Deck 17: Working Capital Management

Question 1

Holding cash simply as a financial reserve is referred to as the ____ motive.

A)precautionary
B)opportunistic
C)speculative
D)activity
E)transaction

Answer 1

precautionary

Question 2

Which one of the following is a disbursement account into which funds are transferred from a master account only as the funds are needed to cover checks presented for payment?

A)Lockbox account
B)Cash concentration account
C)Ledger account
D)Zero-balance account
E)Cash clearing account

Answer 2

Zero-balance account

Question 3

The terms of sale are best defined as the:

A)total invoice amount including all shipping costs and taxes.
B)period of time during which a sale price applies.
C)legal documents related to the credit sale of either goods or services.
D)conditions under which a firm sells its goods or services for either cash or credit.
E)process used to determine which customers will be granted credit and which will not.

Answer 3

conditions under which a firm sells its goods or services for either cash or credit.

Question 4

Which of these is evidence of indebtedness?

A)Terms of sale
B)Credit cost curve
C)Credit instrument
D)Concentration policy
E)Credit policy

Question 5

Kelly just completed compiling a listing of her firm's accounts receivables with each invoice segregated according to the length of time the invoice has been outstanding.What is the name given to this listing?

A)Aging schedule
B)Collection report
C)Credit evaluation report
D)Invoice schedule
E)Terms of credit

Question 6

The basic factors that are reviewed when evaluating the creditworthiness of a potential customer are called the:

A)terms of sale.
B)receivables factors.
C)five Cs of credit.
D)collection policy determinants.
E)credit scores.

Question 7

Float is defined as the difference between the:

A)beginning and ending cash balances as shown on a cash budget.
B)ledger balance and the available balance.
C)book balance and the ledger balance.
D)collections and disbursements for any given period of time.
E)available balance and the collected balance.

Question 8

A disbursement account into which funds are transferred only as needed to cover the demands for payment is called a(n) ____ account.

A)master
B)controlled disbursement
C)bank controlled
D)investment
E)safety stock

Question 9

AJ's Market generally holds $50,000 in cash in case an unexpected investment opportunity arises.This is an example of the ____ motive for holding cash.

A)precautionary
B)opportunistic
C)speculative
D)reserve
E)transaction

Question 10

A (n) _____ is a subsidiary of a firm that exists solely to handle the credit functions of the parent company.

A)internal credit organization
B)bank
C)credit association
D)captive finance company
E)credit union

Question 11

A bill given to a customer for goods he or she purchased is called a(n):

A)account reconciliation.
B)invoice.
C)docket.
D)remittance advice.
E)shipping receipt.

Question 12

Cash concentration is best defined as:

A)combining an entire firm's daily receipts into one bank deposit.
B)combining a week's worth of cash receipts into one bank deposit.
C)combining cash from multiple bank accounts into a firm's main bank accounts.
D)using multiple lockboxes for collecting cash payments.
E)combining a firm's bills so that disbursement checks are mailed only monthly.

Question 13

The process of determining the probability that potential customers will not pay is called:

A)credit analysis.
B)collection policy.
C)account aging.
D)credit terms.
E)customer invoicing.

Question 14

The graphical representation of the sum of the carrying costs and the opportunity costs of a credit policy is called the:

A)aging report.
B)economic credit function.
C)optimal credit curve.
D)credit analysis graph.
E)credit cost curve.

Question 15

The length of time a firm grants its customers to pay for their purchases is called the:

A)lockbox period.
B)discount period.
C)credit period.
D)cash cycle.
E)receivables turnover period.

Question 16

The primary purpose of a cash discount is to:

A)compensate customers for an out-of-stock item.
B)compensate customers for faulty goods or services.
C)offset the interest charges on an account receivable.
D)induce customers to pay promptly.
E)induce customers to purchase specialty items.

Question 17

Which one of the following is a special post office mailbox that is used to speed up the collection of accounts receivable payments?

A)Separation box
B)Cash box
C)Concentration account
D)Lockbox
E)Float box

Question 18

Collection policy refers to the:

A)process of determining which customers will be granted credit.
B)process of determining the probability that customers will not pay.
C)set of guidelines used by a firm to determine the cost of offering credit to its customers.
D)daily process of handling cash inflows and outflows of cash.
E)set of procedures a firm follows in collecting accounts receivable.

Question 19

The transaction motive refers to the need to hold cash:

A)as a safety margin.
B)for unforeseen investment opportunities.
C)for daily operations.
D)as a financial reserve.
E)for emergency situations.

