Chapter 15
Managing Working Capital

TRUE-FALSE QUESTIONS

1. Working capital is essentially a firm’s current assets and consists of cash, accounts receivable, inventories, plant and equipment.

Difficulty Level: Easy

Subject Heading: Importance of Working Capital

L.O. 15.1

2. Fixed capital would be defined as the firm’s fixed assets, which include plant, equipment and property.

Difficulty Level: Easy

Subject Heading: Importance of Working Capital

L.O. 15.1

3. “Investor spoofing” occurs when firms take actions at the end of their fiscal year (or sometimes toward the end of a quarter) to make themselves appear to be more profitable or financially healthy.

Difficulty Level: Easy

Subject Heading: Importance of Working Capital

L.O. 15.1

4. Current assets, typically, comprise about 80-90 percent of a firm’s total assets.

Difficulty Level: Easy

Subject Heading: Importance of Working Capital

L.O. 15.1

5. The operating cycle measures the time it takes between ordering materials and collecting cash from receivables.

Difficulty Level: Easy

Subject Heading: Operating Cycle

L.O. 15.2

6. The operating cycle is the inventory conversion period plus the accounts receivable period.

Difficulty Level: Easy

Subject Heading: Operating Cycle

L.O. 15.2

7. The accounts payable period would be added to the operating cycle to get the cash conversion cycle.

Difficulty Level: Easy

Subject Heading: Cash Conversion Cycle

L.O. 15.2

8. The cash conversion cycle measures a firm’s financing gap in terms of time.

Difficulty Level: Easy

Subject Heading: Cash Conversion Cycle

L.O. 15.2

9. If the average payment period is longer, then the cash conversion cycle will be longer.

Difficulty Level: Medium

Subject Heading: Cash Conversion Cycle

L.O. 15.2

10. The accounts payable period is the time between when a firm pays its suppliers for inventory and collecting cash from inventories.

Difficulty Level: Easy

Subject Heading: Cash Conversion Cycle

L.O. 15.2

11. Increases in the cash conversion cycle will lower the firm’s short-term financing needs.

Difficulty Level: Easy

Subject Heading: Cash Conversion Cycle

L.O. 15.2

12. If the cash conversion cycle shortens, then the firm’s investment in inventories and receivables will always be smaller.

Difficulty Level: Medium

Subject Heading: Cash Conversion Cycle

L.O. 15.2

13. The operating cycle measures the time between when a firm pays its suppliers for inventory and when it collects cash from customers on a sale of the finished product.

Difficulty Level: Medium

Subject Heading: Operating Cycle

L.O. 15.2

14. The cash conversion cycle measures the time between when a firm pays its suppliers for inventory and when it collects cash from customers on a sale of the finished product.

Difficulty Level: Medium

Subject Heading: Cash Conversion Cycle

L.O. 15.2

15. The operating cycle can be reduced by lengthening the accounts payable period.

Difficulty Level: Medium

Subject Heading: Operating Cycle

L.O. 15.2

16. Both the operating cycle and the cash conversion cycle can be reduced by shortening the inventory period.

Difficulty Level: Medium

Subject Heading: Determining the Length of the Operating Cycle and Cash Conversion Cycle

L.O. 15.2

17. A firm with an inventory period of 100 days and an accounts payable period of 50 days will have an operating cycle of 150 days.

Difficulty Level: Medium

Subject Heading: Determining the Length of the Operating Cycle and Cash Conversion Cycle

L.O. 15.2

18. A firm with an inventory period of 100 days and an accounts receivable period of 50 days will have an operating cycle of 150 days.

Difficulty Level: Medium

Subject Heading: Determining the Length of the Operating Cycle and Cash Conversion Cycle

L.O. 15.2

19. The accounts receivable period may be calculated as accounts receivable divided by sales.

Difficulty Level: Easy

Subject Heading: Determining the Length of the Operating Cycle and Cash Conversion Cycle

L.O. 15.2

20. The account receivable period may be calculated as accounts receivable divided by daily sales.

Difficulty Level: Easy

Subject Heading: Determining the Length of the Operating Cycle and Cash Conversion Cycle

L.O. 15.2

21. The inventory conversion period is calculated by inventory divided by costs of goods sold.

Difficulty Level: Easy

Subject Heading: Determining the Length of the Operating Cycle and Cash Conversion Cycle

L.O. 15.2

22. The inventory period is calculated as sales divided by inventories.

Difficulty Level: Easy

Subject Heading: Determining the Length of the Operating Cycle and Cash Conversion Cycle

L.O. 15.2

23. Average payment period is calculated as Accounts payable divided by COGS per day.

Difficulty Level: Easy

Subject Heading: Determining the Length of the Operating Cycle and Cash Conversion Cycle

L.O. 15.2

24. Cash conversion cycle = Operating cycle – Average payment period.

Difficulty Level: Easy

Subject Heading: Determining the Length of the Operating Cycle and Cash Conversion Cycle

L.O. 15.2

25. By multiplying the average sales per day times the inventory conversion period, the inventories investment amount can be determined.

Difficulty Level: Medium

Subject Heading: Investments in Receivables, Inventory, and Payable Financing

L.O. 15.3

26. The size of the accounts payable is affected by the level of the firm’s cost of goods sold and the average payment period.

Difficulty Level: Medium

Subject Heading: Investments in Receivables, Inventory, and Payable Financing

L.O. 15.3

27. Activities that decrease the cash conversion cycle will increase the firm’s need to obtain financing.

Difficulty Level: Medium

Subject Heading: Investments in Receivables, Inventory, and Payable Financing

L.O. 15.3

28. An increase in the cash conversion cycle would lead to an increase in the firm’s short-term needs and financing costs.

Difficulty Level: Medium

Subject Heading: Investments in Receivables, Inventory, and Payable Financing

L.O. 15.3

29. More efficient management of working capital assets will lessen the firm’s needs for financing.

Difficulty Level: Medium

Subject Heading: Investments in Receivables, Inventory, and Payable Financing

L.O. 15.3

30. Receivables investment amount = Net sales per day × Average collection period.

Difficulty Level: Easy

Subject Heading: Investments in Receivables, Inventory, and Payable Financing

L.O. 15.3

31. Accounts payable = Cost of goods sold per day × Average payment period.

Difficulty Level: Easy

Subject Heading: Investments in Receivables, Inventory, and Payable Financing

L.O. 15.3

32. The estimated cash inflows are affected by the sales forecast and customer payment patterns.

Difficulty Level: Easy

Subject Heading: Estimated Cash Inflows

L.O. 15.4

33. A cash budget is a tool the treasurer uses to forecast future cash flows and estimate future short-term borrowing needs.

Difficulty Level: Medium

Subject Heading: Cash Budget

L.O. 15.4

34. To construct a cash budget, two sets of information are needed: estimated cash inflows and estimated cash outflows.

Difficulty Level: Medium

Subject Heading: Cash Budget

L.O. 15.4

35. A level production plan has problems, such as idle plant and laid-off workers during slow sales months and production bottlenecks during busy times.

Difficulty Level: Medium

Subject Heading: Seasonal Versus Level Production

L.O. 15.4

36. Most firms have a minimum desired cash balance.

Difficulty Level: Easy

Subject Heading: Minimum Desired Cash Balance

L.O. 15.4

37. Most firms need similar sized cash buffers.

Difficulty Level: Medium

Subject Heading: Minimum Desired Cash Balance

L.O. 15.4

38. Speculative motives for holding cash include holding funds to meet unexpected demands.

Difficulty Level: Medium

Subject Heading: Cash Management

L.O. 15.5

39. Transactions motives for holding cash include holding funds to meet unexpected demands.

Difficulty Level: Medium

Subject Heading: Cash Management

L.O. 15.5

40. Precautionary motives for holding cash include holding funds to take advantage of unusual cash discounts for needed materials.

Difficulty Level: Medium

Subject Heading: Cash Management

L.O. 15.5

41. A financial manager should strive to maximize the investment in current assets.

Difficulty Level: Easy

Subject Heading: Management of Current Assets

L.O. 15.5

42. All businesses can earn interest at the prime rate on funds in their checking accounts.

Difficulty Level: Easy

Subject Heading: Cash Management

L.O. 15.5

43. The transactions motive is the demand for holding cash.

Difficulty Level: Easy

Subject Heading: Cash Management

L.O. 15.5

44. The transaction motive for holding cash is the demand for cash needed to take advantage of unusual cash discounts for needed materials.

Difficulty Level: Medium

Subject Heading: Cash Management

L.O. 15.5

45. Because commercial paper rates are typically below U.S. Treasury bill rates, they are a valuable short-term financing source for high quality business firms.

Difficulty Level: Medium

Subject Heading: Marketable Securities

L.O. 15.5

46. Theoretically, the transactions demand for cash could be reduced to zero.

Difficulty Level: Medium

Subject Heading: Cash Management

L.O. 15.5

47. Firms may not sell marketable securities to cover cash shortfalls.

Difficulty Level: Medium

Subject Heading: Short-Term Investments

L.O. 15.5

48. Marketable securities may be held for speculative motives.

Difficulty Level: Medium

Subject Heading: Marketable Securities

L.O. 15.5

49. U.S. Treasury bills are sold at a discount through competitive bidding in an annual auction.

Difficulty Level: Medium

Subject Heading: Marketable Securities

L.O. 15.5

50. An inverted yield curve is upward sloping.

Difficulty Level: Medium

Subject Heading: Marketable Securities

L.O. 15.5

51. The federal funds rate is normally several points lower than the T-bill rate.

Difficulty Level: Medium

Subject Heading: Short-Term Investments

L.O. 15.5

52. A negotiable CD is a marketable receipt issued by a bank in exchange for a deposit of funds.

Difficulty Level: Medium

Subject Heading: Marketable Securities

L.O. 15.5

53. A banker’s acceptance is used to finance international trade, represents an unconditional obligation of an accepting bank, and has a yield that closely follows the yield on commercial paper.

Difficulty Level: Medium

Subject Heading: Marketable Securities

L.O. 15.5

54. Typically, business firms should strive to maximize their cash holdings.

Difficulty Level: Medium

Subject Heading: Cash Management

L.O. 15.5

55. To qualify as a marketable security, an investment must have a long maturity.

Difficulty Level: Medium

Subject Heading: Marketable Securities

L.O. 15.5

56. Federal funds are an excellent investment alternative for a firm’s excess cash.

Difficulty Level: Medium

Subject Heading: Marketable Securities

L.O. 15.5

57. Commercial paper is the long-term, unsecured notes of well-known business firms, such as IBM or General Electric (GE).

Difficulty Level: Medium

Subject Heading: Marketable Securities

L.O. 15.5

58. Eurodollars are dollar deposits placed in foreign banks and converted to euros.

Difficulty Level: Medium

Subject Heading: Marketable Securities

L.O. 15.5

59. Securities issued by municipalities, such as cities, towns, states, and school districts, pay interest that, under law, is exempt from federal income taxes.

