Question 1

The term "interest rate price risk" refers to the probability that a firm will be unable to continue making interest payments on its debt.

Accepted Answer

A) True 
 B)False

Question 2

If the average collection period or days sales outstanding is increasing the firm should consider easing its credit policy to allow credit to more of its customers.

Accepted Answer

A) True 
 B)False

Question 3

Inventory management is largely self-contained; that is, only minimum coordination among other departments such as sales, purchasing, and production is required for successful inventory management.

Accepted Answer

A) True 
 B)False

Question 4

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. Since 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 cost of carrying receivables if this change were made?

Accepted Answer

A) $108,750 
B) −$116,250 (carrying costs would decline) 
C) $157,900 
D) −$225,000 (carrying costs would decline) 
E) $260,500 
A) $108,750 
B) −$116,250 (carrying costs would decline) 
C) $157,900 
D) −$225,000 (carrying costs would decline) 
E) $260,500

Question 5

If easing a firm's credit policy lengthens the collection period and results in a worsening of the aging schedule then why do firms take such actions?

Accepted Answer

A) It normally stimulates sales. 
B) To meet competitive pressures. 
C) To increase the firm's deferral period for payables. 
D) All of the above. 
E) Both a and b above. 
A) It normally stimulates sales. 
B) To meet competitive pressures. 
C) To increase the firm's deferral period for payables. 
D) All of the above. 
E) Both a and b above.

Question 6

A Eurodollar is a U.S.dollar deposited in a bank outside the United States.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following statements is correct?

Accepted Answer

A) Poor synchronization of cash flows which results in high cash management costs can be partially offset by increasing disbursement float and decreasing collections float. 
B) The size of a firm's net float is primarily a function of its natural cash flow synchronization and how it clears its checks. 
C) Lockbox systems are used mainly for security purposes as well as to decrease the firm's net float. 
D) If a firm can speed up its collections and slow down its disbursements, it will be able to reduce its net float. 
E) A firm practicing good cash management and making use of positive net float will bring its check book balance as close to zero as possible, but must never generate a negative book balance. 
A) Poor synchronization of cash flows which results in high cash management costs can be partially offset by increasing disbursement float and decreasing collections float. 
B) The size of a firm's net float is primarily a function of its natural cash flow synchronization and how it clears its checks. 
C) Lockbox systems are used mainly for security purposes as well as to decrease the firm's net float. 
D) If a firm can speed up its collections and slow down its disbursements, it will be able to reduce its net float. 
E) A firm practicing good cash management and making use of positive net float will bring its check book balance as close to zero as possible, but must never generate a negative book balance.

Question 8

Which of the following statements is correct?

Accepted Answer

A) Shorter term cash budgets, in general, are used primarily for planning purposes while longer term budgets are used for actual cash control. 
B) The cash budget and the capital budget are planned separately and although they are both important to the firm, they are independent of each other. 
C) Since deprecation is a non-cash charge, it does not appear on nor have an effect on the cash budget. 
D) The target cash balance is set optimally such that it need not be adjusted for seasonal patterns and unanticipated fluctuations in receipts, although it is changed to reflect long-term changes in the firm's
Operations. 
E) The typical actual cash budget will reflect interest on loans and income from investment of surplus cash. These numbers are expected values and actual results might turn out differently. 
A) Shorter term cash budgets, in general, are used primarily for planning purposes while longer term budgets are used for actual cash control. 
B) The cash budget and the capital budget are planned separately and although they are both important to the firm, they are independent of each other. 
C) Since deprecation is a non-cash charge, it does not appear on nor have an effect on the cash budget. 
D) The target cash balance is set optimally such that it need not be adjusted for seasonal patterns and unanticipated fluctuations in receipts, although it is changed to reflect long-term changes in the firm's
Operations. 
E) The typical actual cash budget will reflect interest on loans and income from investment of surplus cash. These numbers are expected values and actual results might turn out differently.

Question 9

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.If the lead time for placing an order is 5 days, and Aberwald holds a safety stock equal to a 30-day supply of chips, then at what inventory level should an order be placed?

