Deck 17: Working Capital Management

Question 1

What is the name given to 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

Answer 1

Captive finance company

Question 2

The transaction motive for holding cash refers to the need to have cash for which one of the following purposes?

A) Safety margin
B) Investment opportunities
C) Daily operations
D) Financial reserve
E) Bargain opportunities

Answer 2

Daily operations

Question 3

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 3

Zero-balance account

Question 4

Which one of the following is the bill given to a customer for goods he or she purchased?

A) Account aging
B) Invoice
C) Docket
D) Remittance advice
E) Shipping receipt

Question 5

Which one of the following terms refers to the length of time a firm grants its customers to pay for their purchases?

A) Lockbox period
B) Discount period
C) Credit period
D) Cash cycle
E) Receivables turnover period

Question 6

Which one of the following best defines the term 'credit scoring'?

A) Categorizing customers into groups depending upon the length of time it takes each customer to pay for purchases
B) Compiling a list of accounts receivables segregated by the length of time each receivable has been outstanding
C) Evaluating 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 7

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

A) Master account
B) Controlled disbursement account
C) Bank controlled account
D) Investment account
E) Safety stock account

Question 8

Which one of the following is the need to hold cash simply as a financial reserve?

A) Precautionary motive
B) Opportunistic motive
C) Speculative motive
D) Activity motive
E) Transaction motive

Question 9

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 10

Which one of the following is the process of determining the probability that customers will not pay?

A) Credit analysis
B) Collection policy
C) Account aging
D) Credit terms
E) Customer invoicing

Question 11

What is the primary purpose of a cash discount?

A) Customer compensation for an out of stock item
B) Customer compensation for faulty goods or services
C) Means of offsetting the interest charges on an account receivable
D) Inducement to pay promptly
E) Incentive to purchase a specialty item

Question 12

Which one of the following defines the terms of sale?

A) Period of time during which a discount can be taken on an invoice
B) Period of time granted to a customer to pay for the goods or services received
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 shall be granted credit and which shall not

Question 13

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 14

Which one of the following best defines cash concentration?

A) Combining all of a firm's receipts into one bank deposit
B) Combining a week's worth of cash receipts into one bank deposit
C) Combining cash from multiple banks 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 only mailed monthly

Question 15

Which one of the following is evidence of indebtedness?

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

Question 16

Which one of the following is the graphical representation of the sum of the carrying costs and the opportunity costs of a credit policy?

A) Accounts receivables aging
B) Economic credit function
C) Optimal credit curve
D) Credit analysis
E) Credit cost curve

Question 17

Which one of the following best defines the term 'collection policy'?

A) Process of determining which customers will be granted credit
B) Process of determining the probability 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 18

Baxter's, Inc. generally holds $125,000 in cash in case an unexpected investment opportunity arises. Which one of the following refers to holding cash for this type of purpose?

A) Precautionary motive
B) Opportunistic motive
C) Speculative motive
D) Reserve motive
E) Transaction motive

Question 19

Which one of the following terms refers to the basic factors that are reviewed when evaluating the creditworthiness of a potential customer?

A) Terms of sale
B) Cash concentration
C) Five Cs of credit
D) Collection policy
E) Credit score

Question 20

Float is defined as the difference between which of the following?

A) Beginning cash balance and the ending cash balance 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 21

Al's Bakery has a check book 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. 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

Laurie's Ice Rink keeps an extra $1,500 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 23

Which one of the following is an expected result of the Check Clearing Act for the Century?

A) Firms will have to wait three days before having access to their deposited funds.
B) Zero-balance accounts will be eliminated.
C) Lockboxes will be prohibited.
D) Collection float, but not disbursement float, will be reduced.
E) Both collection and disbursement float will be reduced.

Question 24

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 Century.
D) Any check received is to be held until the customer's account has been updated to record the payment.
E) Accounts payables processing should be given priority over accounts receivables processing.

Question 25

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 only have 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 26

Faith wrote a check for $22 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 $22.
B) On May 11, the available balance was $22 less than the ledger balance.
C) On May 12, the ledger balance was $22 less than the available balance.
D) On May 14, the available balance increased by $22.
E) On May 10, the ledger balance was $22 less than the available balance.

Question 27

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 28

Which one of the following statements 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 Century is designed to reduce the collection time to one day.

Question 29

Which one of the following best defines the economic order quantity (EOQ)?

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 30

Which one of the following statements concerning disbursement float 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 Century.
E) Disbursement float exists when the available balance is less than the book balance.

Question 31

Stewart's Office Supply has revised its office procedures such that it now takes 1 day to prepare the daily deposit, rather than 2 days. Accounts payables are processed in 5 days, rather than the previous 4 days, so that shipping and receiving can better verify the charges before the checks are written. How will these revised procedures affect the firm's float?