Difficulty Level: Medium

Subject Heading: Marketable Securities

L.O. 15.5

60. The cash conversion cycle can be reduced by lengthening the accounts payable period.

Difficulty Level: Medium

Subject Heading: Getting—and Keeping—the Cash

L.O. 15.6

61. The delivery or transmission float is the delay in transferring the means of payment from the payer (customer) to the payee (the provider of goods or services).

Difficulty Level: Medium

Subject Heading: Getting—and Keeping—the Cash

L.O. 15.6

62. The disbursement float is the delay in transferring the means of payment from the payer (customer) to the payee (the provider of goods or services).

Difficulty Level: Medium

Subject Heading: Getting—and Keeping—the Cash

L.O. 15.6

63. Processing float is the delay in transferring funds between payer and payee because of the banking system check-clearing processes.

Difficulty Level: Medium

Subject Heading: Getting—and Keeping—the Cash

L.O. 15.6

64. A system in which payments are sent to a P.O. box and processed by a bank to reduce collection float is called a lockbox system.

Difficulty Level: Medium

Subject Heading: Getting—and Keeping—the Cash

L.O. 15.6

65. An account in which just enough funds are transferred to cover that day’s checks presented for payment is called a daily account.

Difficulty Level: Medium

Subject Heading: Getting—and Keeping—the Cash

L.O. 15.6

66. Lowering a firm’s credit standards or customer credit quality will cause the average collection period to lengthen.

Difficulty Level: Easy

Subject Heading: Credit Terms and Collection Efforts

L.O. 15.7

67. Credit extended on purchases to a firm’s customers is called trade credit.

Difficulty Level: Medium

Subject Heading: Credit Terms and Collection Efforts

L.O. 15.7

68. A credit bureau is an institutions that obtain credit information about business firms and individuals.

Difficulty Level: Medium

Subject Heading: Credit Terms and Collection Efforts

L.O. 15.7

69. Wells Fargo is a credit bureau.

Difficulty Level: Medium

Subject Heading: Credit Terms and Collection Efforts

L.O. 15.7

70. Inventory administration is primarily a financial management function.

Difficulty Level: Easy

Subject Heading: Inventory Management

L.O. 15.8

71. Costs of owning raw materials, such as financing, storage, and insurance, need to be balanced against other items on the balance sheet.

Difficulty Level: Easy

Subject Heading: Inventory Management

L.O. 15.8

72. Cutting working capital can increase company earnings.

Difficulty Level: Easy

Subject Heading: Inventory Management

L.O. 15.8

MULTIPLE-CHOICE QUESTIONS

73. Working capital does not include:

a. cash

b. accounts receivable

c. marketable securities

d. property, plant, and equipment

Difficulty Level: Easy

Subject Heading: Importance of Working Capital

L.O. 15.1

74. Which one of the following asset accounts is not a part of a firm’s working capital?

a. cash and marketable securities

b. accounts receivable

c. inventories

d. fixed assets

Difficulty Level: Easy

Subject Heading: Importance of Working Capital

L.O. 15.1

75. In general, the more net working capital a company has

a. the greater the risk.

b. the lower the risk.

c. the less likely creditors will lend to the firm.

d. the lower its profits

Difficulty Level: Easy

Subject Heading: Importance of Working Capital

L.O. 15.1

76. In general, the less net working capital a company has

a. the greater the risk.

b. the lower the risk.

c. the less likely creditors will lend to the firm.

d. the faster it will grow

Difficulty Level: Easy

Subject Heading: Importance of Working Capital

L.O. 15.1

77. Holding all other factors constant, if a firm increases its current assets relative to total assets,

a. it increases return and reduces risk.

b. it increases return and increases risk.

c. it reduces return and reduces risk.

d. it reduces return and increases risk.

Difficulty Level: Medium

Subject Heading: Cash Management

L.O. 15.1

78. Holding all other factors constant, if a firm increases its current assets relative to total assets,

a. its financing costs will fall.

b. net working capital will rise.

c. has no effect on return and reduces risk.

d. it reduces return and increases risk.

Difficulty Level: Medium

Subject Heading: Cash Management

L.O. 15.1

79. Holding all other factors constant, if a firm increases its current liabilities relative to total assets,

a. it increases return and reduces risk.

b. it increases return and increases risk.

c. it reduces return and reduces risk.

d. it reduces return and increases risk.

Difficulty Level: Medium

Subject Heading: Cash Management

L.O. 15.1

80. A (n) ________ in current assets ________ net working capital, thereby ________ the risk of technical insolvency.

a. decrease; increases; increasing

b. decrease; decreases; reducing

c. increase; decreases; increasing

d. increase; increases; reducing

Difficulty Level: Hard

Subject Heading: Importance of Working Capital

L.O. 15.1

81. A (n) ________ in current liabilities ________ net working capital, thereby ________ the risk of technical insolvency.

a. decrease; increases; increasing

b. decrease; decreases; reducing

c. increase; decreases; increasing

d. increase; increases; reducing

Difficulty Level: Hard

Subject Heading: Importance of Working Capital

L.O. 15.1

82. A survey of financial managers found they spend nearly what percent of their time dealing with financial planning, budgeting, and working capital issues?

