Question 1

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 2

If your firm's DSO or aging schedule deteriorates from the first quarter of the year to the second quarter, this is a clear indication that your firm's credit policy has weakened.

Accepted Answer

A) True 
 B)False

Question 3

Offering trade credit discounts is costly to a firm and as a result, firms that offer trade discounts are usually those that are performing poorly and need cash quickly.

Accepted Answer

A) True 
 B)False

Question 4

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 5

A firm changes its credit policy from 2/10, net 30, to 3/10, net 30.The change is meant to meet competition, so no increase in sales is expected.Average accounts receivable will probably decline as a result of this change.

Accepted Answer

A) True 
 B)False

Question 6

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 7

The cash conversion cycle is the length of time from

Accepted Answer

A)  the payment of accrued wages to manufacture a product until the sale of that product. 
B)  the payment of accrued wages to manufacture a product until the collection of accounts receivable associated with the sale of that product. 
C)  the payment for the purchase of raw materials to manufacture a product until the sale of that product. 
D)  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. 
A)  the payment of accrued wages to manufacture a product until the sale of that product. 
B)  the payment of accrued wages to manufacture a product until the collection of accounts receivable associated with the sale of that product. 
C)  the payment for the purchase of raw materials to manufacture a product until the sale of that product. 
D)  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.

Question 8

A firm's collection policy and the procedures it follows to collect accounts receivable play an important role in keeping its deferrables period short, although too strict a collection policy can result in outright losses due to non-payment.

Accepted Answer

A) True 
 B)False

Question 9

Accruals represent a source of "free" financing in the sense that no explicit interest is paid on these funds.

Accepted Answer

A) True 
 B)False

Question 10

Because the use of short-term debt to finance fixed assets is a working capital decision variable in the current period, it does not need to be taken into account when managers assess the firm's ability to meet its current obligations using expected cash inflows.

Accepted Answer

A) True 
 B)False

Question 11

Incremental Profits
Aberwald Corporation
Aberwald Corporation expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate.Fixed ordering costs are $200 per order; the purchase price per chip is $25; and the firm's inventory carrying cost is equal to 20 percent of the purchase price.(Assume a 360-day year.)
-Refer to Aberwald Corporation.At the EOQ, what is Aberwald's cost of ordering and carrying inventory?

Accepted Answer

A)  $23,820 
B)  $7,940 
C)  $15,940 
D)  $34,220 
E)  $47,693 
A)  $23,820 
B)  $7,940 
C)  $15,940 
D)  $34,220 
E)  $47,693

Question 12

Which of the following statements is correct?

Accepted Answer

A)  A firm that makes 90 percent of its sales on credit and 10 percent for cash is growing at a rate of 10 percent annually.If the firm maintains stable growth it will also be able to maintain its accounts receivable at its current level, since the 10 percent cash sales can be used to manage the 10 percent growth rate. 
B)  In managing a firm's accounts receivable it is possible to increase credit sales per day yet still keep accounts receivable fairly steady if the firm can shorten the length of its collection period. 
C)  If a firm has a large percentage of accounts over 30 days old, it is a sign that the firm's receivables management needs to be reviewed and improved. 
D)  Because receivables and payables both result from sales transactions, a firm with a high receivables-to-sales ratio should also have a high payables-to-sales ratio. 
A)  A firm that makes 90 percent of its sales on credit and 10 percent for cash is growing at a rate of 10 percent annually.If the firm maintains stable growth it will also be able to maintain its accounts receivable at its current level, since the 10 percent cash sales can be used to manage the 10 percent growth rate. 
B)  In managing a firm's accounts receivable it is possible to increase credit sales per day yet still keep accounts receivable fairly steady if the firm can shorten the length of its collection period. 
C)  If a firm has a large percentage of accounts over 30 days old, it is a sign that the firm's receivables management needs to be reviewed and improved. 
D)  Because receivables and payables both result from sales transactions, a firm with a high receivables-to-sales ratio should also have a high payables-to-sales ratio.

Question 13

Ace Hardware's EOQ is 100 widgets, and it maintains a 50 unit safety stock.Which of the following is Ace's average inventory?

Accepted Answer

A)  100 units 
B)  60 units 
C)  57.07 units 
D)  12.25 units 
E)  75 units 
A)  100 units 
B)  60 units 
C)  57.07 units 
D)  12.25 units 
E)  75 units

Question 14

Which of the following are legitimate financial reasons for holding marketable securities?

Accepted Answer

A)  Expansion of inventory for the summer selling season. 
B)  Payment of dividends. 
C)  The firm just sold long-term securities. 
D)  All of the above. 
E)  Only answers a and c above. 
A)  Expansion of inventory for the summer selling season. 
B)  Payment of dividends. 
C)  The firm just sold long-term securities. 
D)  All of the above. 
E)  Only answers a and c above.

Question 15

If a firm's sales and those of its customers are closely correlated with economic conditions, it is possible for a firm's total investment in accounts receivable to decrease while its days sales outstanding increases.

