Question 1

Firms hold cash balances in order to complete transactions (both routine and precautionary) that are necessary in business operations and as compensation to banks for providing loans and services.

Accepted Answer

A) True 
 B)False

Question 2

As a rule, managers should try to always use the free component of trade credit but should use the costly component only if the cost of this credit is lower than the cost of credit from other sources.

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

A) True 
 B)False  True

Question 4

If a firm has a large percentage of accounts over 30 days old, this is proof positive that its receivables manager is not doing a good job.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements is CORRECT?

Accepted Answer

A)   Under normal conditions, a firm's expected ROE would probably be higher if it financed with short-term rather than with long-term debt, but using short-term debt would probably increase the firm's risk.
B)   Conservative firms generally use no short-term debt and thus have zero current liabilities.
C)   A short-term loan can usually be obtained more quickly than a long- term loan, but the cost of short-term debt is normally higher than that of long-term debt.
D)   If a firm that can borrow from its bank at a 6% interest rate buys materials on terms of 2/10 net 30, and if it must pay by Day 30 or else be cut off, then we would expect to see zero accounts payable on its balance sheet.
E)   If one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but it will not have an adverse financial impact on your firm if the customer periodically pays off its entire balance.F) B) and E)
G) A) and B)

Question 6

A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption that both cash receipts and cash payments occur uniformly over the month but in reality payments are concentrated at the beginning of each month.

Accepted Answer

A) True 
 B)False

Question 7

Kirk Development buys on terms of 2/15, net 60 days. It does not take discounts, and it typically pays on time, 60 days after the invoice date. Net purchases amount to $550,000 per year. On average, what is the dollar amount of total trade credit (costly + free)  the firm receives during the year, i.e., what are its average accounts payable? (Assume a 365-day year, and note that purchases are net of discounts.)

Accepted Answer

A)   $ 90,411
B)   $ 94,932
C)   $ 99,678
D)   $104,662
E)   $109,895F) A) and C)
G) All of the above

Question 8

A firm that follows an aggressive current asset financing approach uses primarily short-term credit and thus is more exposed to an unexpected increase in interest rates than is a firm that uses long-term capital and thus follows a conservative financing policy.

Accepted Answer

A) True 
 B)False

Question 9

One of the advantages of short-term debt financing is that firms can obtain short-term credit more quickly than long-term credit.

Accepted Answer

A) True 
 B)False

Question 10

If a firm's suppliers stop offering discounts, then its use of trade credit is more likely to increase than to decrease, other things held constant.

Accepted Answer

A) True 
 B)False

Question 11

A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption that both cash receipts and cash payments occur uniformly over the month but in reality receipts are concentrated at the beginning of each month.

Accepted Answer

A) True 
 B)False

Question 12

Dyl Pickle Inc. had credit sales of $3,500,000 last year and its days sales outstanding was DSO = 35 days. What was its average receivables balance, based on a 365-day year?

Accepted Answer

A)   $335,616
B)   $352,397
C)   $370,017
D)   $388,518
E)   $407,944F) A) and B)
G) All of the above

Question 13

If a profitable firm finds that it simply must "stretch" its accounts payable, then this suggests that it is undercapitalized, i.e., that it needs more working capital to support its operations.

Accepted Answer

A) True 
 B)False  True

Question 14

A line of credit can be either a formal or an informal agreement between a borrower and a bank regarding the maximum amount of credit the bank will extend to the borrower during some future period, assuming the borrower maintains its financial strength.

Accepted Answer

A) True 
 B)False

Question 15

The longer its customers normally hold inventory, the longer the credit period supplier firms normally offer. Still, suppliers have some flexibility in the credit terms they offer. If a supplier lengthens the credit period offered, this will shorten the customer's cash conversion cycle but lengthen the supplier firm's own CCC.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following statements is CORRECT?

Accepted Answer

A)  	Net working capital is defined as current assets minus the sum of payables and accruals, and any increase in the current ratio automatically indicates that net working capital has increased.
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 associated with 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)  	Net working capital is defined as current assets minus the sum of payables and accruals, and any decrease in the current ratio automatically indicates that net working capital has decreased.
E)  	If a company follows a policy of "matching maturities," this means that it matches its use of short-term debt with its use of long-term debt.F) A) and B)
G) B) and C) B

Question 17

Determining a firm's optimal investment in working capital and deciding how that investment should be financed are critical to working capital management.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following statements concerning the cash budget is CORRECT?

Accepted Answer

A)  	Depreciation expense is not explicitly included, but depreciation's effects are reflected in the estimated tax payments.
B)  	Cash budgets do not include financial items such as interest and dividend payments.
C)  	Cash budgets do not include cash inflows from long-term sources such as the issuance of bonds.
D)  	Changes that affect the DSO do not affect the cash budget.
E)  	Capital budgeting decisions have no effect on the cash budget until projects go into operation and start producing revenues.F) B) and D)
G) C) and D)

Question 19

An increase in any current asset must be accompanied by an equal increase in some current liability.