a. 10 percent

b. 30 percent

c. 50 percent

d. 70 percent

Difficulty Level: Medium

Subject Heading: Importance of Working Capital

L.O. 15.1

83. Which of the following would not normally be discussed when describing a firm’s operating cycle?

a. manufacturing process

b. selling effort

c. acquiring financing

d. collection period

Difficulty Level: Medium

Subject Heading: Figure 15.2

L.O. 15.2

84. Which one of the following activities is not a major component of the operating cycle?

a. manufacturing process

b. selling effort

c. collection period

d. asset investment decisions

Difficulty Level: Medium

Subject Heading: Figure 15.2

L.O. 15.2

85. Which of the following cycles is not a component of the firm’s operating cycle?

a. inventory cycle

b. accounts receivable cycle

c. accounts payable cycle

d. fixed asset cycle

Difficulty Level: Medium

Subject Heading: Figure 15.2

L.O. 15.2

86. Assume a firm’s production process requires an average of 80 days to go from raw materials to finished products and another 40 days before the finished goods are sold. If the accounts receivable cycle is 70 days and the accounts payable cycle is 80 days, what would the operating cycle be?

a. 110 days

b. 130 days

c. 190 days

d. 270 days

Difficulty Level: Medium

Subject Heading: Operating Cycle

L.O. 15.2

87. If a firm has net sales of $400,000, annual cost of goods sold of $315,000, an inventory turnover of 4.5 times a year, and an accounts receivable turnover of five times a year, the combined investment in inventories and accounts receivable would be:

a. $64,500

b. $92,000

c. $122,500

d. $150,000

Difficulty Level: Medium

Subject Heading: Operating Cycle

L.O. 15.2

88. When determining the operating cycle, which of the following components reduce the length of the cycle?

a. increases in the inventory period

b. increases in the accounts receivable period

c. increases in the accounts payable period

d. increases in the fixed asset period

Difficulty Level: Medium

Subject Heading: Operating Cycle

L.O. 15.2

89. Calculation of a firm’s average collection period is the same as calculating the:

a. accounts receivable cycle

b. inventory cycle

c. accounts payable cycle

d. cash cycle

Difficulty Level: Medium

Subject Heading: Determining the Length of the Operating Cycle and Cash Conversion Cycle

L.O. 15.2

90. The time between ordering materials and collecting cash from receivables is known as the:

a. operating cycle

b. cash conversion cycle

c. accounts receivable period

d. term payable cycle

Difficulty Level: Medium

Subject Heading: Operating Cycle

L.O. 15.2

91. The time between when the firm pays its suppliers and when it collects money from its customers is known as the:

a. operating cycle

b. cash conversion cycle

c. accounts receivable period

d. clearing cycle

Difficulty Level: Medium

Subject Heading: Cash Conversion Cycle

L.O. 15.2

92. One item that does not affect the cash conversion cycle is:

a. fixed asset period

b. accounts receivable

c. accounts payable period

d. inventory period

Difficulty Level: Medium

Subject Heading: Cash Conversion Cycle

L.O. 15.2

93. If a firm has an operating cycle of 120 days and an average payment period of 20 days, its cash conversion cycle would be:

a. 100 days

b. 140 days

c. 18 days

d. 160 days

Difficulty Level: Medium

Subject Heading: Cash Conversion Cycle

L.O. 15.2

94. A firm with a operating cycle of 200 days and an cash conversion cycle of 120 days has an average payment period of:

a. 320

b. 80

c. 40

d. 20

Difficulty Level: Medium

Subject Heading: Cash Conversion Cycle

L.O. 15.2

95. If a firm purchases materials on credit and thus has accounts payable, its cash conversion cycle will be:

a. longer than its operating cycle

b. the same length as its operating cycle

c. shorter than its operating cycle

d. the same length as its sales turnover cycle

Difficulty Level: Medium

Subject Heading: Cash Conversion Cycle

L.O. 15.2

96. A firm with an inventory period of 30 days, an accounts receivable period of 30 days, and an accounts payable period of 90 days has a cash conversion cycle of _____ days.

a. 150

b. -60

c. 30

d. -30

Difficulty Level: Medium

Subject Heading: Cash Conversion Cycle

L.O. 15.2

97. A firm with an inventory period of 30 days, an accounts receivable period of 30 days, and an accounts payable period of 90 days has an operating cycle of _____ days.

a. 60

b. -60

c. 30

d. -30

Difficulty Level: Medium

Subject Heading: Operating Cycle

L.O. 15.2

98. The ________ is the time period that elapses from the point when the firm purchases raw materials on account to the point when payment is made to the supplier of the goods.

a. cash conversion cycle

b. average payment period

c. average age of inventory

d. average collection period

Difficulty Level: Medium

Subject Heading: Cash Conversion Cycle

L.O. 15.2

99. The ________ of a firm is the amount of time that elapses from the point when the firm makes an outlay to purchase raw materials to the point when cash is collected from receivable.

a. cash conversion cycle

b. operating cycle

c. average age of inventory

d. average collection period

Difficulty Level: Medium

Subject Heading: Operating Cycle

L.O. 15.2

100. BP has an operating cycle of 120 days, an average collection period of 40 days, and an average payment period of 30 days. Based on this information, BPs average age of inventory is ________ days.

a. 80

b. 50

c. 90

d. 70

Difficulty Level: Medium

Subject Heading: Operating Cycle

L.O. 15.2

101. BP has an operating cycle of 150 days, an average collection period of 40 days, and an average payment period of 20 days. Based on this information, BPs average age of inventory is ________ days.

a. 130

b. 60

c. 90

d. 110

Difficulty Level: Medium

Subject Heading: Operating Cycle

L.O. 15.2

102. BP has an average age of inventory of 60 days, an average collection period of 45 days, and an average payment period of 30 days. Based on this information, BPs cash conversion cycle is ________ days.

a. 55

b. 65

c. 75

d. 85

Difficulty Level: Medium

Subject Heading: Cash Conversion Cycle

L.O. 15.2

103. BP has an average age of inventory of 70 days, an average collection period of 45 days, and an average payment period of 30 days. Based on this information, BPs cash conversion cycle is ________ days.