Accepted Answer

A) 15,570 
B) 3,175 
C) 12,250 
D) 13,675 
E) 8,124 
A) 15,570 
B) 3,175 
C) 12,250 
D) 13,675 
E) 8,124

Question 10

Which of the following statements about cash management is false?

Accepted Answer

A) Depreciation expense does not appear explicitly on the cash budget, but its tax effects are included. 
B) If cash flows are not uniform during the month, then weekly or perhaps daily cash budgets should be prepared rather than monthly budgets. 
C) Compensating balance requirements do not affect a firm's target cash balance. 
D) Cash management involves costs, and it is important to analyze whether the benefits received outweigh the costs incurred. 
E) The cash budget is the foundation of good cash management. 
A) Depreciation expense does not appear explicitly on the cash budget, but its tax effects are included. 
B) If cash flows are not uniform during the month, then weekly or perhaps daily cash budgets should be prepared rather than monthly budgets. 
C) Compensating balance requirements do not affect a firm's target cash balance. 
D) Cash management involves costs, and it is important to analyze whether the benefits received outweigh the costs incurred. 
E) The cash budget is the foundation of good cash management.

Question 11

Which of the following statements is correct?

Accepted Answer

A) Other things held constant, the higher a firm's days sales outstanding (DSO), the better its credit department. 
B) A firm will relax its credit standards only if it expects bad debts will not increase because of the change. 
C) If a firm which sells on terms of "net 30" changes its policy and begins offering all customers terms of "2/10, net 30," and if no change in sales volume occurs, then the firm's DSO will probably increase. 
D) If a firm sells on terms of 2/10, net 30, and its DSO is 30 days, then its aging schedule would probably show some past due accounts. 
E) Statements a, b, c, and d are all false. 
A) Other things held constant, the higher a firm's days sales outstanding (DSO), the better its credit department. 
B) A firm will relax its credit standards only if it expects bad debts will not increase because of the change. 
C) If a firm which sells on terms of "net 30" changes its policy and begins offering all customers terms of "2/10, net 30," and if no change in sales volume occurs, then the firm's DSO will probably increase. 
D) If a firm sells on terms of 2/10, net 30, and its DSO is 30 days, then its aging schedule would probably show some past due accounts. 
E) Statements a, b, c, and d are all false.

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

Which of the following is (are) typically part of the cash budget?

Accepted Answer

A) Payment lag. 
B) Payment for plant construction. 
C) Cumulative cash. 
D) All of the above. 
E) Only answers a and c above. 
A) Payment lag. 
B) Payment for plant construction. 
C) Cumulative cash. 
D) All of the above. 
E) Only answers a and c above.

Question 14

A liquid asset is an asset can be sold in a period of time at a price its fair market value.

Accepted Answer

A) relatively long; way below 
B) relatively long; near 
C) relatively short; way below 
D) relatively short; near 
E) None of the above. 
A) relatively long; way below 
B) relatively long; near 
C) relatively short; way below 
D) relatively short; near 
E) None of the above.

Question 15

is a technique used to reduce float by having payments sent to post office boxes located near the customer.

Accepted Answer

A) Postal deposit system 
B) Preauthorized debit system 
C) Concentration banking 
D) Lockbox arrangement 
E) Zero-balance account 
A) Postal deposit system 
B) Preauthorized debit system 
C) Concentration banking 
D) Lockbox arrangement 
E) Zero-balance account

Question 16

The net float is the difference between the disbursement float and the collections float.

Accepted Answer

A) True 
 B)False

Question 17

A report showing how long accounts receivable have been outstanding is called what?

Accepted Answer

A) Time line. 
B) Preauthorized debit system. 
C) Aging schedule. 
D) Cash discount. 
E) Credit period. 
A) Time line. 
B) Preauthorized debit system. 
C) Aging schedule. 
D) Cash discount. 
E) Credit period.

Question 18

The collection policy refers to the procedures the firm follows to collect its credit accounts.

