Deck 15: Managing Short-Term Assets

Question 1

A just-in-time system of inventory control requires that manufacturers coordinate production with suppliers so that the raw materials or components arrive just as they are needed in the production process.

Answer 1

True

Question 2

Money market instruments are held as marketable securities.

Answer 2

True

Question 3

A _____ current asset investment policy calls for relatively large amounts of current assets to be carried by a company.

A) relaxed
B) restricted
C) moderate
D) lean-and-mean
E) precautionary

Answer 3

A

Question 4

A firm's collection policy refers to the procedures followed by a firm to collect its accounts receivable.

Question 5

Which of the following statements is correct about cash management systems?

A) A lockbox system is useful in concentration banking.
B) A firm that has many divisions operating over a wide geographic area will find that payables centralization offers little benefit.
C) Disbursement float refers to the value of the checks deposited but the amount is not available in the account.
D) There are no actions a firm can take to improve its synchronization of cash flows.
E) Zero-Balance accounts help in managing the cash receipts of a firm.

Question 6

A lockbox arrangement is:

A) a method for the safe-keeping of marketable securities.
B) used to identify inventory safety stocks.
C) a system for slowing down cash disbursements.
D) a system for speeding up a firm's collections of checks received.
E) a system for speeding up a firm's disbursement of checks to the customers.

Question 7

Which of the following current asset investment policies emphasizes holding minimal current assets.

A) Relaxed current asset investment policy
B) Restricted current asset investment policy
C) Moderate current asset investment policy
D) Fat cat current asset investment policy
E) Precautionary current asset investment policy

Question 8

All else equal, firms that hold greater amounts of short-term assets are considered riskier than firms that hold greater amounts of long-term securities.

Question 9

Firms following a restricted current asset investment policy:

A) have uncertain sales and operations.
B) have relatively low levels of accounts receivable.
C) have a lower return on investment, especially on current assets.
D) have the longest cash conversion cycle in the industry.
E) have the highest inventory conversion in the industry.

Question 10

Outsourcing is an inventory control procedure where a red line is drawn around the inside of an inventory-stocked bin to indicate the reorder point level.

Question 11

If the average days of collection according to the aging schedule decrease from the first quarter of the year to the second quarter, then your firm's credit policy has tightened.

Question 12

If a firm's credit terms are 2/10 net 30 days, then customers settling their bills within 30 days will get a 2% discount.

Question 13

The lower the level of current assets that is required to support operations, the closer the firm can follow a _____ current asset investment policy.

A) relaxed
B) restricted
C) moderate
D) lean-and-mean
E) precautionary

Question 14

A firm should adopt a new credit policy if it reduces the value of the firm.

Question 15

Companies provide cash discounts to customers for early payments to speed up the collection period.

Question 16

Concentration banking is one way for a firm to speed up the receipt of payments from customers.

Question 17

A restricted current asset investment policy will cause a firm to hold maximum levels of safety stocks for cash and inventories, and to have a liberal credit policy.

Question 18

A moderate current asset investment policy is one:

A) under which the level of accounts receivable is always greater than the level of accounts payable.
B) which emphasizes on holding equal amount of current assets and current liabilities.
C) that calls for relatively large amounts of current assets to be carried.
D) under which holdings of cash and marketable securities, inventories, and receivables are minimized.
E) that lies between the relaxed and restrictive current asset investment policies.

Question 19

The threat of expropriation creates an incentive for a multinational firm to minimize inventory holdings and to bring in goods only as needed.

Question 20

The target cash balance is the difference between total cash receipts and total cash disbursements.

Question 21

Chovita Marbles' purchases for next month's sales are constant each month at $1,500. Other payments for wages, rent, and taxes are constant at $700 per month. Chovita's total cash disbursements for a month is _____.

A) $1,430
B) $1,500
C) $700
D) $850
E) $2,200

Question 22

The Danser Company expects to have sales of $30,000 in January, $33,000 in February, and $38,000 in March. If 20 percent of sales are for cash, 40 percent are credit sales paid in the month following the sale, and 40 percent are credit sales paid 2 months following the sale, the cash receipts from the sales in March are:

A) $55,000.
B) $47,400.
C) $38,000.
D) $32,800.
E) $30,000.