a. 15

b. 40

c. 55

d. 85

Difficulty Level: Medium

Subject Heading: Cash Conversion Cycle

L.O. 15.2

104. BP has a cash conversion cycle of 80 days, an average collection period of 25 days, and an average age of inventory of 70 days. Based on this information, BPs operating cycle is ________ days.

a. 95

b. 85

c. 75

d. 65

Difficulty Level: Medium

Subject Heading: Cash Conversion Cycle

L.O. 15.2

105. BP has a cash conversion cycle of 80 days, an average collection period of 25 days, and an average age of inventory of 50 days. Based on this information, BPs operating cycle is ________ days.

a. 5

b. 75

c. 105

d. 130

Difficulty Level: Medium

Subject Heading: Cash Conversion Cycle

L.O. 15.2

106. In a perfect world, a firm would prefer to have a

a. positive operating cycle.

b. negative operating cycle.

c. positive cash conversion cycle.

d. negative cash conversion cycle.

Difficulty Level: Medium

Subject Heading: Cash Conversion Cycle

L.O. 15.2

107. A negative cash conversion cycle indicates that the…

a. operating cycle exceeds the average payment period.

b. average payment period exceeds the operating cycle.

c. firm is shortening its average payment period and lengthening its average collection period.

d. lengthening its average collection period and lengthening its inventory period.

Difficulty Level: Medium

Subject Heading: Cash Conversion Cycle

L.O. 15.2

108. A positive cash conversion cycle indicates that the…

a. operating cycle exceeds the average payment period.

b. average payment period is greater than the operating cycle.

c. firm is lengthening its average payment period and lengthening its average collection period.

d. shortening its average collection period and lengthening its inventory period.

Difficulty Level: Medium

Subject Heading: Cash Conversion Cycle

L.O. 15.2

109. A firm can reduce its cash conversion cycle by

a. increasing its average age of inventory

b. increasing its average collection period

c. decreasing its average payment period

d. increasing its average payment period

Difficulty Level: Medium

Subject Heading: Cash Conversion Cycle

L.O. 15.2

110. A firm can reduce its cash conversion cycle by

a. increasing its average age of inventory

b. increasing its average collection period

c. decreasing its average payment period

d. decreasing the number of customers buying on credit

Difficulty Level: Medium

Subject Heading: Cash Conversion Cycle

L.O. 15.2

111. Ithaca Iron has annual operating outlays of $1,800,000 and a cash conversion cycle of 60 days. If the firm currently pays 12 percent for negotiated financing and reduces its cash conversion cycle to 50 days, the annual savings is closest to

a. $60,000.

b. $10,000.

c. $6,000.

d. $16,000.

Difficulty Level: Medium

Subject Heading: Cash Conversion Cycle

L.O. 15.2

112. Ithaca Iron has annual operating outlays of $3,800,000 and a cash conversion cycle of 50 days. If the firm currently pays 10 percent for negotiated financing and reduces its cash conversion cycle to 45 days, the annual savings is closest to

a. $5,000.

b. $10,000.

c. $26,000.

d. $16,000.

Difficulty Level: Medium

Subject Heading: Cash Conversion Cycle

L.O. 15.2

113. The basic strategies that should be employed by the business firm in managing cash include all of the following except

a. paying accounts payable as late as possible without damaging the firm's credit rating.

b. turning over inventory as quickly as possible while avoiding stock outs.

c. operating in a fashion that requires maximum cash.

d. collecting accounts receivable as quickly as possible without damaging customer rapport.

Difficulty Level: Hard

Subject Heading: Cash Conversion Cycle

L.O. 15.2

114. The basic strategies that should be employed by the business firm in managing cash include all of the following except

a. paying accounts payable as late as possible without damaging the firm's credit rating.

b. turning over inventory as slowly as possible while avoiding stock outs.

c. collecting accounts receivable as quickly as possible without damaging customer relationships.

d. tightening credit policies for customers

Difficulty Level: Hard

Subject Heading: Cash Conversion Cycle

L.O. 15.2

115. The time it takes between when materials are ordered and cash is collected from receivables is referred to as the:

a. operating cycle

b. cash conversion cycle

c. assets turnover cycle

d. sales or revenues cycle

Difficulty Level: Medium

Subject Heading: Operating Cycle

L.O. 15.2

116. Inventory / (COGS / 365).

a. Inventory conversion period

b. Average collection period

c. Average payment period

d. Inventory turnover

Difficulty Level: Easy

Subject Heading: Determining the Length of the Operating Cycle and Cash Conversion Cycle

L.O. 15.2

117. Inventory / COGS per day.

a. Inventory conversion period

b. Average collection period

c. Average payment period

d. Inventory turnover

Difficulty Level: Easy

Subject Heading: Determining the Length of the Operating Cycle and Cash Conversion Cycle

L.O. 15.2

118. Accounts receivable / (Net sales / 365).

a. Inventory conversion period

b. Average collection period

c. Average payment period

d. Inventory turnover

Difficulty Level: Easy

Subject Heading: Determining the Length of the Operating Cycle and Cash Conversion Cycle

L.O. 15.2

119. Accounts payable / (COGS / 365).

a. Inventory conversion period

b. Average collection period

c. Average payment period

d. Inventory turnover

Difficulty Level: Easy

Subject Heading: Determining the Length of the Operating Cycle and Cash Conversion Cycle