Question 20

Credit scoring is the:

A)categorizing of customers into groups based on the length of time it takes each customer to pay for purchases.
B)compiling of a list of accounts receivables segregated by the length of time each receivable has been outstanding.
C)evaluation of the opportunity costs of a credit policy.
D)process of quantifying the probability of default when granting credit to customers.
E)tracking of both the number and the size of customer orders over a period of time.

Question 21

Al's Bakery has a checkbook balance of $1,650.A $700 deposit was made today and will be added to the available balance tomorrow.There are two outstanding checks that total to $623 that should clear tomorrow.There are no other outstanding items.Which one of the following statements accurately reflects this situation?

A)The disbursement float is $1,650.
B)The firm's current available balance is equal to $1,650 plus $700 minus $623.
C)The firm's collection float exceeds its disbursement float.
D)The firm's available balance is greater than its book balance.
E)The firm has a net disbursement float.

Question 22

The economic order quantity (EOQ) is best defined as the:

A)minimum size of an order needed to qualify for free shipping.
B)minimum amount that must be ordered to obtain the quantity discount.
C)number of items that are sold on average each month.
D)restocking quantity that minimizes the total cost of inventory.
E)minimal amount of inventory that must be purchased to receive a cash discount.

Question 23

Alicia wrote a check for $18 on Friday, May 6.The check cleared the bank on Wednesday, May 11.There were no other checks or deposits outstanding during the month.Given this, which one of the following statements is correct?

A)On May 6, the available balance decreased by $18.
B)On May 11, the available balance was $18 less than the ledger balance.
C)On May 12, the ledger balance was $18 less than the available balance.
D)On May 14, the available balance increased by $18.
E)On May 10, the ledger balance was $18 less than the available balance.

Question 24

Which of these is most likely the fastest method of collecting cash?

A)Requiring customers to submit all payments to a lockbox
B)Requiring customers to submit all payments to the home office
C)Initiating a financial electronic data interchange at the time of sale
D)Offering customers credit terms of 1/5, net 15
E)Eliminating all disbursement float

Question 25

The set of procedures used to determine the inventory levels for demand-dependent inventories is called:

A)the inventory flow log.
B)materials requirements planning.
C)a just-in-time inventory system.
D)the kanban.
E)the keiretsu.

Question 26

Which of these is a speculative motive for holding cash?

A)Buying extra inventory because a key supplier offered a special one-time discount
B)Paying a $100 bonus to all employees at year-end
C)Paying the annual insurance premium on the firm's assets
D)Needing to purchase a new delivery truck because the old one was totally destroyed in an accident
E)Contributing $1,000 to help fund medical care for an uninsured neighbor

Question 27

Which one of the following is a system for managing demand-dependent inventories that minimizes the amount of inventory on hand?

A)Inventory flow log
B)Materials requirements planning
C)Just-in-time inventory system
D)Kanban
E)Keiretsu

Question 28

Which of these is most apt to delay the collection of cash?

A)Having customers mail checks to a local lockbox rather than the home office
B)Depositing checks throughout the day
C)Posting payments to accounts receivable prior to making deposits
D)Collecting mail more frequently
E)Supplying customers with bar coded payment slips

Question 29

The Check Clearing Act for the 21^st Century has caused:

A)increased check kiting.
B)zero-balance accounts to disappear.
C)the elimination of all lockboxes.
D)a reduction in collection float, but not disbursement float.
E)a reduction in both collection and disbursement float.

Question 30

Which statement is correct?

A)Firms cannot use lockboxes if they use cash concentration accounts.
B)Firms prefer to increase processing delay on disbursements.
C)Firms prefer to eliminate all types of float.
D)Firms open regional offices so their employees can pick up lockbox payments throughout the day.
E)The Check Clearing Act for the 21^st Century is designed to reduce total collection time to one day.

Question 31

Which statement is correct?

A)Disbursement float is the period of time between a firm making a bank deposit and the funds from that deposit being available to the firm.
B)Disbursement float decreases when a check is delayed in the mail due to an extended holiday weekend.
C)Disbursement float causes the available balance to exceed the ledger balance.
D)Disbursement float is being totally eliminated by the Check Clearing Act for the 21^st Century.
E)Disbursement float exists when the available balance is less than the book balance.

Question 32

BJ's just reconciled its bank account and has $10,800 in outstanding deposits, $26,300 in checks outstanding, and a positive checkbook balance.The firm sells on a cash-only basis and deposits its receipts at the bank daily.The deposited funds are available to the firm the following day.The firm writes and mails checks on a daily basis also.These checks generally clear the bank in three days.What do you know about the firm's float given this information?

