chapter 23 Flashcards
1) The correct measure of the cash generating ability of a firm is:
a) Working capital
b) Cash flow from operations
c) Account receivable
d) Net income
b
2) On April 1 Montreal Salsa Dance School had $1,750 in cash, and no receivables or payables. It also had 100 students whose classes finished on April 30. Thirty-five of those students paid their tuition of $500 on time (before April 30). During the month the school incurred costs associated with its operations of instructor salaries $25,000, rent $4,000, and $1,000 utilities. If the school’s policy of paying all bills in cash at the end of each month is respected, how much does the school have to borrow to pay its bills?
a) $30,000
b) $12,500
c) $10,750
d) $0
Answer: c, ; (35*500)+$1,750 = $19,250;
$19,250-$30,000=-$10,750
3) Why are cash budgets important? Choose the best answer.
a) Forecasts cash inflows and outflows
b) Forecasts cash sales
c) Forecasts the impact of cash inflows and outflows on the firm’s cash balances
d) a and c
D
4) Why do banks require that business loan applications be accompanied by cash budgets?
a) To determine how much cash to loan
b) To determine whether the loan will be a short-term or long-term loan.
c) To determine whether the business will be profitable
d) To calculate the expected return it receives from giving the loan
b
5) Which of the following is a reason why a very profitable company might go bankrupt?
a) Managers are not forecasting sales correctly
b) Profits do not include the real costs of the business
c) Lack of cash to finance activities
d) Profits are inflated using some accounting method.
c
6) Which is not a part of good working capital management?
a) the maintenance of optimal cash balances;
b) the investment of any excess liquid funds in marketable securities that provide the best return possible, considering any liquidity or default-risk constraints;
c) the proper management of accounts receivable
d) the extension of long-term debt
d
7) Which of the following is not a key component of a cash budget?
a) Estimated production schedules
b) Sales forecasts
c) Estimates of the size and timing of other cash inflows and outflows
d) Warranty sales
d
8) In the event that a business’ cash budget forecasts a cash deficit for a short future period of time, what should be done?
a) Close the business, as it is unprofitable.
b) Arrange for some short-term borrowing around the expected time of the deficit.
c) Try to make the cash forecast positive by decreasing / cutting costs somehow.
d) Change the credit granting policy of the business.
b
9) The break-even sales growth rate is defined as:
a) The sales growth rate at which a firm makes profits
b) The sales growth rate of return on a firm’s investment
c) The sales growth rate that makes the monthly cash flow from operations equal zero.
d) The sales growth rate at which investors break even
c
10) Which of the following is not a component of a firm’s credit granting policy?
a) How to collect payments
b) How to manage bad debts
c) How to monitor receivables
d) How to extend credit
b
11) A firm’s payment policy is concerned with
a) When the firm pays its bills
b) How the firm pays its bills (examples: cheques, electronic fund transfer)
c) Which bills the firm pays
d) All of the above
a
12) All of the following are important warning signs indicating potential liquidity problems, except:
a) build-up of long-term assets
b) decreases in net working capital
c) increases in accounts receivable
d) increase in debt ratios
a
13) A firm’s inventory policy concerns
a) What the firm does with its inventory
b) What kind of inventory the firm buys
c) The amount of inventory to hold
d) Where the firm holds its inventory
c
14) A firm’s credit policy concerns
a) what the firm does with its loans
b) what the firm does with its bad debts
c) the amount of inventory to hold
d) when the firm collects its receivables
d
15) A firm can grow faster if it:
a) maximizes prices, minimizes production costs, maximizes the time between collection and payment, and minimizes inventory
b) maximizes cash sales, minimizes production costs, maximizes the time between payment and collection, and minimizes inventory
c) maximizes gross margin, minimizes production costs, maximizes the time between collection and payment, and minimizes inventory
d) maximizes its growth rate, minimizes production costs, maximizes the time between payment and collection, and minimizes inventory
c
16) Which one of the following is/are true?
a) The change in cash position is a linear relationship to production.
b) If the sales are lower than the sales growth break-even point, the firm will run out of working capital.
c) As the level of inventory increases, the required sales growth increases as well.
d) As the level of inventory increases, the required sales growth decreases.
d
17) Montreal Skaters Corp. collects 10% of its monthly sales immediately and the rest a month later. Its production costs are 70% of sales. It holds 1 month of sales in inventory, and it pays half its bills immediately and half after 30 days. What is this firm’s break-even sales growth rate?
a) 78.65%
b) 71.43%
c) 31.58%
d) 10.00%
Answer: c, where production cost b=0.7, cash collected immediately a=0.1, bills paid immediately beta=0.5, and inventory gamma=1.
18) Montreal Skaters Corp. collects 35% of its monthly sales immediately and the rest a month later. Its production costs are 65% of sales. It holds 1 month of sales in inventory, and it pays half its bills immediately and half after 30 days. What is this firm’s break-even sales growth rate?
a) 200.0%
b) 46.8%
c) 56.0%
d) 104.0%
c
19) Which of the following relationships is not true?
a) The break-even sales growth rate is inversely related to the inventory level.
b) The break-even sales growth rate is inversely related to the gross margin.
c) The break-even sales growth rate is inversely related to the payables rate.
d) The break-even sales growth rate is positively related to the collection rate.
b
20) Cash flow from operations
a) Increases when the collection rate on receivables rises
b) Increases when the bill payments are made quicker.
c) Decreases when the inventory turnover ratio increases.
d) Increases when the production costs rise.
a
21) Use the following statements to answer this question:
I. Delaying payment of payables can create a buffer for the firm to keep its working capital.
II. If the firm cannot change its credit, payment, and inventory policies, it has to slow growth to survive.
a) I and II are correct
b) I and II are incorrect
c) I is correct and II is incorrect
d) I is incorrect and II is correct
a
22) What are two common measures of liquidity?
a) Cash ratio and inventory turnover ratio
b) Receivables turnover ratio and payables turnover ratio
c) Current ratio and quick ratio
d) Inventory turnover ratio and cash conversion rate
c
23) A good value for the quick ratio is
a) 1
b) Varies from company to company
c) 2
d) Varies from industry to industry
d
24) A firm with a high liquidity ratio is definitely practicing effective working capital management. This statement is:
a) True, higher liquidity means that the firm has more cash than it spends.
b) False, higher liquidity means payables are paid much later than receivables and this hurts the firm’s reputation
c) True, higher liquidity ratio means receivables are greater than payables.
d) False, the firms’ working capital management policy may be too conservative or too lenient
d
