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MAS 3 > Working Capital Management > Flashcards

Working Capital Management Flashcards

Theories

1
Q

Net working capital is the difference between

A

Current Assets and current liabilities

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2
Q

Working capital is important for all the following reasons except
that it:

A. affects a firm’s liquidity and profitability.
B. consists of a large portion of a firm’s total assets.
C. consists of those assets that are most manageable.
D. consumes a small portion of the financial manager’s time.

A

D

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3
Q

Which of the following statements is correct?
A. Working capital is a measure of long-term solvency
B. The stockholder’s equity is a major component of working
capital Roque 2013
C. Net working capital is the difference between quick assets and
current liabilities.
D. Net working capital is the difference between current assets
and current liabilities.

A

D

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4
Q

The longer the firm’s accounts payable period, the:
A. Shorter the firm’s inventory period.
B. Longer the firm’s cash conversion period.
C. Less the firm must invest in working capital
D. More the delay in the accounts receivable period.

A

C

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5
Q

Starrs has current assets of 300,000 and current liabilities of
200,000. Starrs could increase it’s working capital by the
A. Prepayment of 50,000 of next year’s rent
B. Refinancing of 50,000 of short-term debt with long -term debt
C. Purchase of 50,000 of financial assets held for trading for cash
D. Acquisition of land valued at 50,000 through the issuance of
common shares

A

B

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6
Q

Which one of the following transactions does not change the
current ratio and does not change the total current assets?
A. A cash dividend is declared.
B. A fully depreciated asset is sold for cash.
C. A cash advance is made to a divisional office.
D. Short-term notes payables are retired with cash.

A

C

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7
Q

Tiger, Inc. has current ratio of 0.95 is to 1.00. Which of the
following would raise the company’s current ratio?
A. Declaration of cash dividend.
B. Payment of accounts payable.
C. Collection of accounts receivable
D. Purchase merchandise in a 2/10, net 30 open account.

A

D

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8
Q

Which one of the following transactions would increase the current
ratio and decrease net profit?
A. A stock dividend is declared.
B. Vacant land is sold for less than the net book value.
C. An income tax payment due from the previous year is paid.
D. Uncollectible accounts receivable are written off against the
allowance account.

A

B

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9
Q

If a firm increases its cash balance by issuing additional shares of
common stock, working capital
A. increases and the current ratio increases.
B. increases and the current ratio decreases.
C. increases and the current ratio remain unchanged.
D. remains unchanged and the current ratio remains unchanged

A

A

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10
Q

Working capital management involves investment and financing
decisions related to:
A. sales and credit.
B. current assets and capital structure.
C. current assets and current liabilities.
D. plant and equipment and current liabilities.

A

C

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11
Q

. The primary objective of working capital management is to:
A. achieve a balance between risk and return.
B. maximize the company’s total current assets.
C. minimize the company’s total current liabilities.
D. balance the amount of current assets and current liabilities.

A

A

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12
Q

Which of the following assumptions does not underlie risk-return
tradeoffs in managing working capital?
A. Fixed assets remain constant.
B. The yield curve is downward sloping.
C. Current assets are less profitable than fixed assets.
D. Short-term financing is less expensive than long-term financing.

A

B

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13
Q

Which of the following is incorrect
A. Profitability varies directly with liquidity.
B. The greater the risk, the greater is the potential for larger
return.
C. More current assets lead to greater liquidity, but yield lower
returns.
D. Long-term financing has less liquidity risk than short-term
financing, but has a higher explicit cost, hence lower return.

A

A

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14
Q

Which of the following statements is false?
A. Liquidity is the ability to convert an asset into cash without
significant loss.
B. Lengthening the cash cycle increases a firm’s required level of
working capital.
C. Working capital management uses only a small portion of the
financial manager’s time.
D. The goal of working capital management is to maintain the
optimal level of net working capital.

A

C

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15
Q

Which of the following statement is false?
A. Net working capital equals working capital less current
liabilities.
B. A firm with a current ratio greater than one has positive net
working capital.
C. Working capital management concerns decisions about all of a
firm’s assets. Cabrera
D. Net working capital is that portion of a firm’s current assets
financed with long-term funds.