A)The firm has disbursements float but no collection float.
B)The collection float generally exceeds the disbursement float.
C)The firm has a net collection float.
D)The disbursement float generally exceeds the collection float.
E)Since transactions occur daily, the firm has no float.

Question 33

How quickly can a bank receive payment once it transmits a copy of a check to the bank on which the check was drawn?

A)Immediately
B)In one day
C)Between one and two days
D)In two days
E)Between two and three days

Question 34

A firm's float management policy is most apt to include which one of the following statements?

A)All invoices are to be paid the same day they are received.
B)All outgoing checks are to be delivered by the fastest means possible.
C)The depository bank needs to process all deposits in accordance with the Check Clearing Act for the 21^st Century.
D)Any check received is to be held until the customer's account has been updated to record the payment.
E)Accounts payable processing should be given priority over accounts receivable processing.

Question 35

Laurie's Ice Rink keeps an extra $1,000 in its checking account simply in case an emergency arises.Which type of motive for holding cash does this represent?

A)Speculative
B)Float requirement
C)Transaction
D)Precautionary
E)Availability

Question 36

Which of these represents a transaction motive for holding cash?

A)Buying extra inventory in response to an unexpected sale offered by a supplier
B)Distributing the weekly paychecks
C)Increasing the minimum cash balance for the firm's main bank account
D)Unexpectedly purchasing a competitor's firm
E)Holding cash in anticipation that the firm may need to close for a few days if floodwaters keep rising

Question 37

To minimize collection float, a firm should do which of the following?
I.Deposit its collections at least daily
II.Make sure all checks it receives at the sales counter are properly dated and signed
III.Pay its bills in a more timely manner
IV.Eliminate its regional lockboxes and have only one central lockbox located near the firm's home office

A)I and II only
B)III and IV only
C)II, III, and IV only
D)I, II, and III only
E)I, II, III, and IV

Question 38

Which of these practices will reduce a firm's collection float?
I.Installing a lockbox system
II.Utilizing zero-balance accounts
III.Depositing checks daily rather than weekly
IV.Reducing the processing delay by one day

A)I and III only
B)II and IV only
C)I, II, and III only
D)I, III, and IV only
E)I, II, III, and IV

Question 39

Which one of the following will reduce the disbursement float of a firm?

A)Mailing a check from a very remote location
B)Mailing an unsigned check so that it must be returned for a signature
C)Paying a loan payment at the bank rather than mailing a check to the bank
D)Requiring that all checks be held one day before mailing so they can be reviewed by a manager
E)Writing checks on a zero-balance account rather than on the master account

Question 40

Taylor's Market received five checks today and went to the bank to deposit all of them.Unfortunately, the bank was closed for the day due to a robbery.How does the bank closure affect the firm's float assuming these five checks are the only outstanding bank items?

A)Collection float increased
B)Collection float decreased
C)Disbursement float increased
D)Disbursement float decreased
E)Net float remained unchanged

Question 41

Which characteristic generally applies to commercial paper?

A)Issued only by financial institutions
B)Issued only by corporations
C)Maturities limited to 90 days or less
D)Unsecured
E)Secured by accounts receivable

Question 42

What is the key difference between an ordinary preferred stock and a money market preferred stock?

A)Issuer
B)Maturity
C)Fixed versus floating dividend
D)Voting rights
E)Absence of any dividend

Question 43

Which of the following characteristics apply to U.S.Treasury bills?
I.Interest income taxed at both the federal and state level
II.Minimal, if any, default risk
III.Marketable, but not liquid
IV.Short maturities

A)I and III only
B)II and IV only
C)I, II, and IV only
D)II, III, and IV only
E)I, II, III, and IV

Question 44

How are checks that are deposited into a typical lockbox handled?

A)The checks are deposited into a local bank which then overnights one check for the entire amount to the firm.
B)The checks are collected once a day, normally in the early morning, by a bank employee.
C)The checks are posted to the customer's account prior to being deposited.
D)The checks are collected throughout the day and immediately deposited into the firm's account.
E)The checks are collected and sent overnight to the firm's main office for processing.

Question 45

The checks received in a lockbox are deposited:

A)into a local bank and then transferred electronically to a concentration account.
B)into a local bank and immediately invested in short-term investments.
C)as soon as they are posted to the customer's account.
D)the following day and immediately invested.
E)directly into an investment account.

Question 46

Which statement is true concerning a controlled disbursement account?

