Deck 16: The Management of Working Capital Multiple Choice Questions

Question 1

Which of the following accounts is (are) not part of a firm's working capital?

A) Plant and equipment
B) Marketable securities
C) Cash
D) a and c

Answer 1

A

Question 2

Which of the following transactions will 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.

Answer 2

B

Question 3

Net working capital is defined as:

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

Answer 3

A

Question 4

Seasonal peaks in business are supported by:

A) permanent working capital.
B) long-term financing.
C) temporary working capital.
D) discretionary financing.

Question 5

An aggressive working capital policy:

A) uses more short-term financing than long-term.
B) uses short-term financing to support only the peaks of temporary working capital.
C) supports a portion of permanent working capital with short-term financing.
D) Both a & b
E) Both a & c

Question 6

Temporary working capital is:

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 7

Which of the following is not considered working capital?

A) Old but salable inventory
B) A 90-day old receivable that should be paid within the next 60 days
C) A bank loan granted to support working capital that isn't due for three years
D) A payable owed to a customer that's bankrupt

Question 8

Working capital policy involves a tradeoff between easier operation and ____.

A) more working capital
B) spontaneous liabilities
C) temporary financing
D) the cost of carrying short-term assets

Question 9

Which of the following factors does not directly affect the firm's investment in working capital?

A) The firm's inventory and credit policies
B) The age of the firm's plant and equipment
C) The firm's sales level
D) The length of the firm's operating cycle

Question 10

Which of the following is not part of net working capital?

A) Accounts payable
B) Marketable securities
C) Retained earnings
D) Inventory
E) Accounts payable

Question 11

Which of the following best describes 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 12

An aggressive working capital policy would include:

A) using short term financing to finance only the peak temporary working capital.
B) using short term financing to finance all temporary working capital.
C) using short term financing to finance all temporary and some permanent working capital.
D) both a. and b. above describe aggressive working capital policies.
E) All of the above describe aggressive working capital policies.

Question 13

Working capital increases when ____ decreases.

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

Question 14

Which of the following will cause working capital to increase?

A) A decision to tighten credit and collections policies
B) A decision to carry higher levels of inventory
C) A decision to take increased advantage of suppliers trade credit
D) Both b. and c. above will increase permanent working capital.
E) All of the above will increase permanent working capital.

Question 15

Which of the following is an accepted financing wisdom?

A) The maturity of funds used to support a project should roughly match the project's duration.
B) Because firms can use their own equity as they choose, equity can be used to finance projects of any duration.
C) Any project can appropriately be supported by funding with a shorter maturity.
D) Any project can appropriately be supported by funding with a longer maturity.

Question 16

An effective program of working capital management requires that:

A) the firm run with the absolute minimum in each current asset account.
B) a series of cost/benefit tradeoffs be considered because running a business is easier with more working capital than with less, but holding working capital costs money.
C) large inventories be maintained to adequately service customers.
D) credit can be easily granted to customers to encourage higher sales.

Question 17

The term "net working capital" means:

A) the firm's gross working capital minus spontaneous financing.
B) the firm's cash, accounts receivable, and inventory minus short-term payables and accruals.
C) the firm's current assets minus its current liabilities.
D) All of the above

Question 18

The cash conversion cycle measures the time:

A) between the creation of receivables and their collection.
B) it takes for inventory to be turned into product and sold.
C) between payment for inventory and collection of cash for its subsequent sale as product.
D) for a check to clear the banking system.

Question 19

Which of the following describes the cash conversion cycle?

A) From the purchase of inventory to the collection of cash from the sale of that inventory.
B) From the payment for inventory to the sale of that inventory.
C) From the payment for inventory to the collection of cash from the sale of that inventory.
D) From the purchase of inventory to the sale of that inventory.
E) None of the above describes the cash conversion cycle.

Question 20

Working capital represents assets that support day-to-day operating activities. Funding working capital requires:

A) a commitment of capital (money) for a short time, i.e. a time comparable to the period for which working capital assets are held.
B) a more or less permanent investment of funds to support ongoing daily operations.
C) a commitment to allocate funds annually from the firm's capital budget.
D) All of the above

Question 21

All other things equal, a policy of financing with a relatively ____ proportion of short-term debt will tend to result in ____ earnings.

A) large, lower
B) constant, higher
C) constant, lower
D) large, higher

Question 22

Which of the following account changes would reduce a firm's net working capital if all other account balances are held constant?

A) Increase in inventories
B) Increase in accounts payable
C) Decrease in accounts receivable
D) b and c
E) None of the above

Question 23

A principal difference between a line of credit and a revolving credit agreement is that:

A) a revolver is a legally binding commitment from the bank to lend up to a stipulated amount.
B) the borrower must pay a commitment fee on unborrowed money with a line of credit.
C) the line of credit is an informal agreement but may not be canceled due to a decline in the borrower's financial health during the relatively short period of the agreement.
D) the bank can cancel a revolver at any time if it refunds the commitment fee.

