Question 1

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 2

Large, strong companies frequently resort to commercial paper as a source of short-term funds because:

Accepted Answer

A)  commercial paper dealers and lenders are flexible about repayment terms. 
B)  commercial paper is normally cheaper than other sources of short-term credit. 
C)  interest rates on commercial paper are very stable. 
D)  All of the above 
A)  commercial paper dealers and lenders are flexible about repayment terms. 
B)  commercial paper is normally cheaper than other sources of short-term credit. 
C)  interest rates on commercial paper are very stable. 
D)  All of the above

Question 3

Which of the following reasons for holding cash is not under the control of management as a matter of policy?

Accepted Answer

A)  Transaction demand 
B)  Precautionary demand 
C)  Speculative demand 
D)  Compensating balances 
E)  All of these reasons are under the complete control of management. 
A)  Transaction demand 
B)  Precautionary demand 
C)  Speculative demand 
D)  Compensating balances 
E)  All of these reasons are under the complete control of management.

Question 4

Seasonal working capital needs are best financed by:

Accepted Answer

A)  short-term loans. 
B)  sales of long-term debt. 
C)  forgoing dividend payments. 
D)  selling inventories. 
A)  short-term loans. 
B)  sales of long-term debt. 
C)  forgoing dividend payments. 
D)  selling inventories.

Question 5

Which of the following best describes temporary working capital?

Accepted Answer

A)  Incremental working capital to finance accounts receivable that are higher than expected. 
B)  Incremental working capital to finance high seasonal production levels. 
C)  Incremental working capital to finance an unplanned bargain purchase. 
D)  None of the above describes temporary working capital. 
E)  a., b., and c. above describe temporary working capital. 
A)  Incremental working capital to finance accounts receivable that are higher than expected. 
B)  Incremental working capital to finance high seasonal production levels. 
C)  Incremental working capital to finance an unplanned bargain purchase. 
D)  None of the above describes temporary working capital. 
E)  a., b., and c. above describe temporary working capital.

Question 6

Working capital increases when ____ decreases.

Accepted Answer

A)  accounts receivable 
B)  inventory 
C)  accounts payable 
D)  cash 
A)  accounts receivable 
B)  inventory 
C)  accounts payable 
D)  cash

Question 7

Which of the following is not a cost related to the extension of credit to customers?

Accepted Answer

A)  Bad-debt losses 
B)  Prompt payment discounts 
C)  Quantity discounts 
D)  Collection costs 
A)  Bad-debt losses 
B)  Prompt payment discounts 
C)  Quantity discounts 
D)  Collection costs

Question 8

Temporary working capital is:

Accepted Answer

A)  the seasonal borrowing capacity of a firm. 
B)  incremental working capital necessary to finance slower than expected collections of customer receivables. 
C)  incremental working capital necessary to support peak activity in seasonal businesses. 
D)  additional payroll cost and expenses incurred during seasonal peaks. 
A)  the seasonal borrowing capacity of a firm. 
B)  incremental working capital necessary to finance slower than expected collections of customer receivables. 
C)  incremental working capital necessary to support peak activity in seasonal businesses. 
D)  additional payroll cost and expenses incurred during seasonal peaks.

Question 9

In the context of working capital an accrual is not:

Accepted Answer

A)  an estimate of an obligation of the firm. 
B)  effectively a short term loan from the unpaid supplier of services. 
C)  an adjustment to the accrued depreciation account. 
D)  a source of spontaneous financing. 
A)  an estimate of an obligation of the firm. 
B)  effectively a short term loan from the unpaid supplier of services. 
C)  an adjustment to the accrued depreciation account. 
D)  a source of spontaneous financing.

Question 10

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 11

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 12

Which of the following transactions will cause net working capital to decrease?

Accepted Answer

A)  Inventory is purchased on credit. 
B)  The firm declares and pays a cash dividend. 
C)  An account payable is paid with cash. 
D)  Inventory is sold for cash. 
E)  None of the above would cause net working capital to decrease. 
A)  Inventory is purchased on credit. 
B)  The firm declares and pays a cash dividend. 
C)  An account payable is paid with cash. 
D)  Inventory is sold for cash. 
E)  None of the above would cause net working capital to decrease.

Question 13

A firm's credit policy:

Accepted Answer

A)  represents an investing decision. 
B)  has no impact on a firm's ACP. 
C)  affects the level of a firm's bad debts. 
D)  a and c 
E)  All of the above 
A)  represents an investing decision. 
B)  has no impact on a firm's ACP. 
C)  affects the level of a firm's bad debts. 
D)  a and c 
E)  All of the above

Question 14

Which of the following represents spontaneous financing?