A

C

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16
Q

The optimal level of working capital depends on all of the following
factors except the:
A. Kind of firm.
B. Length of the cash cycle.
C. Stability of dividends.
D. Variablity of cash flows.

A

c

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17
Q

Determining the appropriate level of working capital of the firm
requires
A. Changing the capital structure and dividend policy of the firm.
B. Offsetting the profitability of current assets and current
liabilities against the probability of technical insolvency.
C. Evaluating the risk associated with various levels of fixed assets
and the types of debt used to finance those assets.
D. Maintaining a high proportion of liquid assets to the total assets
in order to maximize the return on total investment.

A

B

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18
Q

A firm following an aggressive working capital strategy would:
A. hold substantial amounts of liquid assets.
B. minimize the amount of short-term financing.
C. finance fluctuating assets with long-term financing.
D. minimize the amount of funds held in liquid assets.

A

D

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19
Q

Conservative working capital management strategies involve:
A. high risk, high return.
B. low risk, high return.
C. low risk, low return. D. moderate risk, moderate
return.

A

C

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20
Q

Compared to other firms in the industry, a company that maintains a conservative working capital policy will tend to have a
A. Higher total asset turnover
B. Greater percentage of short-term financing
C. Higher ratio of current assets to fixed assets
D. Greater risk of needing to sell current assets to repay debt

A

C

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21
Q

As a company becomes more conservative in working capital
policy, it would tend to have a(an)
A. Decrease in its acid-test ratio.
B. Increase in the ratio of current assets to units of output.
C. Increase in the ratio of current liabilities to non-current
liabilities.
D. Increase in funds invested in common stock and a decrease in
funds invested in marketable securities.

A

B

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22
Q

Temporary working capital supports
A. acquisition of capital equipment.
B. payment of long term debt.
C. seasonal peaks.
D. the cash needs of the
company.

A

C

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23
Q

According to the hedging approach, working capital should be financed with:

A. long-term financing.
B. short-term financing. C. short-term and long-term financing.
D. spontaneously generated
funds.

A

C

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24
Q

The hedging approach to financing involves
A. The use of long-term debt to finance current assets.
B. Matching maturities of debt with specific financing needs.
C. The use of short-term debt to finance non-current assets.
D. Issuance of common stocks to raise funds for working capital
requirements.

A

B

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25
Q

The financing of the basic level of current assets by issuing
commercial paper is inconsistent with
A. the maximization of shareowners’ wealth
B. the goal of minimizing the cost of debt financing
C. the objective of matching the maturities of assets and liabilities
D. the expectation that long-term interest rates will decrease the
coming year

A

C

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26
Q

An advantage of the use of long-term debt as opposed to shortterm debt to finance current assets is
A. It is easy to repay
B. It decreases the risk of the firm
C. It generally is less costly than short-term debt
D. It generally places fewer restrictions on the firm

A

B

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27
Q

Financing inventory build-up with long-term debt is an example of
A. Matching policy.
B. Hedging policy.
C. An aggressive working capital policy
D. A conservative working capital policy

A

D

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28
Q

In a conservative or relaxed working capital financing policy,
A. Operations are operated with too much working capital.
B. Operations are conducted on a minimum amount of working
capital.
C. The company is exposed to risk of illiquidity because of low
working capital position.
D. Short term liabilities are used to finance not only temporary
current assets, but also part or all of the permanent current
asset requirements.

A

A

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29
Q

As a company becomes more conservative with respect to working
capital policy, it would tend to have a(n)
A. Increase in the operating cycle.
B. Decrease in the operating cycle.
C. Increase in the ratio of current assets to current liabilities.
D. Increase in the ratio of current liabilities to noncurrent liabilities

A

C

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30
Q

Which of the following statements is true?Which of the following statements is true?
A. Short-term debt is usually more expensive than long-term debt.
B. A conservative working capital policy is characterized by higher
current ratio and acid-test ratio.
C. Determining the appropriate level of working capital for a firm
requires changing the firm’s capital structure and dividend
policy.
D. Liquid assets do not ordinarily earn higher returns relative to
long-term assets, so holding the former will maximize the return
on total assets.

