Question 1

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 2

The ____ is the average length of time to convert the firm's receivables into cash.

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 3

The economic order quantity is that order quantity that results in the minimum ordering costs.

Accepted Answer

A) True 
 B)False

Question 4

Picard Orchards requires a $100,000 annual loan in order to pay laborers to tend and harvest its fruit crop.Picard borrows on a discount interest basis at a simple annual rate of 11 percent.If Picard must actually receive $100,000 net proceeds to finance its crop, then what must be the face value of the note?

Accepted Answer

A)  $111,000 
B)  $100,000 
C)  $112,360 
D)  $89,000 
E)  $108,840 
A)  $111,000 
B)  $100,000 
C)  $112,360 
D)  $89,000 
E)  $108,840

Question 5

Which of the following statements is correct?

Accepted Answer

A)  In a factoring arrangement, the factor always performs three functions: (1) credit checking, (2) lending, and (3) receivables collection. 
B)  The pledging of accounts receivable involves a transfer of the risk associated with accounts receivable from the borrower to the lender. 
C)  In a factoring arrangement, the seller can select various combinations of credit checking, lending, and risk bearing the factor performs by changing provisions in the factoring agreement. 
D)  In a factoring agreement, the factor would not perform the credit checking and risk taking functions without performing the lending function, because the former are required before the factor can lend to the seller. 
E)  The financing of accounts receivable involves an agreement which is informal and non-binding, which makes it difficult for the factor to protect itself. 
A)  In a factoring arrangement, the factor always performs three functions: (1) credit checking, (2) lending, and (3) receivables collection. 
B)  The pledging of accounts receivable involves a transfer of the risk associated with accounts receivable from the borrower to the lender. 
C)  In a factoring arrangement, the seller can select various combinations of credit checking, lending, and risk bearing the factor performs by changing provisions in the factoring agreement. 
D)  In a factoring agreement, the factor would not perform the credit checking and risk taking functions without performing the lending function, because the former are required before the factor can lend to the seller. 
E)  The financing of accounts receivable involves an agreement which is informal and non-binding, which makes it difficult for the factor to protect itself.

Question 6

Short-term loans generally are obtained faster than long-term loans because when lenders consider long-term loans they insist on a more thorough evaluation of the borrower's financial health and because the loan agreement is more complex.

Accepted Answer

A) True 
 B)False

Question 7

Your firm buys on credit terms of 2/10, net 45, and it always pays on day 45.If you calculate that this policy effectively costs your firm $157,500 each year, what is the firm's average accounts payable balance?

Accepted Answer

A)  $1,234,000 
B)  $75,000 
C)  $157,500 
D)  $625,000 
E)  $750,000 
A)  $1,234,000 
B)  $75,000 
C)  $157,500 
D)  $625,000 
E)  $750,000

Question 8

Which of the following might be attributed to efficient inventory management?

Accepted Answer

A)  High inventory turnover ratio. 
B)  Low incidence of production schedule disruptions. 
C)  High total asset turnover. 
D)  All of the above. 
E)  Only answers a and c above. 
A)  High inventory turnover ratio. 
B)  Low incidence of production schedule disruptions. 
C)  High total asset turnover. 
D)  All of the above. 
E)  Only answers a and c above.

Question 9

A lockbox plan is

Accepted Answer

A)  A method for safe-keeping of marketable securities. 
B)  Used to identify inventory safety stocks. 
C)  A system for slowing down the collection of checks written by a firm. 
D)  A system for speeding up a firm's collections of checks received. 
E)  Not described by any of the above statements. 
A)  A method for safe-keeping of marketable securities. 
B)  Used to identify inventory safety stocks. 
C)  A system for slowing down the collection of checks written by a firm. 
D)  A system for speeding up a firm's collections of checks received. 
E)  Not described by any of the above statements.

Question 10

The pledging of receivables differs from factoring in that, under pledging, the lender normally has recourse against the borrower.

Accepted Answer

A) True 
 B)False

Question 11

You have recently been hired to improve the performance of Multiplex Corporation which has been experiencing a severe cash shortage.As one part of your analysis, you want to determine the firm's cash conversion cycle.Using the following information and a 360-day year, what is your estimate of the firm's current cash conversion cycle?

Accepted Answer

A)  49 days 
B)  143 days 
C)  100 days 
D)  168 days 
E)  191 days 
A)  49 days 
B)  143 days 
C)  100 days 
D)  168 days 
E)  191 days

Question 12

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 13

A zero balance account is used by firms as an effective tool of cash management to reduce the amount of idle cash a firm might otherwise keep.

