Question 1

As a firm increases the amount spent on the collection of overdue accounts, both the average collection period and the percentage of bad debts decline.

Accepted Answer

A) True 
 B)False

Question 2

Working capital assets typically include cash, accounts receivable, and inventories. The liabilities include payables, accruals, and all borrowing regardless of term to maturity, that is used to fund day-to-day operations.

Accepted Answer

A) True 
 B)False

Question 3

Banks like to make self-liquidating loans because they usually command higher interest rates than other loans.

Accepted Answer

A) True 
 B)False

Question 4

J&J Production Inc. has annual sales of $30 million and accounts receivables of $1.5 million. They have an inventory turnover of 4. How long is J &J's operating cycle? (Assume a 360-day year)

Accepted Answer

A) 18 days 
B) 90 days 
C) 108 days 
D) 72 days 
A) 18 days 
B) 90 days 
C) 108 days 
D) 72 days

Question 5

The aggressive approach to the financing of a firm's current assets uses a ____ proportion of short-term debt and a ____ proportion of long-term debt.

Accepted Answer

A) low, high 
B) relatively high, relatively low 
C) high interest, low interest 
D) None of the above 
A) low, high 
B) relatively high, relatively low 
C) high interest, low interest 
D) None of the above

Question 6

The assets and liabilities in working capital accounts turn over:

Accepted Answer

A) regularly. 
B) seldom. 
C) sporadically. 
D) frequently. 
A) regularly. 
B) seldom. 
C) sporadically. 
D) frequently.

Question 7

A decrease in a firm's inventory should decrease:

Accepted Answer

A) carrying costs. 
B) sales. 
C) ordering costs. 
D) a and b 
E) All of the above 
A) carrying costs. 
B) sales. 
C) ordering costs. 
D) a and b 
E) All of the above

Question 8

Compensating balances refer to charges that compensate the bank for work it does to balance customer accounts.

Accepted Answer

A) True 
 B)False

Question 9

The gross working capital is equivalent to ____.

Accepted Answer

A) the current assets 
B) the current assets less current liabilities 
C) the current assets less inventory 
D) the current liabilities 
A) the current assets 
B) the current assets less current liabilities 
C) the current assets less inventory 
D) the current liabilities

Question 10

The average collection period measures the:

Accepted Answer

A) number of days from the time a typical credit sale is made until payment is received. 
B) number of days it takes a typical check to "clear" through the banking system. 
C) number of days beyond the end of the credit period before a typical customer payment is received. 
D) number of days before a typical account becomes delinquent. 
A) number of days from the time a typical credit sale is made until payment is received. 
B) number of days it takes a typical check to "clear" through the banking system. 
C) number of days beyond the end of the credit period before a typical customer payment is received. 
D) number of days before a typical account becomes delinquent.

Question 11

If a firm only accepts cash for the purchase of its products, what effect would this have on the operating and cash cycles?

Accepted Answer

A) The operating and cash cycles would be equal. 
B) The operating and cash cycles would decrease relative to offering credit to customers. 
C) Only the cash cycle would decrease relative to offering credit to customers. 
D) Only the operating cycle would increase relative to offering credit to customers. 
A) The operating and cash cycles would be equal. 
B) The operating and cash cycles would decrease relative to offering credit to customers. 
C) Only the cash cycle would decrease relative to offering credit to customers. 
D) Only the operating cycle would increase relative to offering credit to customers.

Question 12

The term working capital refers to the assets and liabilities required to operate a business on a day to day basis.

Accepted Answer

A) True 
 B)False

Question 13

The cash conversion cycle is shorter than the operating cycle by the time it takes for the firm to pay its own bills.

Accepted Answer

A) True 
 B)False

Question 14

Under a line of credit agreement between a firm and its bank:

Accepted Answer

A) the loan often must be completely paid off for a portion of the year. 
B) the firm can borrow up to a specified maximum during a specified period. 
C) the bank is contractually committed to lend the firm the money. 
D) a and b. 
A) the loan often must be completely paid off for a portion of the year. 
B) the firm can borrow up to a specified maximum during a specified period. 
C) the bank is contractually committed to lend the firm the money. 
D) a and b.

Question 15

If a vendor's invoice states terms of sale of 2/10 net 60, the implied annual cost of interest from foregoing the discount would be:

Accepted Answer

A) 13.2%. 
B) 14.6%. 
C) 2.0%. 
D) 13.7%. 
A) 13.2%. 
B) 14.6%. 
C) 2.0%. 
D) 13.7%.

Question 16

____ are liquid investments that can be held instead of cash and earn a modest return.

Accepted Answer

A) Fixed asset investments 
B) Marketable securities 
C) Real estate securities 
D) Treasury bonds 
A) Fixed asset investments 
B) Marketable securities 
C) Real estate securities 
D) Treasury bonds

Question 17

More aggressive collection procedures should:

Accepted Answer

A) increase credit sales. 
B) decrease accounts receivable. 
C) increase ACP. 
D) All of the above 
E) None of the above 
A) increase credit sales. 
B) decrease accounts receivable. 
C) increase ACP. 
D) All of the above 
E) None of the above

Question 18

Which of the following changes would result in higher receivables?