Accepted Answer

A)  The origination of a 9-month bank loan 
B)  The issuance of a note payable with a maturity of less than one year 
C)  An increase in accounts payable resulting from the purchase of inventories on 30-day credit 
D)  a and c 
E)  All of the above 
A)  The origination of a 9-month bank loan 
B)  The issuance of a note payable with a maturity of less than one year 
C)  An increase in accounts payable resulting from the purchase of inventories on 30-day credit 
D)  a and c 
E)  All of the above

Question 15

Net working capital is defined as:

Accepted Answer

A)  current assets minus current liabilities. 
B)  working capital minus short-term debt. 
C)  current assets plus current liabilities. 
D)  All of the above 
A)  current assets minus current liabilities. 
B)  working capital minus short-term debt. 
C)  current assets plus current liabilities. 
D)  All of the above

Question 16

Which of the following is not a reason that firms typically hold cash?

Accepted Answer

A)  To make routine transactions 
B)  To satisfy compensating balance requirements 
C)  To earn interest 
D)  To be able to respond to emergencies and opportunities 
A)  To make routine transactions 
B)  To satisfy compensating balance requirements 
C)  To earn interest 
D)  To be able to respond to emergencies and opportunities

Question 17

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 18

Hatter Enterprises has current assets of $15 million and a current ratio of 3. The bank has offered Hatter a $13 million revolving credit agreement at an interest rate of 10%. Hatter will have to pay a commitment fee of 1% on the unused balance. Assuming that current assets and the current ratio remain constant, calculate the total annual financing charge associated with this agreement if Hatter borrows enough to support all of its net working capital.

Accepted Answer

A)  $1,030,000 
B)  $1,240,000 
C)  $1,310,000 
D)  $1,390,000 
A)  $1,030,000 
B)  $1,240,000 
C)  $1,310,000 
D)  $1,390,000

Question 19

Which of the following is(are) not related to the extension of credit to customers?

Accepted Answer

A)  Compensating balances 
B)  Prompt payment discounts 
C)  Quantity discounts 
D)  a and c 
A)  Compensating balances 
B)  Prompt payment discounts 
C)  Quantity discounts 
D)  a and c

Question 20

Relaxation of credit policy results in:

Accepted Answer

A)  an increase in credit sales. 
B)  a decrease in credit expenses. 
C)  a decrease in investment in receivables. 
D)  b and c 
E)  All of the above 
A)  an increase in credit sales. 
B)  a decrease in credit expenses. 
C)  a decrease in investment in receivables. 
D)  b and c 
E)  All of the above

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

Large, strong companies frequently resort to commercial paper as a source of short-term funds because:

Which of the following reasons for holding cash is not under the control of management as a matter of policy?

Seasonal working capital needs are best financed by:

Which of the following best describes temporary working capital?

Working capital increases when ____ decreases.

Which of the following is not a cost related to the extension of credit to customers?

Temporary working capital is:

In the context of working capital an accrual is not:

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

Which of the following transactions will cause net working capital to decrease?

A firm's credit policy:

Which of the following represents spontaneous financing?

Net working capital is defined as:

Which of the following is not a reason that firms typically hold cash?

The assets and liabilities in working capital accounts turn over:

Which of the following is(are) not related to the extension of credit to customers?

Relaxation of credit policy results in:

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

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

The Management of Working Capital

Corporate Restructuring

International Finance

Filters

Exam 16: The Management of Working Capital Multiple Choice Questions

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

Large, strong companies frequently resort to commercial paper as a source of short-term funds because:

Which of the following reasons for holding cash is not under the control of management as a matter of policy?

Seasonal working capital needs are best financed by:

Which of the following best describes temporary working capital?

Working capital increases when ____ decreases.

Which of the following is not a cost related to the extension of credit to customers?

Temporary working capital is:

In the context of working capital an accrual is not:

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

Which of the following transactions will cause net working capital to decrease?

A firm's credit policy:

Which of the following represents spontaneous financing?

Net working capital is defined as:

Which of the following is not a reason that firms typically hold cash?

The assets and liabilities in working capital accounts turn over:

Which of the following is(are) not related to the extension of credit to customers?

Relaxation of credit policy results in:

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

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

The Management of Working Capital

Corporate Restructuring

International Finance

Filters