A)The number of checks that can be disbursed on any one day is limited.
B)The bank will inform the firm of the amount that needs to be transferred on a daily basis.
C)The amount that can be disbursed on any given day is limited to the balance in the account when the bank opens in the morning.
D)The total number of checks that can be written in any one month is limited.
E)The amount of the disbursements is limited to the amount the firm has available on its bank line of credit.

Question 47

A firm offers credit terms of 1/5, net 25.How long is the net credit period?

A)1 day
B)5 days
C)20 days
D)25 days
E)30 days

Question 48

Which one of the following is most commonly used in international trades?

A)Sight draft
B)Time draft
C)Commercial paper
D)Banker's acceptance
E)Open account

Question 49

Which one of the following is a primary benefit of implementing zero-balance accounts into a cash management system?

A)Increased disbursements float
B)Total elimination of all safety stocks
C)Additional cash availability
D)Decreased collection float
E)Elimination of all float

Question 50

Which of these will tend to decrease the length of the credit period?

A)Decrease in default risk
B)Increase in the cost of the product
C)Increase in competition
D)Decrease in the size of the account
E)Decrease in turnover rate

Question 51

A firm grants credit with terms of 2/10, net 30.The firm's customers have ___ days to pay in order to receive a _____ percent discount.

A)2; 10
B)10; 2
C)15; 2
D)20; 2
E)30; 20

Question 52

Which of these are money market securities?
I.Jumbo CDs
II.Short-term municipal debt
III.U.S.Treasury bills
IV.Commercial paper

A)I and IV only
B)II and III only
C)I, II, and IV only
D)II, III, and IV only
E)I, II, III, and IV

Question 53

Which one of the following will tend to increase the length of the credit period?

A)Decrease in product cost
B)Decrease in consumer demand
C)Decrease in collateral value
D)Increase in credit risk
E)Increase in product standardization

Question 54

Which of these will tend to decrease the credit period?

A)Perishable product
B)Long production and sales cycle
C)Well-established customer
D)Heavy reliance on sales to that particular customer
E)Specialized new product

Question 55

Which statement is correct?

A)Commercial paper is highly marketable.
B)All T-bills are issued with 90-day maturities.
C)A certificate of deposit is a short-term loan to the government.
D)Any CD with a face amount of $10,000 or more is classified as a jumbo CD.
E)Money market preferred securities have less price volatility than ordinary preferred.

Question 56

Which of these would be the most common evidence of indebtedness when a sale is made on open account?

A)Sight draft
B)Commercial draft
C)Banker's acceptance
D)Promissory note
E)Invoice

Question 57

Which of these is the most ethical practice related to cash disbursement management?

A)Intentionally delaying payments by creating a complex accounts payable system
B)Taking the cash discount but paying after the discount period
C)Paying a supplier from a zero-balance account
D)Purposely losing a supplier's invoice and requiring the supplier to submit another copy
E)Mailing a check from the most remote location possible

Question 58

Cash concentration accounts:

A)are no longer needed since the Check Clearing Act for the 21^st Century has been passed.
B)eliminate the need for lockboxes.
C)decrease a firm's disbursement float by reducing mail and processing delays.
D)allow firms to more efficiently handle cash.
E)tend to decrease a firm's investment income.

Question 59

When are funds generally transferred into zero-balance accounts?

A)Monthly
B)Weekly
C)Daily
D)As needed
E)Never

Question 60

Lockboxes should be located:

A)in every town where a firm has a customer.
B)geographically close to a firm's primary customers.
C)only in major urban areas since those are the key financial areas of the country.
D)close to a firm's home office.
E)only in cities where the firm has regional offices.

Question 61

The economic order quantity approach states that inventory order sizes should be determined by:

A)dividing annual item sales by the carrying cost per item and multiplying by 2.
B)computing the average number of items sold each month.
C)equating restocking costs with carrying costs.
D)dividing the inventory into various groups based on the value per item.
E)computing the amount of the derived demand.

Question 62

Which one of the 5 C's refers to the general economic climate in a customer's line of business?

A)Capital
B)Conditions
C)Capacity
D)Character
E)Collateral

Question 63

Which of the following characteristics will tend to cause a firm to adopt a more liberal credit policy?
I.Repeat customers
II.Excess capacity
III.High variable costs
IV.Limited competition

A)I and II only
B)III and IV only
C)I, II, and III only
D)II, III, and IV only
E)I, II, III, and IV

Question 64

The primary goal of inventory management is to minimize the:

A)number of orders per year.
B)average inventory level.
C)total costs of holding inventory.
D)level of inventory for the most expensive items.
E)total opportunity costs.