Accepted Answer

A) True 
 B)False

Question 16

Determining the appropriate amount of total current assets and the amount in specific asset accounts, as well as their financing, are basic elements of working capital policy.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following is not commonly regarded as being a credit policy variable?

Accepted Answer

A)  Credit period. 
B)  Collection policy. 
C)  Credit standards. 
D)  Cash discounts. 
E)  All of the above are credit policy variables. 
A)  Credit period. 
B)  Collection policy. 
C)  Credit standards. 
D)  Cash discounts. 
E)  All of the above are credit policy variables.

Question 18

Inventory financing can take the form of a

Accepted Answer

A)  Blanket lien. 
B)  Trust receipt. 
C)  Warehouse receipt. 
D)  All of the above. 
E)  Answers a and b above. 
A)  Blanket lien. 
B)  Trust receipt. 
C)  Warehouse receipt. 
D)  All of the above. 
E)  Answers a and b above.

Question 19

A lockbox plan is most beneficial to firms that

Accepted Answer

A)  Send payables over a wide geographic area. 
B)  Have widely disbursed manufacturing facilities. 
C)  Have a large marketable securities account to protect. 
D)  Hold inventories at many different sites. 
E)  Make collections over a wide geographic area. 
A)  Send payables over a wide geographic area. 
B)  Have widely disbursed manufacturing facilities. 
C)  Have a large marketable securities account to protect. 
D)  Hold inventories at many different sites. 
E)  Make collections over a wide geographic area.

Question 20

When a firm factors its accounts receivable, the factor normally performs the functions of risk bearing, credit checking, and lending.

Accepted Answer

A) True 
 B)False

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

If your firm's DSO or aging schedule deteriorates from the first quarter of the year to the second quarter, this is a clear indication that your firm's credit policy has weakened.

Offering trade credit discounts is costly to a firm and as a result, firms that offer trade discounts are usually those that are performing poorly and need cash quickly.

Net working capital is defined as

A firm changes its credit policy from 2/10, net 30, to 3/10, net 30.The change is meant to meet competition, so no increase in sales is expected.Average accounts receivable will probably decline as a result of this change.

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.

The cash conversion cycle is the length of time from

A firm's collection policy and the procedures it follows to collect accounts receivable play an important role in keeping its deferrables period short, although too strict a collection policy can result in outright losses due to non-payment.

Accruals represent a source of "free" financing in the sense that no explicit interest is paid on these funds.

Because the use of short-term debt to finance fixed assets is a working capital decision variable in the current period, it does not need to be taken into account when managers assess the firm's ability to meet its current obligations using expected cash inflows.

Which of the following statements is correct?

Ace Hardware's EOQ is 100 widgets, and it maintains a 50 unit safety stock.Which of the following is Ace's average inventory?

Which of the following are legitimate financial reasons for holding marketable securities?

If a firm's sales and those of its customers are closely correlated with economic conditions, it is possible for a firm's total investment in accounts receivable to decrease while its days sales outstanding increases.

Determining the appropriate amount of total current assets and the amount in specific asset accounts, as well as their financing, are basic elements of working capital policy.

Which of the following is not commonly regarded as being a credit policy variable?

Inventory financing can take the form of a

A lockbox plan is most beneficial to firms that

When a firm factors its accounts receivable, the factor normally performs the functions of risk bearing, credit checking, and lending.

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

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

If your firm's DSO or aging schedule deteriorates from the first quarter of the year to the second quarter, this is a clear indication that your firm's credit policy has weakened.

Offering trade credit discounts is costly to a firm and as a result, firms that offer trade discounts are usually those that are performing poorly and need cash quickly.

Net working capital is defined as

A firm changes its credit policy from 2/10, net 30, to 3/10, net 30.The change is meant to meet competition, so no increase in sales is expected.Average accounts receivable will probably decline as a result of this change.

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.

The cash conversion cycle is the length of time from

A firm's collection policy and the procedures it follows to collect accounts receivable play an important role in keeping its deferrables period short, although too strict a collection policy can result in outright losses due to non-payment.

Accruals represent a source of "free" financing in the sense that no explicit interest is paid on these funds.

Because the use of short-term debt to finance fixed assets is a working capital decision variable in the current period, it does not need to be taken into account when managers assess the firm's ability to meet its current obligations using expected cash inflows.

Which of the following statements is correct?

Ace Hardware's EOQ is 100 widgets, and it maintains a 50 unit safety stock.Which of the following is Ace's average inventory?

Which of the following are legitimate financial reasons for holding marketable securities?

If a firm's sales and those of its customers are closely correlated with economic conditions, it is possible for a firm's total investment in accounts receivable to decrease while its days sales outstanding increases.

Determining the appropriate amount of total current assets and the amount in specific asset accounts, as well as their financing, are basic elements of working capital policy.

Which of the following is not commonly regarded as being a credit policy variable?

Inventory financing can take the form of a

A lockbox plan is most beneficial to firms that

When a firm factors its accounts receivable, the factor normally performs the functions of risk bearing, credit checking, and lending.

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