Question 23

Which of the following investments is an example of marketable securities?

A) Accounts payable
B) Long-term bonds
C) Long-term loans
D) Equity
E) Treasury bills

Question 24

Which of the following statements is correct regarding cash budgets?

A) Cash disbursements for credit purchases are not included in cash budgets.
B) Only cash inflow from cash sales are included in cash budgets.
C) The target cash balance set in cash budgets are fixed.
D) Cash budgets do not include cash flow through investment activities.
E) Cash budgets include the tax expenses of a firm.

Question 25

A minimum checking account balance that a firm must maintain with a bank to help offset the costs and services such as check clearing and cash management advice is called a _____ balance.

A) transactions
B) compensating
C) precautionary
D) speculative
E) convertible

Question 26

Having synchronized cash flows enables a firm to:

A) speed up collections on checks written.
B) increase its bank loans.
C) increase its interest expenses.
D) increase its profits.
E) increase its cash balances.

Question 27

Jumpdisk Company writes checks averaging $15,000 a day, and it takes 5 days for these checks to clear. The firm also receives checks in the amount of $17,000 per day, but the firm loses three days while its receipts are being deposited and cleared. The firm's net float in dollars is:

A) $126,000.
B) $75,000.
C) $32,000.
D) $24,000.
E) $16,000.

Question 28

The value of checks that have been written and given to the customers but have not been deducted from the account on which they were written is the _____ float.

A) disbursement
B) net
C) collections
D) balance
E) deposit

Question 29

A cash balance held in reserve for unforeseen fluctuations in cash flows is called a _____ balance.

A) transactions
B) compensating
C) precautionary
D) speculative
E) lockbox

Question 30

Which of the following is a common method of disbursement or cash outflow control?

A) Lockbox arrangement
B) Zero-balance account
C) Concentration banking
D) Preauthorized debits
E) Net float agreement

Question 31

Firms should own marketable securities because they:

A) serve as a substitute for long-term debt.
B) offer a place to temporarily put cash balance without any returns.
C) are used for managing accounts receivables.
D) are risky investments that cannot be sold easily in the market.
E) include securities that can be traded in the money market.

Question 32

Reston Inc. has expected sales of $17,000,000. While 10 percent of its customers pay cash, the remaining 90 percent pay on credit with 40 percent paying on Day 10, 30 percent paying on Day 20, 15 percent paying on Day 25, and 15 percent paying on Day 30. Which of the following is Reston's days sales outstanding (DSO)?

A) 17.65 days
B) 18.25 days
C) 12.46 days
D) 10.12 days
E) 14.33 days

Question 33

Which of the following will help a firm accelerate the collection of customers' payments and the conversion of those payments into cash?

A) Lockbox arrangement
B) Controlled disbursement accounts
C) Economic order quantity
D) Payables concentration
E) Zero-balance accounts

Question 34

The amount of checks that have been received and deposited but have not yet been made available to the account in which they were deposited is the _____ float.

A) disbursement
B) net
C) collections
D) balance
E) deposit

Question 35

Rainbow Inc. has expected sales of $200,000 a month. Rainbow's cash sales are 10% of total sales and the remaining 90 percent pay on credit, of which 20% take advantage of a discount and rest pay during the following month. If Rainbow's credit policy is 2/10 net 30, the amount of discount offered by Rainbow is _____.

A) $850.
B) $720.
C) $560.
D) $485.
E) $900.

Question 36

Marketable securities:

A) are extremely liquid investments.
B) are long-term investments.
C) provide much higher yields than other assets.
D) held by a firm depend upon its long-term needs.
E) will be held by a firm when inventories and receivables are high.

Question 37

Chadmark Corporation's budgeted monthly sales are $3,000. 40 percent of its customers pay in the same month and take the 2 percent discount. The remaining 60 percent pay in the month following the sale and don't receive a discount. Chadmark's total receipts for a typical month i.

A) $1,543
B) $2,976
C) $3,200
D) $1,652
E) $2,408

Question 38

Total cash receipts for Zinc Corporation in a month is $15,000 and total cash disbursements in a month is $10,000. Which of the following is true about Zinc's cash position if it aims to maintain minimum cash balance of $8,000?

A) Zinc has surplus cash of $8,000.
B) Zinc has a cash shortfall of $3,000.
C) Zinc has surplus cash of $6,000.
D) Zinc has a cash shortfall of $23,000.
E) Zinc has surplus cash of $20,000.

Question 39

What type of system allows a customer's bank to periodically transfer funds from its account to a selling firm's bank account for payment of bills?

A) Disbursement agreement
B) Preauthorized debit system
C) Lockbox agreement
D) Concentration banking system
E) Zero-balance account

Question 40

A report showing how long accounts receivable have been outstanding is called _____.

A) a time line
B) a preauthorized debit system
C) an aging schedule
D) an account tracker
E) a credit document

Question 41

Trust Chemicals is considering changing its credit policy. It conducted a net present value (NPV) analysis for both its existing credit policy and proposed credit policy. The net change in NPV on a daily basis is $20 and the expected return is 10%. Assuming there are 360 days in a year, the increase in the firm's value is _____.

A) $50,000
B) $72,000
C) $43,000
D) $20,000
E) $67,000

Question 42

From the information given below, the economic order quantity (EOQ) for Shinebird Textiles is _____. Ordering cost = $10 per order
Carrying cost = 20% of purchase price
Purchase price = $10 per unit
Total sales for year = 1,000 units

A) 250 units
B) 100 units
C) 300 units
D) 900 units
E) 150 units

Question 43

Sunshine Inc. tightened its credit policy, resulting in a $10 change in net present value (NPV) on a daily basis. If Sunshine's expected return is 8%, then the change in the value of the firm is_____. (Note: Assume 360 days in a year)

A) $20,000
B) $5,000
C) $34,000
D) $45,000
E) $60,000

Question 44

The economic ordering quantity (EOQ) for Nashville Records Inc. from the information given below is _____. (Round the answer to the nearest whole number.) Sales = 15,000 units per year
Sales price = $10 per unit
Purchase price = $5
Carrying cost = 0.25 times inventory value
Fixed cost per order = $1,000

A) 3,464 units
B) 4,899 units
C) 346 units
D) 490 units
E) 1,549 units

Question 45

Ace Hardware's economic order quantity (EOQ) is 100 widgets, its total demand is 20,000 units per period, its carrying cost per unit is 20% of inventory value, its purchase price $4, and its fixed costs per order is $20. Which of the following is the total inventory cost of Ace?

A) $1,250
B) $3,250
C) $1,750
D) $2,000
E) $4,040

Question 46

A firm that offers payment terms of 2/10 net 30 gives its customers:

A) a 2% discount if the bill is paid on or before Day 30, otherwise an additional cost of 10% is applicable.
B) a 20% discount if the bill is paid on or before Day 10, otherwise the entire bill is due by Day 30.
C) a 30% discount if the bill is paid on or before Day 10, otherwise the entire bill is due by Day 2 of the consecutive month.
D) a 10% discount if the bill is paid on or before Day 2, otherwise the entire bill is due by Day 30.
E) a 2% discount if the bill is paid on or before Day 10, otherwise the entire bill is due by Day 30.

Question 47

Other things equal, the days sales outstanding (DSO) of Firm A is 20 days and the days sales outstanding (DSO) of Firm B is 30 days. Which of the following statements about the firms is correct?

A) Firm A takes more time to collect its receivables than Firm B.
B) Firm A has tighter credit terms than Firm B.
C) Firm A has a weaker collection team than Firm B.
D) Firm A provides less discount to its customers to pay its bills early than Firm B.
E) Firm A has weaker receivables monitoring system than Firm B.

Question 48

A change in the credit policy will be beneficial to a firm if it results in an increase in the:

A) days sales outstanding.
B) bad debt loss.
C) net present value.
D) fixed costs.
E) variable costs.

