Question 1

Net working capital is the difference between current assets and current liabilities.

Accepted Answer

A) True 
 B)False

Question 2

Under a pledging agreement, the borrower offers its receivables as collateral for a loan.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following is not a consequence of too high a level of accounts receivable?

Accepted Answer

A) Higher financing cost on money needed to support the higher level of current assets 
B) Larger bad debt losses 
C) Poorer relations with customers 
D) A reputation of having a poor collection policy 
E) c and d 
A) Higher financing cost on money needed to support the higher level of current assets 
B) Larger bad debt losses 
C) Poorer relations with customers 
D) A reputation of having a poor collection policy 
E) c and d

Question 4

Due to administrative costs, warehousing is an expensive source of financing.

Accepted Answer

A) True 
 B)False

Question 5

Typically, working capital assets are expected to be converted into cash within twelve months while liabilities are expected to be paid within twelve months.

Accepted Answer

A) True 
 B)False

Question 6

Smooth Yogurt, Inc. has average receivables of $80,000, which turn over once every 60 days.  It pledges all of its receivables to a bank that advances 80% of the total at 4% over prime and charges a 2% administrative fee on the total amount pledged.  If prime is 10.5%, what effective interest rate is Smooth paying for its receivables financing?

Accepted Answer

A) 6.0% 
B) 14.5% 
C) 15.0% 
D) 29.5% 
A) 6.0% 
B) 14.5% 
C) 15.0% 
D) 29.5%

Question 7

A line of credit extended to a firm guarantees the availability of a certain level of funds for a specific length of time by the bank.

Accepted Answer

A) True 
 B)False

Question 8

Lender control over borrower use of pledged inventory is greatest under which of the following financing arrangements?

Accepted Answer

A) Warehouse receipts 
B) Floating lien 
C) Trust receipts 
D) Lender control is equal under all of the above. 
A) Warehouse receipts 
B) Floating lien 
C) Trust receipts 
D) Lender control is equal under all of the above.

Question 9

Credit terms of 1/10, net 30 mean:

Accepted Answer

A) purchases made between the first and tenth day of the month must be paid by month end. 
B) if the vendor is not paid within 30 days, 1% interest is charged for every 10 days thereafter. 
C) the vendor will grant a discount of 10% for payment within 30 days. 
D) the vendor will grant a 1% discount if paid within 10 days; otherwise the bill is due in full within 30 days. 
A) purchases made between the first and tenth day of the month must be paid by month end. 
B) if the vendor is not paid within 30 days, 1% interest is charged for every 10 days thereafter. 
C) the vendor will grant a discount of 10% for payment within 30 days. 
D) the vendor will grant a 1% discount if paid within 10 days; otherwise the bill is due in full within 30 days.

Question 10

The cash conversion cycle measures the time:

Accepted Answer

A) between the creation of receivables and their collection. 
B) it takes for inventory to be turned into product and sold. 
C) between payment for inventory and collection of cash for its subsequent sale as product. 
D) for a check to clear the banking system. 
A) between the creation of receivables and their collection. 
B) it takes for inventory to be turned into product and sold. 
C) between payment for inventory and collection of cash for its subsequent sale as product. 
D) for a check to clear the banking system.

Question 11

Marketable securities are also referred to as near cash or cash equivalents.

Accepted Answer

A) True 
 B)False

Question 12

A low level of cash may force the firm to interrupt operations.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following is not a cost of carrying inventory?

Accepted Answer

A) Breakage and theft 
B) Obsolescence 
C) Financing and storage costs 
D) Slower inventory turnover 
A) Breakage and theft 
B) Obsolescence 
C) Financing and storage costs 
D) Slower inventory turnover

Question 14

Which of the following is a source of short-term financing?

Accepted Answer

A) Accounts Payable 
B) Accruals 
C) Commercial Paper 
D) Both a & c 
E) All of the above 
A) Accounts Payable 
B) Accruals 
C) Commercial Paper 
D) Both a & c 
E) All of the above

Question 15

There is more risk associated with short-term debt than long-term debt because of:

Accepted Answer

A) uncertainty arising from interest rate fluctuations. 
B) the risk of being unable to refund the debt. 
C) relatively high cost of short-term debt. 
D) a and b 
A) uncertainty arising from interest rate fluctuations. 
B) the risk of being unable to refund the debt. 
C) relatively high cost of short-term debt. 
D) a and b

Question 16

Self-liquidating debt must be ____when the item financed becomes cash.