Accepted Answer

A) True 
 B)False

Question 19

Fashion Clothiers Inc.
Assume that Fashion Clothiers Inc. uses 1,440,000 yards of material each year. Further, assume that Fashion can order the material at a cost of $2 per yard, plus fixed ordering costs of $100 per order. The firm's carrying cost is
20 percent of the inventory value, at cost.
-Refer to Fashion Clothiers Inc.Now, suppose the manufacturer offers a discount of 0.5 percent for orders of at least 40,000 yards.Should Fashion Clothiers increase its ordering quantity to take the discount?

Accepted Answer

A) Yes; it will save $827 if it takes the discount. 
B) No; it will lose $827 if it takes the discount. 
C) Yes; it will save $14,400 if it takes the discount. 
D) Yes; it will save $13,573 if it takes the discount. 
E) No; it will lose $13,573 if it takes the discount. 
A) Yes; it will save $827 if it takes the discount. 
B) No; it will lose $827 if it takes the discount. 
C) Yes; it will save $14,400 if it takes the discount. 
D) Yes; it will save $13,573 if it takes the discount. 
E) No; it will lose $13,573 if it takes the discount.

Question 20

A cash balance that is held to enable the firm to take advantage of any bargain purchases that might arise is called a ____ balance.

Accepted Answer

A) transactions 
B) compensating 
C) precautionary 
D) speculative 
E) convertible 
A) transactions 
B) compensating 
C) precautionary 
D) speculative 
E) convertible

The term "interest rate price risk" refers to the probability that a firm will be unable to continue making interest payments on its debt.

If the average collection period or days sales outstanding is increasing the firm should consider easing its credit policy to allow credit to more of its customers.

Inventory management is largely self-contained; that is, only minimum coordination among other departments such as sales, purchasing, and production is required for successful inventory management.

If easing a firm's credit policy lengthens the collection period and results in a worsening of the aging schedule then why do firms take such actions?

A Eurodollar is a U.S.dollar deposited in a bank outside the United States.

Which of the following statements is correct?

Which of the following statements is correct?

Which of the following statements about cash management is false?

Which of the following statements is correct?

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

Which of the following is (are) typically part of the cash budget?

A liquid asset is an asset can be sold in a period of time at a price its fair market value.

is a technique used to reduce float by having payments sent to post office boxes located near the customer.

The net float is the difference between the disbursement float and the collections float.

A report showing how long accounts receivable have been outstanding is called what?

The collection policy refers to the procedures the firm follows to collect its credit accounts.

A cash balance that is held to enable the firm to take advantage of any bargain purchases that might arise is called a ____ balance.

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Bonds Debt Characteristics and Valuation

Socks Equity Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk Appendix

The Cost of Capital

Capital Structure

Distribution of Retained Earrings: Dividends and Stock Repurchases

Working Capital Policy

Managing Short- Term Assets

Financial Planning and Control

Filters

Exam 16: Managing Short-Term Liabilities Financing

The term "interest rate price risk" refers to the probability that a firm will be unable to continue making interest payments on its debt.

If the average collection period or days sales outstanding is increasing the firm should consider easing its credit policy to allow credit to more of its customers.

Inventory management is largely self-contained; that is, only minimum coordination among other departments such as sales, purchasing, and production is required for successful inventory management.

If easing a firm's credit policy lengthens the collection period and results in a worsening of the aging schedule then why do firms take such actions?

A Eurodollar is a U.S.dollar deposited in a bank outside the United States.

Which of the following statements is correct?

Which of the following statements is correct?

Which of the following statements about cash management is false?

Which of the following statements is correct?

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

Which of the following is (are) typically part of the cash budget?

A liquid asset is an asset can be sold in a period of time at a price its fair market value.

is a technique used to reduce float by having payments sent to post office boxes located near the customer.

The net float is the difference between the disbursement float and the collections float.

A report showing how long accounts receivable have been outstanding is called what?

The collection policy refers to the procedures the firm follows to collect its credit accounts.

A cash balance that is held to enable the firm to take advantage of any bargain purchases that might arise is called a ____ balance.

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Bonds Debt Characteristics and Valuation

Socks Equity Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk Appendix

The Cost of Capital

Capital Structure

Distribution of Retained Earrings: Dividends and Stock Repurchases

Working Capital Policy

Managing Short- Term Assets

Financial Planning and Control

Filters