Question 49

Which of the following inventory management techniques gives the optimal amount of inventory to be purchased?

A) Economic order quantity model
B) Lockbox system
C) Payables system
D) Outsourcing arrangement
E) Quantity discount model

Question 50

Orangetree Pharma's demand for test tubes is 72,000 units. If the lead time for placing an order is 5 days, then an order should be placed at an inventory level of: (Assume 360 days in a year)

A) 625 units.
B) 800 units.
C) 1,250 units.
D) 1,000 units.
E) 2,500 units.

Question 51

The aging schedule of a firm shows that 40% of the receivables are collected in 18 days and the remaining 60% of the receivables are collected in 50 days. The days sales outstanding (DSO) of the firm is _____.

A) 12.32 days
B) 12.78 days
C) 20.34 days
D) 40.56 days
E) 37.20 days

Question 52

_____ increase the prices of products that are allowed to be imported.

A) Stockouts
B) Tariffs
C) Quotas
D) Discounts
E) Expropriations

Question 53

Which of the following is minimized when a company uses the economic order quantity (EOQ) model?

A) Outsourcing
B) Total inventory cost
C) Purchase price
D) Safety stock
E) Quantity discount

Question 54

The process of evaluating the credit policy to determine whether a shift in the customers' payment patterns has occurred is called _____.

A) receivables monitoring
B) payables management
C) concentration banking
D) a lockbox system
E) relaxed management

Question 55

Aberwald Corporation expects to order 126,000 memory chips for inventory during the coming year and has calculated its economic order quantity as 3000 units. If the cost per order is $5, the total ordering cost incurred by Aberwald is:

A) $500.
B) $425.
C) $210.
D) $310.
E) $620.

Question 56

Which of the following statements is true about inventory management?

A) The economic order quantity is the quantity at which the total inventory cost will be maximized.
B) A quantity discount is the level of inventory at which an order should be placed.
C) Safety stock is the additional inventory carried to guard against unexpected changes in sales.
D) The reorder point is the discount from the purchase price that is offered when inventory is ordered in large quantities
E) Outsourcing is the practice of ordering inventory from the supplier just when they are needed for production.

Question 57

Fashion Clothier's economic order quantity (EOQ) for dyes is 14,000 units. If the total demand is 196,000 units per period, carrying cost per unit is 25% of inventory value, purchase price is $10, and fixed costs per order is $30, then the total inventory cost is_____.

A) $18,280
B) $23,250
C) $14,750
D) $13,000
E) $17,920

Question 58

Fullerton's total carrying cost is $210 and total ordering cost is $150. Fullerton's total inventory cost is _____.

A) $210
B) $360
C) $450
D) $300
E) $150

Question 59

The "red-line method" refers to:

A) the policy of drawing a red line around certain neighborhoods on a map and then refusing to sell on credit to people who live within those areas.
B) restrictions imposed on companies which use a just-in-time inventory system.
C) a red line that shows the maximum amount of credit that should be extended to a customer.
D) a method of controlling inventories by drawing a red line around the inside of a bin.
E) a method of controlling receivables by drawing a red line on invoices of companies that are expected to pay late.

Question 60

_____ are the products that are ready for sale.

A) Reorder stock
B) Safety stock
C) Raw materials
D) Work-in-process
E) Finished goods

Question 61

Which of the following statements is true about multinational working capital management?

A) Exchange rate changes influence the credit policies of multinational companies.
B) Foreign governments often encourage cash to be taken out of their countries.
C) If the probability of expropriation is large, the inventory holdings will be maximized.
D) Most multinational corporations prefer banking with the local banks where they operate.
E) The political and legal environments of foreign countries are conducive to collect defaulted accounts.

Question 62

Which of the following statements is true about the cash management of multinational companies?

A) Multinational companies safeguard their foreign operations through quotas.
B) Multinational companies do not use lock box systems due to longer distances.
C) Multinational companies prefer keeping cash idle.
D) Multinational companies try to slow down collections and speed up disbursements where possible.
E) Multinational companies face restrictions in transfers of funds from foreign governments.