Accepted Answer

A) True 
 B)False

Question 20

A conservative current operating asset financing approach will result in permanent current assets and some seasonal current assets being financed using long-term securities.

Accepted Answer

A) True 
 B)False

Exam 16: Working Capital Management

Firms hold cash balances in order to complete transactions (both routine and precautionary) that are necessary in business operations and as compensation to banks for providing loans and services.

Correct Answer
verified

As a rule, managers should try to always use the free component of trade credit but should use the costly component only if the cost of this credit is lower than the cost of credit from other sources.

Correct Answer
verified

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

Correct Answer
verified
True

If a firm has a large percentage of accounts over 30 days old, this is proof positive that its receivables manager is not doing a good job.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption that both cash receipts and cash payments occur uniformly over the month but in reality payments are concentrated at the beginning of each month.

Correct Answer
verified

Correct Answer
verified

A firm that follows an aggressive current asset financing approach uses primarily short-term credit and thus is more exposed to an unexpected increase in interest rates than is a firm that uses long-term capital and thus follows a conservative financing policy.

Correct Answer
verified

One of the advantages of short-term debt financing is that firms can obtain short-term credit more quickly than long-term credit.

Correct Answer
verified

If a firm's suppliers stop offering discounts, then its use of trade credit is more likely to increase than to decrease, other things held constant.

Correct Answer
verified

A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption that both cash receipts and cash payments occur uniformly over the month but in reality receipts are concentrated at the beginning of each month.

Correct Answer
verified

Dyl Pickle Inc. had credit sales of $3,500,000 last year and its days sales outstanding was DSO = 35 days. What was its average receivables balance, based on a 365-day year?

Correct Answer
verified

If a profitable firm finds that it simply must "stretch" its accounts payable, then this suggests that it is undercapitalized, i.e., that it needs more working capital to support its operations.

Correct Answer
verified
True

A line of credit can be either a formal or an informal agreement between a borrower and a bank regarding the maximum amount of credit the bank will extend to the borrower during some future period, assuming the borrower maintains its financial strength.

Correct Answer
verified

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified
B

Determining a firm's optimal investment in working capital and deciding how that investment should be financed are critical to working capital management.

Correct Answer
verified

Which of the following statements concerning the cash budget is CORRECT?

Correct Answer
verified

An increase in any current asset must be accompanied by an equal increase in some current liability.

Correct Answer
verified

A conservative current operating asset financing approach will result in permanent current assets and some seasonal current assets being financed using long-term securities.

Correct Answer
verified

Exam 16: Working Capital Management

Firms hold cash balances in order to complete transactions (both routine and precautionary) that are necessary in business operations and as compensation to banks for providing loans and services.

Correct AnswerverifiedShow Answer

As a rule, managers should try to always use the free component of trade credit but should use the costly component only if the cost of this credit is lower than the cost of credit from other sources.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedTrue

If a firm has a large percentage of accounts over 30 days old, this is proof positive that its receivables manager is not doing a good job.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption that both cash receipts and cash payments occur uniformly over the month but in reality payments are concentrated at the beginning of each month.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A firm that follows an aggressive current asset financing approach uses primarily short-term credit and thus is more exposed to an unexpected increase in interest rates than is a firm that uses long-term capital and thus follows a conservative financing policy.

Correct AnswerverifiedShow Answer

One of the advantages of short-term debt financing is that firms can obtain short-term credit more quickly than long-term credit.

Correct AnswerverifiedShow Answer

If a firm's suppliers stop offering discounts, then its use of trade credit is more likely to increase than to decrease, other things held constant.

Correct AnswerverifiedShow Answer

A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption that both cash receipts and cash payments occur uniformly over the month but in reality receipts are concentrated at the beginning of each month.

Correct AnswerverifiedShow Answer

Dyl Pickle Inc. had credit sales of $3,500,000 last year and its days sales outstanding was DSO = 35 days. What was its average receivables balance, based on a 365-day year?

Correct AnswerverifiedShow Answer

If a profitable firm finds that it simply must "stretch" its accounts payable, then this suggests that it is undercapitalized, i.e., that it needs more working capital to support its operations.

Correct AnswerverifiedTrue

A line of credit can be either a formal or an informal agreement between a borrower and a bank regarding the maximum amount of credit the bank will extend to the borrower during some future period, assuming the borrower maintains its financial strength.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedB

Determining a firm's optimal investment in working capital and deciding how that investment should be financed are critical to working capital management.

Correct AnswerverifiedShow Answer

Which of the following statements concerning the cash budget is CORRECT?

Correct AnswerverifiedShow Answer

An increase in any current asset must be accompanied by an equal increase in some current liability.

Correct AnswerverifiedShow Answer

A conservative current operating asset financing approach will result in permanent current assets and some seasonal current assets being financed using long-term securities.

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
True

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
True

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
B

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified