Question 1

Which of the following is an incorrect statement of an issue involved in receivables management?

Accepted Answer

A)  Easier credit increases sales 
B)  Easier credit increases bad debt losses 
C)  Easier credit lowers the cost of financing receivables 
D)  Easier credit improves customer relations 
A)  Easier credit increases sales 
B)  Easier credit increases bad debt losses 
C)  Easier credit lowers the cost of financing receivables 
D)  Easier credit improves customer relations

Question 2

A ____ gives the lender a claim against all inventories held by the borrower.

Accepted Answer

A)  warehousing arrangement 
B)  chattel mortgage agreement 
C)  trust receipt 
D)  blanket lien 
A)  warehousing arrangement 
B)  chattel mortgage agreement 
C)  trust receipt 
D)  blanket lien

Question 3

When a lender uses trust receipts in financing a borrower's inventory:

Accepted Answer

A)  the specific units of inventory pledged as collateral are identified. 
B)  the lender has a general claim on all of the borrower's inventory. 
C)  the lender retains physical control over the inventory. 
D)  public warehouses are frequently utilized. 
A)  the specific units of inventory pledged as collateral are identified. 
B)  the lender has a general claim on all of the borrower's inventory. 
C)  the lender retains physical control over the inventory. 
D)  public warehouses are frequently utilized.

Question 4

Haverly offers its customers an effective interest rate of 24.33% on its terms of sale. They offer a 1% discount if payment is made within 5 days. Assuming a 365-day year, what terms of sale does Haverly use?

Accepted Answer

A)  1/5, net 30 
B)  1/5, net 20 
C)  1/5, net 15 
D)  1/5, net 10 
A)  1/5, net 30 
B)  1/5, net 20 
C)  1/5, net 15 
D)  1/5, net 10

Question 5

Characteristics of accruals as a source of financing include:

Accepted Answer

A)  spontaneous. 
B)  costless. 
C)  non-controllable by financial manager. 
D)  a and c 
E)  All of the above 
A)  spontaneous. 
B)  costless. 
C)  non-controllable by financial manager. 
D)  a and c 
E)  All of the above

Question 6

When accounts receivable are pledged as collateral for a loan:

Accepted Answer

A)  title to the receivables is transferred to the lender. 
B)  the borrower's customers are usually notified of the pledging arrangement. 
C)  the lender assumes the default risk on the receivables. 
D)  b and c. 
E)  None of the above 
A)  title to the receivables is transferred to the lender. 
B)  the borrower's customers are usually notified of the pledging arrangement. 
C)  the lender assumes the default risk on the receivables. 
D)  b and c. 
E)  None of the above

Question 7

Assume the following facts about a firm that borrows by pledging its receivables: $\begin{array}{ll}\text { Average balance of accounts receivable }&\$60,000\
\text { Annual receivables turnover ( } 360 / \mathrm{ACP}) & 6 \mathrm{x} \
\text { Administrative fee charged on all new receivabless } & 1.5 \% \
\text { Interest rate on outstandingloans } & 11.5 \% \
\text { Percent of receivables accepted } & 75 \%
\end{array}$ What is the effective cost of financing stated as an annual rate?

Accepted Answer

A)  23.5% 
B)  13% 
C)  13.5% 
D)  16.83% 
A)  23.5% 
B)  13% 
C)  13.5% 
D)  16.83%

Question 8

Which of the following is not a source of short-term financing?

Accepted Answer

A)  Spontaneous financing from payables and accruals 
B)  Unsecured bank loans 
C)  Five year bonds with a call feature exercisable within one year 
D)  Commercial paper 
A)  Spontaneous financing from payables and accruals 
B)  Unsecured bank loans 
C)  Five year bonds with a call feature exercisable within one year 
D)  Commercial paper

Question 9

Characteristics of a line of credit include:

Accepted Answer

A)  guaranteed access to funds. 
B)  commitment fee. 
C)  annual clean-up period. 
D)  All of the above 
E)  None of the above 
A)  guaranteed access to funds. 
B)  commitment fee. 
C)  annual clean-up period. 
D)  All of the above 
E)  None of the above

Question 10

Why will banks extend short-term working capital financing to companies to which they would not extend long-term credit?

Accepted Answer

A)  Conditions are unlikely to deteriorate too badly in the short term. 
B)  Working capital loans are "self-liquidating." 
C)  The working capital itself can be used to collateralize the loan. 
D)  All of the above 
A)  Conditions are unlikely to deteriorate too badly in the short term. 
B)  Working capital loans are "self-liquidating." 
C)  The working capital itself can be used to collateralize the loan. 
D)  All of the above

Question 11

Pledging accounts receivable:

Accepted Answer

A)  is similar to factoring in that the receivables no longer belong to the borrowing firm. 
B)  may involve recourse which means that the borrower is responsible for losses from uncollectible accounts. 
C)  always requires the lender to review each account individually and determine which ones are creditworthy before agreeing to a loan. 
D)  is a relatively inexpensive form of financing. 
E)  All of the above are correct regarding pledging accounts receivable. 
A)  is similar to factoring in that the receivables no longer belong to the borrowing firm. 
B)  may involve recourse which means that the borrower is responsible for losses from uncollectible accounts. 
C)  always requires the lender to review each account individually and determine which ones are creditworthy before agreeing to a loan. 
D)  is a relatively inexpensive form of financing. 
E)  All of the above are correct regarding pledging accounts receivable.

Question 12

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 13

Credit policy consists of:

Accepted Answer

A)  the period over which credit is granted. 
B)  procedures undertaken to collect overdue accounts. 
C)  the length of the credit period and the discount offered. 
D)  the guidelines used to decide which customers get credit. 
A)  the period over which credit is granted. 
B)  procedures undertaken to collect overdue accounts. 
C)  the length of the credit period and the discount offered. 
D)  the guidelines used to decide which customers get credit.

Question 14

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 15

If net working capital became negative, this is considered _____.

Accepted Answer

A)  bad, because it will reduce cash flow 
B)  good, because entities other than the firm are supplying all of the short-term funding for running the operations of the firm 
C)  bad, because it makes the current ratio less than one 
D)  good, because it makes the current ratio greater than one 
A)  bad, because it will reduce cash flow 
B)  good, because entities other than the firm are supplying all of the short-term funding for running the operations of the firm 
C)  bad, because it makes the current ratio less than one 
D)  good, because it makes the current ratio greater than one

Question 16

____ refers to the economic reason for holding cash in the bank to pay bills for the goods and services used.

Accepted Answer

A)  Compensating balance 
B)  Transactions demand 
C)  Precautionary demand 
D)  Speculative demand 
A)  Compensating balance 
B)  Transactions demand 
C)  Precautionary demand 
D)  Speculative demand

Question 17

Supporting working capital with short-term financing is:

Accepted Answer

A)  inexpensive but risky. 
B)  conservative but expensive. 
C)  expensive and risky. 
D)  conservative and inexpensive. 
A)  inexpensive but risky. 
B)  conservative but expensive. 
C)  expensive and risky. 
D)  conservative and inexpensive.

Question 18

Waller Corporation has an $18 million revolving credit agreement with its bank at prime plus 3%, based on a calendar year. It borrowed $3 million on June 1, when it accessed the agreement for the first time. Prime is 8.75% and the bank's commitment fee is 1/4% annually. What bank charges will Waller incur for the month of June?

Accepted Answer

A)  $262,500 
B)  $3,120 
C)  $32,496 
D)  $29,375 
A)  $262,500 
B)  $3,120 
C)  $32,496 
D)  $29,375

Question 19

____ working capital arises from the seasonal or cyclical nature of a company's sales.

Accepted Answer

A)  Current 
B)  Permanent current 
C)  Temporary 
D)  None of the above 
A)  Current 
B)  Permanent current 
C)  Temporary 
D)  None of the above

Question 20

Which of the following assets (if any) are not part of a firm's working capital investment?

Accepted Answer

A)  Cash 
B)  Accounts receivable 
C)  Inventory 
D)  None of the above 
A)  Cash 
B)  Accounts receivable 
C)  Inventory 
D)  None of the above

Which of the following is an incorrect statement of an issue involved in receivables management?

A ____ gives the lender a claim against all inventories held by the borrower.

When a lender uses trust receipts in financing a borrower's inventory:

Haverly offers its customers an effective interest rate of 24.33% on its terms of sale. They offer a 1% discount if payment is made within 5 days. Assuming a 365-day year, what terms of sale does Haverly use?

Characteristics of accruals as a source of financing include:

When accounts receivable are pledged as collateral for a loan:

Which of the following is not a source of short-term financing?

Characteristics of a line of credit include:

Why will banks extend short-term working capital financing to companies to which they would not extend long-term credit?

Pledging accounts receivable:

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

Credit policy consists of:

Credit terms of 1/10, net 30 mean:

If net working capital became negative, this is considered _____.

____ refers to the economic reason for holding cash in the bank to pay bills for the goods and services used.

Supporting working capital with short-term financing is:

____ working capital arises from the seasonal or cyclical nature of a company's sales.

Which of the following assets (if any) are not part of a firm's working capital investment?

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 an incorrect statement of an issue involved in receivables management?

A ____ gives the lender a claim against all inventories held by the borrower.

When a lender uses trust receipts in financing a borrower's inventory:

Haverly offers its customers an effective interest rate of 24.33% on its terms of sale. They offer a 1% discount if payment is made within 5 days. Assuming a 365-day year, what terms of sale does Haverly use?

Characteristics of accruals as a source of financing include:

When accounts receivable are pledged as collateral for a loan:

Which of the following is not a source of short-term financing?

Characteristics of a line of credit include:

Why will banks extend short-term working capital financing to companies to which they would not extend long-term credit?

Pledging accounts receivable:

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

Credit policy consists of:

Credit terms of 1/10, net 30 mean:

If net working capital became negative, this is considered _____.

____ refers to the economic reason for holding cash in the bank to pay bills for the goods and services used.

Supporting working capital with short-term financing is:

____ working capital arises from the seasonal or cyclical nature of a company's sales.

Which of the following assets (if any) are not part of a firm's working capital investment?

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