Accepted Answer

A) Tightening credit policy 
B) An increase in the net period of the terms of sale 
C) An increase in the prompt payment discount offered 
D) All of the above 
A) Tightening credit policy 
B) An increase in the net period of the terms of sale 
C) An increase in the prompt payment discount offered 
D) All of the above

Question 19

Holding cash for which of the following reasons is an example of speculative demand?

Accepted Answer

A) Purchase of an input when there is an abrupt drop in the price 
B) Quick acquisition of new raw materials for an emergency demand 
C) A new shipment that has to be produced immediately because of product damage 
D) Payments made to tax authorities 
A) Purchase of an input when there is an abrupt drop in the price 
B) Quick acquisition of new raw materials for an emergency demand 
C) A new shipment that has to be produced immediately because of product damage 
D) Payments made to tax authorities

Question 20

When a factor does not assume the bad debt risk on accounts it purchases, the factoring relationship is said to be "without recourse."

Accepted Answer

A) True 
 B)False

As a firm increases the amount spent on the collection of overdue accounts, both the average collection period and the percentage of bad debts decline.

Working capital assets typically include cash, accounts receivable, and inventories. The liabilities include payables, accruals, and all borrowing regardless of term to maturity, that is used to fund day-to-day operations.

Banks like to make self-liquidating loans because they usually command higher interest rates than other loans.

J&J Production Inc. has annual sales of $30 million and accounts receivables of $1.5 million. They have an inventory turnover of 4. How long is J &J's operating cycle? (Assume a 360-day year)

The aggressive approach to the financing of a firm's current assets uses a proportion of short-term debt and a proportion of long-term debt.

The assets and liabilities in working capital accounts turn over:

A decrease in a firm's inventory should decrease:

Compensating balances refer to charges that compensate the bank for work it does to balance customer accounts.

The gross working capital is equivalent to ____.

The average collection period measures the:

If a firm only accepts cash for the purchase of its products, what effect would this have on the operating and cash cycles?

The term working capital refers to the assets and liabilities required to operate a business on a day to day basis.

The cash conversion cycle is shorter than the operating cycle by the time it takes for the firm to pay its own bills.

Under a line of credit agreement between a firm and its bank:

If a vendor's invoice states terms of sale of 2/10 net 60, the implied annual cost of interest from foregoing the discount would be:

____ are liquid investments that can be held instead of cash and earn a modest return.

More aggressive collection procedures should:

Which of the following changes would result in higher receivables?

Holding cash for which of the following reasons is an example of speculative demand?

When a factor does not assume the bad debt risk on accounts it purchases, the factoring relationship is said to be "without recourse."

Foundations

Financial Background: a Review of Accounting Financial Statements and Taxes

Cash Flows and Financial Analysis

Financial Planning

The Financial System Corporate Governance and Interest

Time Value of Money

The Valuation and Characteristics of Bonds and Leasing

The Valuation and Characteristics of Stock

Risk and Return

Capital Budgeting

Cash Flow Estimation

Risk Topics and Real Options in Capital Budgeting

Cost of Capital

Capital Structure and Leverage

Dividends and Repurchases

Corporate Restructuring

International Finance

Filters

Exam 16: The Management of Working Capital

As a firm increases the amount spent on the collection of overdue accounts, both the average collection period and the percentage of bad debts decline.

Working capital assets typically include cash, accounts receivable, and inventories. The liabilities include payables, accruals, and all borrowing regardless of term to maturity, that is used to fund day-to-day operations.

Banks like to make self-liquidating loans because they usually command higher interest rates than other loans.

J&J Production Inc. has annual sales of $30 million and accounts receivables of $1.5 million. They have an inventory turnover of 4. How long is J &J's operating cycle? (Assume a 360-day year)

The aggressive approach to the financing of a firm's current assets uses a ____ proportion of short-term debt and a ____ proportion of long-term debt.

The assets and liabilities in working capital accounts turn over:

A decrease in a firm's inventory should decrease:

Compensating balances refer to charges that compensate the bank for work it does to balance customer accounts.

The gross working capital is equivalent to ____.

The average collection period measures the:

If a firm only accepts cash for the purchase of its products, what effect would this have on the operating and cash cycles?

The term working capital refers to the assets and liabilities required to operate a business on a day to day basis.

The cash conversion cycle is shorter than the operating cycle by the time it takes for the firm to pay its own bills.

Under a line of credit agreement between a firm and its bank:

If a vendor's invoice states terms of sale of 2/10 net 60, the implied annual cost of interest from foregoing the discount would be:

____ are liquid investments that can be held instead of cash and earn a modest return.

More aggressive collection procedures should:

Which of the following changes would result in higher receivables?

Holding cash for which of the following reasons is an example of speculative demand?

When a factor does not assume the bad debt risk on accounts it purchases, the factoring relationship is said to be "without recourse."

Foundations

Financial Background: a Review of Accounting Financial Statements and Taxes

Cash Flows and Financial Analysis

Financial Planning

The Financial System Corporate Governance and Interest

Time Value of Money

The Valuation and Characteristics of Bonds and Leasing

The Valuation and Characteristics of Stock

Risk and Return

Capital Budgeting

Cash Flow Estimation

Risk Topics and Real Options in Capital Budgeting

Cost of Capital

Capital Structure and Leverage

Dividends and Repurchases

Corporate Restructuring

International Finance

Filters

The aggressive approach to the financing of a firm's current assets uses a proportion of short-term debt and a proportion of long-term debt.