Accepted Answer

A) True 
 B)False

Question 14

Cost of Late Payment
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 bad debt losses if the change were made?

Accepted Answer

A)  $315,000 
B)  $260,500 
C)  −$260,500 (bad debt losses would decline) 
D)  −$315,000 (bad debt losses would decline) 
E)  $0 (no change would occur) 
A)  $315,000 
B)  $260,500 
C)  −$260,500 (bad debt losses would decline) 
D)  −$315,000 (bad debt losses would decline) 
E)  $0 (no change would occur)

Question 15

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?

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 16

For the Prince Company, the average age of accounts receivable is 60 days, the average age of accounts payable is 45 days, and the average age of inventory is 72 days.Assume a 360-day year.If Prince's annual sales are $936,000, what is the firm's average accounts receivable balance?

Accepted Answer

A)  $104,000 
B)  $118,000 
C)  $156,000 
D)  $212,000 
E)  $260,000 
A)  $104,000 
B)  $118,000 
C)  $156,000 
D)  $212,000 
E)  $260,000

Question 17

The aging schedule is a commonly used method of monitoring receivables.

Accepted Answer

A) True 
 B)False

Question 18

Short-term financing might be riskier than long-term financing because, during periods of tight credit, the firm might not be able to rollover (renew) its debt.

Accepted Answer

A) True 
 B)False

Question 19

Generally, ordering costs are the single most important cost element in inventory management, because they are greater in magnitude than carrying costs.

Accepted Answer

A) True 
 B)False

Question 20

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

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

The ____ is the average length of time to convert the firm's receivables into cash.

The economic order quantity is that order quantity that results in the minimum ordering costs.

Which of the following statements is correct?

Short-term loans generally are obtained faster than long-term loans because when lenders consider long-term loans they insist on a more thorough evaluation of the borrower's financial health and because the loan agreement is more complex.

Your firm buys on credit terms of 2/10, net 45, and it always pays on day 45.If you calculate that this policy effectively costs your firm $157,500 each year, what is the firm's average accounts payable balance?

Which of the following might be attributed to efficient inventory management?

A lockbox plan is

The pledging of receivables differs from factoring in that, under pledging, the lender normally has recourse against the borrower.

Which of the following statements is correct?

A zero balance account is used by firms as an effective tool of cash management to reduce the amount of idle cash a firm might otherwise keep.

For the Prince Company, the average age of accounts receivable is 60 days, the average age of accounts payable is 45 days, and the average age of inventory is 72 days.Assume a 360-day year.If Prince's annual sales are $936,000, what is the firm's average accounts receivable balance?

The aging schedule is a commonly used method of monitoring receivables.

Short-term financing might be riskier than long-term financing because, during periods of tight credit, the firm might not be able to rollover (renew) its debt.

Generally, ordering costs are the single most important cost element in inventory management, because they are greater in magnitude than carrying costs.

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

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

The ____ is the average length of time to convert the firm's receivables into cash.

The economic order quantity is that order quantity that results in the minimum ordering costs.

Which of the following statements is correct?

Short-term loans generally are obtained faster than long-term loans because when lenders consider long-term loans they insist on a more thorough evaluation of the borrower's financial health and because the loan agreement is more complex.

Your firm buys on credit terms of 2/10, net 45, and it always pays on day 45.If you calculate that this policy effectively costs your firm $157,500 each year, what is the firm's average accounts payable balance?

Which of the following might be attributed to efficient inventory management?

A lockbox plan is

The pledging of receivables differs from factoring in that, under pledging, the lender normally has recourse against the borrower.

Which of the following statements is correct?

A zero balance account is used by firms as an effective tool of cash management to reduce the amount of idle cash a firm might otherwise keep.

For the Prince Company, the average age of accounts receivable is 60 days, the average age of accounts payable is 45 days, and the average age of inventory is 72 days.Assume a 360-day year.If Prince's annual sales are $936,000, what is the firm's average accounts receivable balance?

The aging schedule is a commonly used method of monitoring receivables.

Short-term financing might be riskier than long-term financing because, during periods of tight credit, the firm might not be able to rollover (renew) its debt.

Generally, ordering costs are the single most important cost element in inventory management, because they are greater in magnitude than carrying costs.

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