Question 1

$\text { Flum Packages, Inc. }$

$\begin{array}{lrlr}\text { Assets }&&\text { Liabilities \& Equity }\
\hline\text { Current assets } & \$ 10,000 & \text { Current Liabilities } & \$ 5,000 \
\text { Fixed assets } & 20,000 & \text { Long-term debt } & 12,000 \
& & \text { Equity } & 13,000\&---&&---\\text { Total }&\$30,000&\text { Total }&\$30,000
\end{array}$
The company earns 5 percent on current assets and 15 percent on fixed assets. The firm's current liabilities cost 7 percent to maintain and the average annual cost of long-term funds is 20 percent.
-If the firm was to shift $7,000 of fixed assets to current assets, the firm's net working capital would__________, the annual profits on total assets would__________and the risk of not being able to meet current obligations would__________, respectively

Accepted Answer

A)  decrease; increase; decrease 
B)  increase; decrease; decrease 
C)  increase; decrease; increase 
D)  decrease; increase; increase

Question 2

Processing float is the delay between the receipt of a check by the payee and its deposit in the firm's account.

Accepted Answer

A) True 
 B)False

Question 3

The permanent financial need of a firm is the financing requirements for the firm's fixed assets plus the permanent portion of the firm's current assets.

Accepted Answer

A) True 
 B)False

Question 4

A negative cash conversion cycle (CCC) means the average payment period (APP) exceeds the operating cycle (OC).

Accepted Answer

A) True 
 B)False

Question 5

An applicant's capacity to repay the requested credit is shown by

Accepted Answer

A)  bank account balances. 
B)  the level of assets the applicant can pledge toward the loan. 
C)  the applicant's payment history. 
D)  financial statement analysis.

Question 6

The more predictable its cash inflows, the more net working capital a firm needs.

Accepted Answer

A) True 
 B)False

Question 7

The aggressive financing strategy is a strategy by which the firm finances all projected funds requirements with long-term funds and uses short-term financing only for emergencies or unexpected outflows.

Accepted Answer

A) True 
 B)False

Question 8

A firm's credit terms specify the minimum requirements for extending credit to a customer.

Accepted Answer

A) True 
 B)False

Question 9

The operating cycle is the recurring transition of a firm's working capital from cash to inventories and inventories to receivables and back to cash.

Accepted Answer

A) True 
 B)False

Question 10

If a firm uses an aggressive financing strategy,

Accepted Answer

A)  it increases return and increases risk. 
B)  it increases return and decreases risk. 
C)  it decreases return and decreases risk. 
D)  it decreases return and increases risk.

Question 11

One major risk a firm assumes in an aggressive financing strategy is

Accepted Answer

A)  the possibility that it will run out of cash. 
B)  the possibility that collections will be slower than expected. 
C)  the possibility that short-term funds may not be available when needed. 
D)  the possibility that long-term funds may not be available when needed.

Question 12

Playing the float involves the strategic use of mailing points and bank accounts to lengthen mailfloat and clearing float, respectively.

Accepted Answer

A) True 
 B)False

Question 13

A firm has an average age of inventory of 60 days, an average collection period of 45 days, and an average payment period of 30 days. The firm's operating cycle is _________days.

Accepted Answer

A)  135 
B)  75 
C)  90 
D)  105

Question 14

The cost of marginal investment in accounts receivable can be calculated by finding the difference between the average investment in accounts receivable before and after the introduction of the changes in credit standards.

Accepted Answer

A) True 
 B)False

Question 15

If the firm relaxes its credit standards, the volume of accounts receivable increases and so does the firm's carrying cost.

Accepted Answer

A) True 
 B)False

Question 16

Relative to cash flows affecting net working capital, all of the following are true EXCEPT

Accepted Answer

A)  because most firms are unable to match cash inflows to outflows with certainty, current assets that more than cover outflows for current liabilities are necessary. 
B)  cash outlays for current liabilities are relatively predictable. 
C)  the more predictable the cash inflows, the less net working capital a firm needs. 
D)  cash inflows are generally more predictable than cash outlays.

Question 17

If the cash discount period is increased, the firm's investment in accounts receivable due to discount takers still getting cash discounts but paying later is expected to increase.

Accepted Answer

A) True 
 B)False

Question 18

Company ___________ are the procedures followed to collect accounts receivable when they come due.

Accepted Answer

A)  collection policies 
B)  credit analyses 
C)  credit policies 
D)  credit scorings

Question 19

While credit scoring provides sound credit information, it is frequently NOT used in business because

Accepted Answer

A)  scoring standards are too rigid. 
B)  the scoring information is difficult to obtain. 
C)  most business transactions involve mercantile credit which cannot be scored. 
D)  mercantile credit decisions are easily quantifiable.

Question 20

The economic order quantity (EOQ) is the order quantity which minimizes

Accepted Answer

A)  the total inventory costs. 
B)  the order quantity in units. 
C)  the order cost per order. 
D)  the carrying costs per unit per period.

Exam 14: Working Capital and Management of Current Assets

Processing float is the delay between the receipt of a check by the payee and its deposit in the firm's account.

The permanent financial need of a firm is the financing requirements for the firm's fixed assets plus the permanent portion of the firm's current assets.

A negative cash conversion cycle (CCC) means the average payment period (APP) exceeds the operating cycle (OC).

An applicant's capacity to repay the requested credit is shown by

The more predictable its cash inflows, the more net working capital a firm needs.

The aggressive financing strategy is a strategy by which the firm finances all projected funds requirements with long-term funds and uses short-term financing only for emergencies or unexpected outflows.

A firm's credit terms specify the minimum requirements for extending credit to a customer.

The operating cycle is the recurring transition of a firm's working capital from cash to inventories and inventories to receivables and back to cash.

If a firm uses an aggressive financing strategy,

One major risk a firm assumes in an aggressive financing strategy is

Playing the float involves the strategic use of mailing points and bank accounts to lengthen mailfloat and clearing float, respectively.

A firm has an average age of inventory of 60 days, an average collection period of 45 days, and an average payment period of 30 days. The firm's operating cycle is _________days.

The cost of marginal investment in accounts receivable can be calculated by finding the difference between the average investment in accounts receivable before and after the introduction of the changes in credit standards.

If the firm relaxes its credit standards, the volume of accounts receivable increases and so does the firm's carrying cost.

Relative to cash flows affecting net working capital, all of the following are true EXCEPT

If the cash discount period is increased, the firm's investment in accounts receivable due to discount takers still getting cash discounts but paying later is expected to increase.

Company ___________ are the procedures followed to collect accounts receivable when they come due.

While credit scoring provides sound credit information, it is frequently NOT used in business because

The economic order quantity (EOQ) is the order quantity which minimizes