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Exam 18: Current Asset Management

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Question 51

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The credit period is the amount of time it takes to do a credit search on a potential customer.

A) True
B) False

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Question 52

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You receive some goods on April 1 with the following terms: 3/20, net 30, June 1 dating. This means that you will receive a 3% discount if the bill is paid on or before June 20 and also that the full amount must be paid 30 days after receipt of the goods.

A) True
B) False

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Question 53

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The average collection period is calculated by dividing total sales by accounts receivable. It is an effective measure for internal use in monitoring a firm's collections.

A lockbox plan is most beneficial to which firms?

What is the economic ordering quantity for chips?

Marketable securities are liquid assets. Holding too low an amount of these liquid assets may adversely affect a firm's creditworthiness and lower its credit rating, resulting in higher future costs for securing both short- and long-term funds.

Cash discounts are mostly used to get new customers in the door since existing customers almost always use the delayed payment terms.

Which of the following would cause average inventory holdings to decrease, other things held constant?

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

For a nongrowth firm, it is possible to increase the percentage of sales that are made on credit sales and still keep accounts receivable at their current level, provided the firm can shorten the length of its collection period sufficiently.

Cash is often referred to as a nonearning asset. Thus, one goal of cash management is to minimize the amount of cash necessary to conduct business.

Fogel's Pumps offers its customers credit terms of 2/10, net 30, while Larry's Pumps offers terms of 2/10, net 45 days. The aging schedules for the two companies' receivables are shown below: Which company has the higher percentage of overdue accounts, and what is their percentage of overdue accounts?

Two methods for improving the collection process are the use of a lockbox system and moving funds by electronic transfer.

Which of the following has to do with inventory management?

Which of the following is NOT correct for a firm with seasonal sales and customers that all pay promptly at the end of 30 days?

Which of the following is true of the EOQ model? Note that the optimal order quantity, Q, will be called EOQ.

A firm's collection policy, i.e., the procedures it follows to collect accounts receivable, plays an important role in keeping its average collection period short, although too strict a collection policy can reduce profits due to lost sales.

Because money has time value, cash sales are always more profitable than credit sales.

Wintoki Company writes cheques averaging $15,000 a day, and it takes 5 days for these cheques to clear. The firm also receives cheques in the amount of $17,000 per day, and it takes 3 days for these cheques to be deposited and cleared. What is the firm's net float, in dollars?

Cash balances vary widely both among industries and among firms, depending upon specific conditions and on the owners' and financial managers' aversion to risk.