A) Increase the disbursement float by 1 day
B) Decrease the collection float by 1 day
C) Decrease the net float by 2 days
D) Increase the net float by 2 days
E) No effect on the firm's float

Question 32

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 33

Which of the following 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 34

Which one of the following best represents the 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 35

Which one of the following 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 36

Which one of the following 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) Offer customers credit terms of 1/5, net 15
E) Eliminating all disbursement float

Question 37

Ted's Toys just reconciled its bank account and has $12,300 in outstanding deposits and $31,400 in checks outstanding. The firm's checkbook has a positive balance. The firm sells on a cash basis only and deposits its receipts on a daily basis. 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 3 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 exceeds the disbursement float.
C) The firm has a net collection float.
D) The disbursement float exceeds the collection float.
E) Since transactions occur daily, the firm has no float.

Question 38

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 39

Which one of the following is the set of procedures used to determine the inventory levels for demand-dependent inventory?

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

Question 40

Which one of the following 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 twice daily
E) Supplying customers with bar coded payment slips

Question 41

When are funds generally transferred into zero-balance accounts?

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

Question 42

How are checks which 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 43

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 44

A firm grants credit with terms of 2/5, net 20. The firm's customers have ___ days to pay in order to receive a _____ percent discount.

A) 2; 5
B) 5; 2
C) 15; 2
D) 20; 2
E) 30; 5

Question 45

Which of the following will tend to increase the credit period? I. increase in the buyer's inventory period
II) decrease in the buyer's inventory period
III) increase in the buyer's operating cycle
IV) decrease in the buyer's operating cycle

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

Question 46

Which one of the following characteristics 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 47

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 48

Lockboxes should be located:

A) in every town where a firm has a customer.
B) based on where a firm's primary customers are located.
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 49

Cash concentration accounts:

A) are no longer needed since the Check Clearing Act for the 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 50

Which of the following 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 51

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

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

Question 52

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 53

Which one of the following 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 54

Which one of the following 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 55

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 1 day
C) Between 1 and 2 days
D) 2 days
E) Between 2 and 3 days

Question 56

Which one of the following 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 57

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 58

Which of the following characteristics apply to U. S. Treasury bills? I. 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 59

Which one of the following 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 60

Which one of the following statements concerning money market securities 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 is less volatile than ordinary preferred.

Question 61

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 62

The optimal credit policy will do which one of the following?

A) Maximize sales
B) Minimize bad debts
C) Maximize units sold
D) Minimize the total costs of granting credit
E) Minimize carrying costs

Question 63

Which one of the following reports will tell me the percentage of accounts receivables that are delinquent by 90 days or more?

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

Question 64

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 65

Which one of the following 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) Cell phone waiting to be encased

Question 66

The economic order quantity approach states that inventory order sizes should be determined in which one of the following manners?

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

Question 67

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 because people are improving their diets
D) Restaurant sales are rising because unemployment is falling
E) Retail stores have higher sales around the holiday season than in other seasons of the year

Question 68

As of this morning, your firm had a ledger balance of $740 with no outstanding deposits or checks. Today, your firm deposited 5 checks in the amount of $89 each and wrote a check in the amount of $330. What is the amount of the collection float as of the end of the day?

A) $115
B) $240
C) $330
D) $445
E) $775

Question 69

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

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

Question 70

As of Monday morning, the ledger balance and the available balance for a firm was $3,600. During the day, the firm wrote 3 checks in the amounts of $230, $590, and $870. The firm deposited a check for $360 and a check for $910. What is the amount of the collection float as of the end of the day?

A) $420
B) $580
C) $840
D) $1,270
E) $1,690

Question 71

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

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

Question 72

On any given day, Casey's receives numerous checks worth an average combined total of $6,300. The funds from the deposited checks are generally available in 1.5 days. Every day, the firm mails out checks totaling $4,800 that generally take 2 days to clear the bank. What is the amount of the disbursement float?

A) $150
B) $400
C) $9,450
D) $9,600
E) $9,850

Question 73

Which one of the following best states the primary goal of inventory management?

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

Question 74

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

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

Question 75

Which one of the following would tend 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 76

On any given day, a firm receives numerous checks worth an average combined total of $5,900. The funds from the deposited checks are generally available after 1.5 days. Every day, the firm mails out checks totaling $4,400 that generally take 3 days to clear the bank. What is the amount of the collection float?

A) $4,400
B) $4,450
C) $8,850
D) $13,250
E) $13,400

Question 77

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 78

Which one of the following is a shortage cost associated with a firm's inventory?

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

Question 79

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 80

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