Accepted Answer

A) leveraged 
B) paid off 
C) amortized 
D) liquidated 
A) leveraged 
B) paid off 
C) amortized 
D) liquidated

Question 17

A revolving-credit agreement between a firm and its bankers:

Accepted Answer

A) is a contractual agreement between the firm and its bank. 
B) does not need to be "cleaned up" during the term of the arrangement. 
C) involves payment of a commitment fee to the bank. 
D) All of the above 
A) is a contractual agreement between the firm and its bank. 
B) does not need to be "cleaned up" during the term of the arrangement. 
C) involves payment of a commitment fee to the bank. 
D) All of the above

Question 18

Which of the following is not associated with short-term debt?

Accepted Answer

A) Easily available to most companies. 
B) It is usually the lowest cost financing. 
C) It is a flexible form of financing. 
D) It is usually used to finance property, plant, equipment. 
A) Easily available to most companies. 
B) It is usually the lowest cost financing. 
C) It is a flexible form of financing. 
D) It is usually used to finance property, plant, equipment.

Question 19

Accruals tend to be directly related to a firm's level of operations.

Accepted Answer

A) True 
 B)False

Question 20

What type of situation will result in a firm having temporary working capital needs?

Accepted Answer

A) A steady clientele of buyers for the firm's product. 
B) A specialized product for summer outdoor sports. 
C) A product that is essential for a number of different manufacturing processes. 
D) A routine service provided on the basis of long-term contracts. 
A) A steady clientele of buyers for the firm's product. 
B) A specialized product for summer outdoor sports. 
C) A product that is essential for a number of different manufacturing processes. 
D) A routine service provided on the basis of long-term contracts.

Net working capital is the difference between current assets and current liabilities.

Under a pledging agreement, the borrower offers its receivables as collateral for a loan.

Which of the following is not a consequence of too high a level of accounts receivable?

Due to administrative costs, warehousing is an expensive source of financing.

Typically, working capital assets are expected to be converted into cash within twelve months while liabilities are expected to be paid within twelve months.

A line of credit extended to a firm guarantees the availability of a certain level of funds for a specific length of time by the bank.

Lender control over borrower use of pledged inventory is greatest under which of the following financing arrangements?

Credit terms of 1/10, net 30 mean:

The cash conversion cycle measures the time:

Marketable securities are also referred to as near cash or cash equivalents.

A low level of cash may force the firm to interrupt operations.

Which of the following is not a cost of carrying inventory?

Which of the following is a source of short-term financing?

There is more risk associated with short-term debt than long-term debt because of:

Self-liquidating debt must be ____when the item financed becomes cash.

A revolving-credit agreement between a firm and its bankers:

Which of the following is not associated with short-term debt?

Accruals tend to be directly related to a firm's level of operations.

What type of situation will result in a firm having temporary working capital needs?

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

Net working capital is the difference between current assets and current liabilities.

Under a pledging agreement, the borrower offers its receivables as collateral for a loan.

Which of the following is not a consequence of too high a level of accounts receivable?

Due to administrative costs, warehousing is an expensive source of financing.

Typically, working capital assets are expected to be converted into cash within twelve months while liabilities are expected to be paid within twelve months.

A line of credit extended to a firm guarantees the availability of a certain level of funds for a specific length of time by the bank.

Lender control over borrower use of pledged inventory is greatest under which of the following financing arrangements?

Credit terms of 1/10, net 30 mean:

The cash conversion cycle measures the time:

Marketable securities are also referred to as near cash or cash equivalents.

A low level of cash may force the firm to interrupt operations.

Which of the following is not a cost of carrying inventory?

Which of the following is a source of short-term financing?

There is more risk associated with short-term debt than long-term debt because of:

Self-liquidating debt must be ____when the item financed becomes cash.

A revolving-credit agreement between a firm and its bankers:

Which of the following is not associated with short-term debt?

Accruals tend to be directly related to a firm's level of operations.

What type of situation will result in a firm having temporary working capital needs?

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