L.O. 15.2

120. As sales increase over time, assets will increase at the same growth rate so long as the…

a. asset turnover increases

b. asset turnover ratio remains constant

c. asset turnover ratio decreases

d. profit margin remains constant

Difficulty Level: Medium

Subject Heading: Investments in Receivables, Inventory, and Payable Financing

L.O. 15.3

121. In cash budgeting, the ________ seasonal and uncertain a firm's cash flows, the ________ the number of budgeting intervals it should use

a. more; greater

b. more; fewer

c. less; greater

d. less; fewer

Difficulty Level: Medium

Subject Heading: Cash Budgeting

L.O. 15.3

122. The projections on a cash budget will reflect which of the following:

a. the firm’s engineering effort.

b. the firm’s credit policies.

c. how the firm manages its employees

d. the environmental costs of the firm

Difficulty Level: Medium

Subject Heading: Cash Budgeting

L.O. 15.3

123. Ningbo shipping has projected sales in May, June, and July of $100, $200, and $300, respectively. It makes 20 percent of sales for cash and collects the balance one month following the sale. Ningbo Shipping’s total cash receipts in July are

a. $220

b. $200

c. $180

d. $100

Difficulty Level: Medium

Subject Heading: Cash Budgeting

L.O. 15.3

124. Ningbo shipping has projected sales in May, June, and July of $500, $600, and $700, respectively. It makes 20 percent of sales for cash and collects the balance one month following the sale. Ningbo Shipping’s total cash receipts in July are

a. $620

b. $520

c. $680

d. $1,100

Difficulty Level: Medium

Subject Heading: Cash Budgeting

L.O. 15.3

125. Cash disbursements may include all of the following EXCEPT

a. tax payments

b. rent payments

c. depreciation expense

d. fixed asset outlays

Difficulty Level: Medium

Subject Heading: Cash Budgeting

L.O. 15.3

126. In June, Erie Plastics had an ending cash balance of $35,000. In July, the firm had total cash receipts of $40,000 and total cash disbursements of $50,000. The minimum cash balance required by the firm is $25,000. At the end of July, Erie Plastics had

a. an excess cash balance of $25,000

b. An excess cash balance of $0

c. required financing of $10,000

d. required financing of $25,000

Difficulty Level: Medium

Subject Heading: Cash Budgeting

L.O. 15.3

127. In June, Erie Plastics had an ending cash balance of $55,000. In July, the firm had total cash receipts of $70,000 and total cash disbursements of $10,000. The minimum cash balance required by the firm is $25,000. At the end of July, Erie Plastics had

a. an excess cash balance of $90,000

b. an excess cash balance of $0

c. an excess cash balance of $115,000

d. required financing of $25,000

Difficulty Level: Medium

Subject Heading: Cash Budgeting

L.O. 15.3

128. A firm’s cash receipts may include all of the following except

a. dividends received from other firms

b. collections of accounts receivable

c. cash sales

d. interest income

Difficulty Level: Medium

Subject Heading: Estimated Cash Inflows

L.O. 15.4

129. Examples of regular cash outflows would not include:

a. materials purchases

b. rent

c. utility bills

d. fixed asset purchases

Difficulty Level: Easy

Subject Heading: Estimated Cash Outflows

L.O. 15.4

130. A firm has a minimum desired cash balance of $10,000. Any cash shortfalls will be made up with short-term financing. The net cash flow for January is $3,000 and the beginning balance for that month is $5,000: The cash balance for the beginning of February will be:

a. -$2,000

b. $10,000

c. $3,000

d. $18,000

Difficulty Level: Medium

Subject Heading: Cash Budgeting

L.O. 15.4

131. A firm has a minimum desired cash balance of $120,000. Any cash shortfalls will be made up with short-term financing. The net cash flow for January is $80,000 and the beginning balance for that month is $15,000: short-term financing requirements that month will be:

a. -$120,000

b. $25,000

c. $215,000

d. $200,000

Difficulty Level: Medium

Subject Heading: Cash Budgeting

L.O. 15.4

132. Which of the following statements is most correct?

a. The financial crisis and recession of 2007–2009 had little effect on the ability of borrower firms to obtain short-term financing and for firms with surplus funds to invest in short-term instruments.

b. The financial crisis and recession of 2007–2009 had strong effects on the ability of borrower firms to obtain short-term financing and for firms with surplus funds to invest in short-term instruments.

c. The financial crisis and recession of 2007–2009 had strong effects on the ability of borrower firms to obtain short-term financing but made it easy for firms with surplus funds to invest in short-term instruments.

d. The financial crisis and recession of 2007–2009 had little effect on the ability of borrower firms to obtain short-term financing but made it easy for firms with surplus funds to invest in short-term instruments.

Difficulty Level: Hard

Subject Heading: The Financial Crisis and its Impact on Short-Term Firm Financing

L.O. 15.5

133. Marketable securities are held primarily to meet:

a. transactions motives

b. precautionary motives

c. speculative motives

d. leverage motives

Difficulty Level: Easy

Subject Heading: Cash Management

L.O. 15.5

134. Which of the following marketable securities is sold at a discount throughout competitive bidding in a weekly auction?