Question 24

Forming working capital policy involves a series of:

A) profit-risk tradeoffs.
B) financial choices.
C) capital budgeting decisions.
D) None of the above

Question 25

The aggressive approach to the financing of a firm's current assets uses a ____ proportion of short-term debt and a ____ proportion of long-term debt.

A) low, high
B) relatively high, relatively low
C) high interest, low interest
D) None of the above

Question 26

Supporting working capital with long-term financing is:

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

Question 27

The size and nature of a firm's investment in current assets is a function of a number of different factors including all of the following except:

A) how efficiently the firm manages its fixed assets.
B) the length of the cash conversion.
C) the sales level.
D) credit policies.

Question 28

Supporting working capital with short-term financing is:

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

Question 29

Which of the following is not an element of working capital policy?

A) The amount of working capital used
B) The level of attention that top management pays to working capital issues
C) The nature and source of financing that supports working capital
D) How the components of working capital are managed
E) The extent to which working capital is supported by short versus long term financing

Question 30

Which of the following represents spontaneous financing?

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 31

The size of a firm's investment in working capital is a function of all of the following factors except:

A) sales level.
B) inventory policies.
C) credit policies.
D) stockholders equity.

Question 32

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

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

Question 33

There is more risk associated with short-term debt than long-term debt because of:

A) uncertainty arising from interest rate fluctuations.
B) the risk of being unable to refund the debt.
C) relatively high cost of short-term debt.
D) a and b

Question 34

Which of the following is a component of a firm's gross working capital?

A) Cash
B) Accounts payable
C) Fixed assets
D) a and b
E) All of the above

Question 35

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

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

Question 36

Which of the following working capital financing policies subjects the firm to the greatest risk?

A) Financing temporary working capital with long-term debt
B) Financing permanent working capital with long-term debt
C) Financing permanent working capital with short-term debt
D) Financing temporary working capital with short-term debt

Question 37

In the context of working capital an accrual is not:

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 38

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

A) Trade credit
B) Accounts receivable
C) Commercial paper
D) Line of credit

Question 39

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

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 40

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

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 41

Which of the following creates spontaneous financing?

A) Accounts payable
B) Accrual liabilities
C) Trade credit
D) Both a. and b. create spontaneous financing.
E) All of the above create spontaneous financing.

Question 42

If a company decides to factor its receivables without recourse, it will:

A) offer the receivables to a lending institution as collateral.
B) sell receivables to a lender and remain liable for uncollectible accounts.
C) sell the receivables at a discount.
D) offer receivables that are more than 120 days old to a collection agency.
E) none of the above defines factoring receivables.

Question 43

A revolving-credit agreement between a firm and its bankers:

A) is a contractual agreement between the firm and its bank.
B) does not need to be "cleaned up" during the term of the arrangement.
C) involves payment of a commitment fee to the bank.
D) All of the above

Question 44

Credit terms of 1/10, net 30 mean:

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 45

Which of the following bank loans/agreements requires a fee even if no money is borrowed?

A) Promissory note
B) Line of credit
C) Revolving credit agreement
D) Compensating balance
E) None of the above has fees if no money is borrowed.

Question 46

The provision in short-term credit agreements that require customers to be out of debt for 30 to 45 days each year is referred to as a:

A) loan payoff requirement.
B) clean-up requirement.
C) debt free period requirement.
D) solvency period requirement.

Question 47

A revolving credit agreement:

A) is similar to a line of credit except that it is binding on the bank.
B) does not guarantee the availability of funds.
C) requires the lender to pay a commitment fee.
D) Both a& c.
E) All of the above

Question 48

The principal business of commercial banks is to make short-term loans to businesses. About two thirds of commercial bank loans are for less than:

A) six months.
B) three years.
C) nine months.
D) one year.

Question 49

Commercial paper:

A) is normally issued by smaller firms that require cash for less than 270 days.
B) is normally purchased by insurance companies and mutual funds that have excess funds to invest for a short period.
C) is considered very safe and pays interest rates slightly below 3-month treasuries.
D) requires SEC registration.
E) All of the above are correct regarding commercial paper.

Question 50

Which of the following statements related to trade credit is true?

A) Trade credit has an explicit interest cost.
B) Large firms tend to use trade credit more than small firms.
C) The total trade credit owed at any point in time is called accounts receivable.
D) Trade credit arises from the time lag between the receipt of and payment for supplies.

Question 51

Seasonal working capital needs are best financed by:

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

Question 52

Which of the following is a source of short-term financing?

