuses on three basic questions: (1) how many units to hold in stock, (2) how many units of each item to order, and (3) at what point to reorder.

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

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

An unusually high turnover of accounts receivable, which implies a very short days sales outstanding (DSO), could indicate that the firm

Which of the following statements is correct?

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

Which of the following statements is correct?

Accruals represent a spontaneous source of funding but, unfortunately, due to economic forces, firms have little control over the level of these accounts.

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

Synchronization of cash flows is an important cash management technique and effective synchronization can actually increase a firm's profitability.

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

If you borrow $2,000 from a bank for one year at a stated annual interest rate of 14 percent, but interest is prepaid (a discounted loan), then what is your effective annual rate?

In the text, the "red-line method" refers to

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 Concepts

Security Valuation and Selection

Filters