a. U.S. Treasury bills

b. federal funds

c. commercial paper

d. negotiable certificates of deposit

Difficulty Level: Easy

Subject Heading: Marketable Securities

L.O. 15.5

135. Deposits placed in foreign banks that remain denominated in U.S. dollars are called:

a. bankers’ acceptances

b. Eurodollars

c. federal funds

d. commercial paper

Difficulty Level: Easy

Subject Heading: Marketable Securities

L.O. 15.5

136. One type of investment that would not be suitable for marketable securities would be:

a. bankers’ acceptances

b. short-term notes of U.S. government agencies

c. negotiable CD’s

d. mortgages

Difficulty Level: Medium

Subject Heading: Marketable Securities

L.O. 15.5

137. Reasons to invest in marketable securities would not include:

a. transactions motives

b. precautionary motives

c. speculative motives

d. all the above are reasons to invest in marketable securities

Difficulty Level: Medium

Subject Heading: Cash Management

L.O. 15.5

138. Federal funds rates usually parallel the:

a. prime rate

b. U. S. Treasury bill rate

c. Dow Jones Industrial Average

d. Home loan rates

Difficulty Level: Medium

Subject Heading: Marketable Securities

L.O. 15.5

139. Which of the following statements is most correct?

a. Eurodollars are deposits placed in U.S. banks that remain denominated in foreign currencies.

b. Treasury bills are rarely traded in secondary money markets.

c. The most common trading unit for federal funds is $1 million.

d. Federal funds are used most often by firms to finance inventories.

Difficulty Level: Medium

Subject Heading: Marketable Securities

L.O. 15.5

140. Which of the following would not be a characteristic of commercial paper?

a. issued by well-known business firms

b. debt is secured

c. short-term debt

d. Used as an investment vehicle to earn short term interest.

Difficulty Level: Medium

Subject Heading: Short-Term Investments

L.O. 15.5

141. The size of the cash buffer depends upon:

a. the ability to easily acquire more inventory

b. the predictability of cash inflows

c. total fixed asset investment

d. the ability to accelerate asset depreciation

Difficulty Level: Medium

Subject Heading: Marketable Securities

L.O. 15.5

142. Business firms hold cash and marketable securities for which of the following reasons or motives?

a. transactions, precautionary, and goodwill motives

b. precautionary, speculative, and goodwill motives

c. transactions, precautionary, and speculative motives

d. precautionary, goodwill, and transactions motives

Difficulty Level: Medium

Subject Heading: Cash Management

L.O. 15.5

143. A firm’s excess cash balance during a particular month could be best deployed if it were

a. financed with short term investments

b. financed with long term investments

c. invested in short term investments

d. invested in long term investments

Difficulty Level: Medium

Subject Heading: Cash Management

L.O. 15.5

144. The goal of a company’s cash management policy is to

a. increase the cash conversion cycle.

b. increase the payment period.

c. minimize the cash requirement.

d. maximize cash outflows.

Difficulty Level: Medium

Subject Heading: Cash Management

L.O. 15.5

145. A goal of a company’s cash management policy is to

a. increase the cash conversion cycle.

b. increase the payment period.

c. reduce the need to borrow.

d. maximize cash outflows.

Difficulty Level: Medium

Subject Heading: Cash Management

L.O. 15.5

146. These are short-term money market investments that are extremely safe and liquid; they can be quickly converted into cash at values very close to their intrinsic values.

a. preferred stocks.

b. treasury bonds.

c. corporate bonds.

d. marketable securities.

Difficulty Level: Medium

Subject Heading: Marketable Securities

L.O. 15.5

147. Which of the following statements is false?

a. the cash conversion cycle is the time between when the firm pays its suppliers and when it collects money from its customers.

b. Because commercial paper rates are typically below the U.S. Treasury bill rates, commercial paper is a valuable short-term financing source for high quality business firms.

c. More efficient management of working capital assets will lessen the firm’s need to obtain financing.

d. Commercial paper is a form of unsecured short term borrowing.

Difficulty Level: Hard

Subject Heading: Multiple Topics

L.O. 15.5

148. All of the following statements is correct except

a. The financial crisis and recession of 2007–2009 had strong effects on the ability of borrower firms to obtain short-term financing and for firms with surplus funds to invest in short-term instruments.

b. During the 2007-2009 financial crisis and recession, major spikes in the risk premium between commercial paper and T-bills indicate major stresses to the financial system—both for issuers and investors.

c. During the 2007-2009 financial crisis and recession, major spikes in the risk premium between commercial paper and T-bills indicate periods of investors fleeing investments of perceived risk (commercial paper) and placing funds in the safest assets (T-Bills).

d. During the 2007-2009 financial crisis and recession, major spikes in the risk premium between commercial paper and T-bills indicate periods of investors fleeing investments of perceived risk (T-Bills) and placing funds in the safest assets (corporate bonds).

Difficulty Level: Hard

Subject Heading: The Financial Crisis and its Impact on Short-Term Firm Financing

L.O. 15.5

149. Holding funds to meet unexpected demands.

a. Precautionary motives

b. Speculative motives

c. Safety motives

d. Tax motives

Difficulty Level: Easy

Subject Heading: Cash Management

L.O. 15.5

150. Holding marketable securities to take advantage of unusual cash discounts or price bargains on materials if it can pay quickly with cash.