A) Accounts Payable
B) Accruals
C) Commercial Paper
D) Both a & c
E) All of the above

Question 53

Which of the following is not associated with short-term debt?

A) Easily available to most companies.
B) It is usually the lowest cost financing.
C) It is a flexible form of financing.
D) It is usually used to finance property, plant, equipment.

Question 54

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 55

Which of the following is true regarding pledged receivables?

A) They are collateral for a loan.
B) Uncollected accounts are usually the responsibility of the lender.
C) The process involves factoring.
D) Both a & b

Question 56

Under a line of credit agreement between a firm and its bank:

A) the loan often must be completely paid off for a portion of the year.
B) the firm can borrow up to a specified maximum during a specified period.
C) the bank is contractually committed to lend the firm the money.
D) a and b.

Question 57

Short-term liabilities:

A) represent claims on a firm's income and assets.
B) are sources of funds for the firm.
C) can arise spontaneously from a firm's operations.
D) All of the above

Question 58

Short-term loans are generally used to:

A) finance permanent additions to working capital.
B) finance additions to fixed assets.
C) finance seasonal working-capital requirements.
D) retire equity, thus changing a firm's capital structure.

Question 59

Which of the following is(are) true?

A) Secured lenders have lower priority claims than unsecured creditors.
B) Trade credit, commercial paper, and unsecured loans are all methods of financing which require no specific pledging of assets as collateral.
C) Short-term bank debt is used more frequently than trade credit.
D) a and b

Question 60

Credit extended in connection with goods purchased for resale is called:

A) commercial paper.
B) bank loans.
C) trade credit or payables.
D) commercial credit.

Question 61

A bank's ____ is the rate it charges its largest and most creditworthy corporate customers.

A) risk-free rate
B) commitment fee
C) prime rate
D) nominal rate

Question 62

Characteristics of a line of credit include:

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

Question 63

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

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 64

The purpose of collateral in a secured loan agreement is to:

A) reduce the lender's risk.
B) reduce the expense of administering the loan.
C) make borrowers indifferent to the default risk of the loan.
D) increase the rate borrowers are willing to pay for funds.

Question 65

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

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 66

In a field warehouse arrangement for a loan against inventory:

A) the inventory is held in a public warehouse and must be transported to a firm's plant.
B) the inventory is kept on the firm's premises but is under the control of the warehouse manager.
C) the inventory is kept by the firm but is identified by a serial number for the lender's protection.
D) the borrower pledges inventory as collateral for a loan without specifying the exact items involved.

Question 67

Which of the following provides financing that can vary in size over the life of a loan?

A) Revolving credit agreement
B) Commercial paper
C) Single payment note
D) a and b
E) None of the above

Question 68

A commitment fee is required by a commercial bank on:

A) line of credit.
B) revolving credit agreement.
C) single payment note.
D) a and b.
E) All of the above

Question 69

A compensating balance arrangement between a firm and its bank:

A) increases the return on the loan to the bank.
B) forces the firm to keep a minimum balance in its checking account.
C) increases the cost of the loan to the firm.
D) All of the above

Question 70

Under which of the following inventory financing arrangements does the borrower remain in physical control of the inventory?

A) Blanket liens and chattel mortgage agreements
B) Field warehousing
C) Public warehousing
D) The borrower doesn't remain in complete physical control of the inventory under any of these arrangements.

Question 71

Characteristics of accruals as a source of financing include:

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

Question 72

Which of the following is true of commitment fees?

A) Commitment fees are in the neighborhood of one quarter of 1% per year.
B) Commitment fees are approximately three-fourth of 1% per year.
C) Commitment fees are usually half of the risk-free rate.
D) Commitment fees are in the neighborhood of the risk-free rate.

Question 73

Trade credit is implicitly costless only:

A) during the entire net period.
B) during the prompt payment discount period.
C) between the first and last days of the net period.
D) at no time.

Question 74

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

A) Warehouse receipts
B) Floating lien
C) Trust receipts
D) Lender control is equal under all of the above.

Question 75

Which of the following describe commercial paper instruments?

A) They always mature within six months.
B) They typically have rates below the prime rate.
C) They typically require compensating balances.
D) a and b

Question 76

Functions that can be performed by a factor include:

A) perform credit analysis.
B) collect accounts receivable.
C) assume bad debt risk.
D) b and c
E) All of the above

Question 77

When accounts receivable are pledged as collateral for a loan:

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 78

Factoring receivables:

A) means selling them at a discount to a financial organization.
B) means the seller is always responsible for losses from uncollectible accounts.
C) means the seller must do all of its own credit and collection functions.
D) means the borrowed funds must be repaid to the lending company periodically.

Question 79

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

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

Question 80

Which of the following forms of compensating balance has a less severe effect on the borrower?

A) Line of credit
B) Average balance
C) Minimum balance
D) Revolving credit