Question 65

On any given day, Daisy's receives and deposits numerous checks worth an average combined total of $3,428.The funds from these checks are generally available in 1.6 days.Every day the firm mails out checks totaling $2,850 that generally take 1.9 days to clear the bank.What is the amount of the disbursement float if the opening bank balance was $945 with no outstanding items?

A)$5,388
B)$5,505
C)$4,560
D)$5,415
E)$5,700

Question 66

As of this morning, a firm had a ledger balance of $1,695 with no outstanding deposits or checks.Today, the firm deposited five checks in the amount of $32each and wrote a check in the amount of $465.What is the amount of the collection float as of the end of the day assuming none of these checks had cleared?

A)$305
B)$625
C)$283
D)$160
E)$1,070

Question 67

As of Monday morning, the ledger balance and the available balance for a firm was $3,000.During the day, the firm wrote three checks in the amounts of $750, $225, and $452.The firm deposited a check for $560 and a check for $258.What is the amount of the collection float as of the end of the day assuming none of these checks have cleared?

A)$755
B)$1,427
C)$609
D)$818
E)$2,245

Question 68

For which one of the following instruments does a bank guarantee payment by the buyer?

A)Money market preferred stock
B)Commercial paper
C)Banker's acceptance
D)Invoice
E)Time draft

Question 69

On any given day, a firm receives and deposits numerous checks worth an average combined total of $9,215.The funds from the deposited checks are generally available after two days.Every day, the firm mails out checks totaling $7,300 that generally take three days to clear the bank.What is the amount of the collection float if the opening bank balance was $9,200?

A)$14,230
B)$15,970
C)$18,430
D)$7,300
E)$11,130

Question 70

Which of these is a shortage cost?

A)Restocking cost
B)Opportunity cost of capital
C)Inventory obsolescence
D)Insurance cost
E)Inventory theft

Question 71

The optimal credit policy of any firm will:

A)maximize sales.
B)minimize bad debts.
C)maximize units sold.
D)minimize the total costs of granting credit.
E)minimize carrying costs.

Question 72

Which report identifies the percentage of accounts receivable that are delinquent by 90 days or more?

A)Cash budget
B)5 C's of credit
C)Credit analysis
D)Aging schedule
E)Credit scoring report

Question 73

The UpTowner writes 39 checks a day for an average amount of $918 each.These checks generally clear the bank 2.5 days after they are written.In addition, the firm generally receives an average of $53,419 a day in checks.The checks that are received are deposited immediately and the funds are generally available the following day.What is the amount of the firm's disbursement float?

A)$36,086
B)$89,505
C)$17,333
D)$53,419
E)$106,838

Question 74

Which of these tends to create an unexpected increase in a firm's average collection period?

A)Increased credit sales
B)The implementation of a cash discount
C)Increased customer delinquencies
D)Increased dollar value per each sale
E)Increased collection efforts

Question 75

Which of these refers to a customer's willingness to meet his or her credit obligations?

A)Capital
B)Conditions
C)Capacity
D)Character
E)Collateral

Question 76

Which one of the following best illustrates the concept of derived demand?

A)A minimum wage worker tends to buy more off-brand products than do more highly paid professionals.
B)A windshield company has to step up production because auto sales are increasing.
C)A grocery store is selling more fresh fruits and vegetables.
D)Restaurant sales are rising because unemployment is falling.
E)Retail stores have increased sales around the holiday season.

Question 77

Kate's Korner Market monitors 3 percent of its inventory on a daily basis, another 20 percent on a weekly basis, and the remaining inventory on a quarterly basis.What inventory management approach is being used?

A)ABC
B)EOQ
C)MRP
D)Q*
E)JIT

Question 78

Which one of the following inventory management approaches determines the finished goods inventory level and then works backward until the raw material needs are determined?

A)Extended EOQ
B)Just-in-time
C)ABC approach
D)Materials requirements planning
E)Economic order quantity

Question 79

A firm uses the extended economic order quantity approach to inventory management.Which one of the following inventory levels is considered to be the minimum inventory level given this approach?

A)Zero inventory
B)Reorder point level
C)Safety stock level
D)50 percent of the reorder quantity
E)Safety stock plus the reorder quantity

Question 80

Which of these is the best example of a raw material?

A)Set of tires for an automaker
B)Partially assembled airplane
C)Cabinets ready to be shipped
D)Can of paint waiting to be sold
E)Completed product awaiting customer delivery