a. Precautionary motives

b. Speculative motives

c. Safety motives

d. Tax motives

Difficulty Level: Easy

Subject Heading: Cash Management

L.O. 15.5

151. Holding cash outside of the United States.

a. Precautionary motives

b. Speculative motives

c. Safety motives

d. Tax motives

Difficulty Level: Easy

Subject Heading: Cash Management

L.O. 15.5

152. Cash disbursements may include which of the following?

a. cash sales

b. collection of accounts receivable

c. inventory financing

d. fixed asset outlays

Difficulty Level: Easy

Subject Heading: Getting—and Keeping—the Cash

L.O. 15.6

153. The time between when a payee sends payment and the funds are credited to the payee’s bank account is called the:

a. collection float

b. disbursement float

c. total float

d. transmittal float

Difficulty Level: Medium

Subject Heading: Getting—and Keeping—the Cash

L.O. 15.6

154. Methods used to speed up collections include all of the following except:

a. a lockbox system

b. remote disbursement locations

c. pre-authorized checks

d. inventory flooring arrangements

Difficulty Level: Medium

Subject Heading: Getting—and Keeping—the Cash

L.O. 15.6

155. One way a firm can reduce the amount of cash it needs in any one month is to

a. slow down the payment of receivables

b. delay the payment of wages

c. speed up the payment of taxes

d. speed up the payment of wages

Difficulty Level: Medium

Subject Heading: Getting—and Keeping—the Cash

L.O. 15.6

156. One way a firm can reduce the amount of cash it needs in any one month is to

a. slow down the collection of receivables

b. delay the payment of wages

c. speed up the payment of taxes

d. speed up the payment of payables

Difficulty Level: Medium

Subject Heading: Getting—and Keeping—the Cash

L.O. 15.6

157. The delay that occurs when funds are sent by a payer to a payee.

a. Float

b. Transmission float

c. Processing float

d. Clearing float

Difficulty Level: Easy

Subject Heading: Getting—and Keeping—the Cash

L.O. 15.6

158. The same as delivery float.

a. Float

b. Transmission float

c. Processing float

d. Clearing float

Difficulty Level: Easy

Subject Heading: Getting—and Keeping—the Cash

L.O. 15.6

159. The delay in transferring the means of payment from the payer (customer) to the payee (the provider of the goods or services).

a. Float

b. Transmission float

c. Processing float

d. Clearing float

Difficulty Level: Easy

Subject Heading: Getting—and Keeping—the Cash

L.O. 15.6

160. Delays in processing incoming payments from customers by the receiving firm.

a. Float

b. Transmission float

c. Processing float

d. Clearing float

Difficulty Level: Easy

Subject Heading: Getting—and Keeping—the Cash

L.O. 15.6

161. The delay in transferring funds between payer and payee because of the banking system check-clearing processes.

a. Float

b. Transmission float

c. Processing float

d. Clearing float

Difficulty Level: Easy

Subject Heading: Getting—and Keeping—the Cash

L.O. 15.6

162. Which of the following is not considered to be one of the five C’s of credit analysis?

a. character

b. caution

c. capital

d. collateral

Difficulty Level: Easy

Subject Heading: Credit Analysis

L.O. 15.7

163. Which one of the following is a private firm that operates as a credit-reporting agency?

a. National Credit Interchange Bureau

b. Foreign Credit Interchange Bureau

c. Dun & Bradstreet

d. Merrill-Lynch

Difficulty Level: Easy

Subject Heading: Credit-Reporting Agencies

L.O. 15.7

164. A mercantile credit bureau serves primarily as a (n):

a. collection agency for delinquent accounts

b. common meeting place where credit managers may exchange information

c. organization through which accounts receivable may be sold to other businesses

d. central record-keeping organization for credit information on business

Difficulty Level: Medium

Subject Heading: Credit-Reporting Agencies

L.O. 15.7

165. Dun & Bradstreet serves as:

a. an agency for rating the bonds of businesses and governmental bodies

b. the principal rating agency for commercial paper

c. a research and advisory facility for stocks and bonds

d. a general credit reporting agency covering all fields of business activity

Difficulty Level: Medium

Subject Heading: Credit-Reporting Agencies

L.O. 15.7

166. The willingness of a credit applicant to pay her or his bills is measured by:

a. capacity

b. capital

c. conditions

d. character

Difficulty Level: Medium

Subject Heading: Cash Management

L.O. 15.7

167. The level of investment in accounts receivable depends on:

a. credit analysis

b. accounts payable terms

c. number of customers

d. average sale prices

Difficulty Level: Medium

Subject Heading: Credit Analysis

L.O. 15.7

168. With regards to credit analysis, this refers to the ethical quality of the applicant on which one can base a judgment about his or her willingness to pay bills.

a. Character

b. Capacity

c. Capital

d. Collateral

Difficulty Level: Easy

Subject Heading: Credit Analysis

L.O. 15.7

169. With regards to credit analysis, this is best judged by reviewing past credit history for long overdue or unpaid obligations.

a. Character

b. Capacity

c. Capital

d. Collateral

Difficulty Level: Easy

Subject Heading: Credit Analysis

L.O. 15.7

170. With regards to credit analysis, this refers to the ability to pay bills and often involves an examination of liquidity ratios.

a. Character

b. Capacity

c. Capital

d. Collateral

Difficulty Level: Easy

Subject Heading: Credit Analysis

L.O. 15.7

171. With regards to credit analysis, this indicates the adequacy of owners’ equity relative to existing liabilities as the underlying support for creditworthiness.

a. Conditions

b. Capacity

c. Capital

d. Collateral

Difficulty Level: Easy

Subject Heading: Credit Analysis

L.O. 15.7

172. With regards to credit analysis, this reflects whether assets are available to provide security for the potential credit.

a. Conditions

b. Capacity

c. Capital

d. Collateral

Difficulty Level: Easy

Subject Heading: Credit Analysis

L.O. 15.7

173. With regards to credit analysis, this refers to the current economic climate and state of the business cycle.

a. Character

b. Capacity

c. Capital

d. Collateral

Difficulty Level: Easy

Subject Heading: Credit Analysis

L.O. 15.7

174. If a firm’s inventories on hand are $200,000 and its cost of goods sold is $600,000, what is the inventory turnover?

a. 2.0 times

b. 3.0 times

c. 4.0 times

d. 6.0 times

Difficulty Level: Medium

Subject Heading: Inventory Management

L.O. 15.8