A

B

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31
Q

Short-term financing plans with high liquidity have:
A. high return and high risk
B. low profit and low risk
C. moderate return and
moderate risk
D. none of the given choices

A

C

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32
Q

Which of the following would increase risk?
A. Raise the level of working capital.
B. Increase the amount of equity financing.
C. Increase the amount of short-term borrowing.
D. Decrease the amount of inventory by formulating an effective
inventory policy.

A

C

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33
Q

. When a firm finances long-term assets with short-term sources of
funding, it
A. Improves the leverage ratio
B. Will have higher interest expense
C. Reduces the risk of cash shortage
D. Is ignoring the principle of matched maturities

A

D

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34
Q

The probability of technical insolvency is reduced by:
A. maintaining a high level of liquid assets.
B. financing fluctuating assets with long-term debt.
C. financing permanent assets with short-term debt.
D. both A and B.

A

D

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35
Q

If the firm was to shift P2,000 of current liabilities to long term
fund, the firm’s net working capital would____ , the annual cost of financing would _____, and the risk of technical insolvency
would____, respectively.

A. decrease, decrease, increase
B. decrease, increase, decrease
C. increase, decrease, decrease
D. increase, increase, decrease

A

D

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36
Q

Zap Company follows an aggressive financing policy in its working
capital management while Zing Corporation follows a conservative
financing policy. Which one of the following statements is correct?
A. Zap has less liquidity risk while Zing has more liquidity risk.
B. Zap has a low current ratio while Zing has a high current ratio.
C. Zap has low ratio of short-term debt to total debt while Zing has
a high ratio of short-term debt to total debt.
D. Zap finances short-term assets with long-term debt while Zing
finances short-term assets with short-term debt.

A

B

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37
Q

Which of the following statements is false?
A. Using short-term debt to finance permanent assets increases
the risk of insolvency.
B. Financing fluctuating current assets with long-term financing is
a conservative strategy.
C. The term permanent assets refers only to fixed assets such as
machinery, buildings, and equipment.
D. Maintaining a high level of current assets in the form of
marketable securities reduces the probability of technical
insolvency.

A

C

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38
Q

Which of the following statements is true?
A. A higher level of working capital increases the firm’s
profitability.
B. Long-term financing is used to finance current assets under the
hedging approach.
C. Technical solvency is the inability of a firm to pay its obligations
as they come due.
D. The hedging approach is an example of an aggressive working
capital management strategy.

A

C

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39
Q

All of the following statements in regard to working capital are
correct excepT
A. Profitability varies inversely with liquidity.
B. Current liabilities are an important source of financing for small
firms.
C. The hedging approach to financing involves matching
maturities of debt with specific financing needs.
D. Financing permanent inventory build up with long-term debt is
an example of an aggressive working capital policy

A

D

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40
Q

The length of time it takes for the initial cash outflows for goods
and services to be realized as cash inflows from sales is called
A. Cash conversion cycle
B. Manufacturing cycle
C. Product life cycle
D. Vicious cycle

A

A

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41
Q

The length of time between payment for inventory and the
collection of cash is referred to as:
A. cash conversion cycle
B. operating cycle
C. payables deferral period
D. receivables conversion period

A

a

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42
Q

The average length of time a peso is tied up in current asset is
called the:
A. cash conversion cycle.
B. inventory conversion period.
C. net working capital.
D. receivables conversion period.

A

A

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43
Q

The length of time between the acquisition of inventory and
payment for it is called the
A. Accounts payable deferral period
B. Accounts receivable period
C. Inventory conversion
period
D. Operating cycle

A

A

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44
Q

As a firm’s cash conversion cycle increases, the firm:
A. becomes less profitable
B. incurs more shortage costs
C. reduces its accounts payable period
D. increases its investment in working capital

A

D

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45
Q

Ignoring cost and other effects on the firm, which of the following
measures would tend to reduce the cash conversion cycle?
A. Take discounts when offered
B. Forgo the discounts that are currently being taken
C. Maintain the level of receivables as sales decrease
D. Buy more raw materials to take advantage of price breaks

A

B

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46
Q

. Which of the following actions is likely to reduce the length of a
firm’s cash conversion cycle?
A. Reducing the amount of time the firm takes to pay its supplier.
B. Increasing the average days sales outstanding on its accounts
receivable. Wiley 2012
C. Adopting a new inventory system that reduces the inventory
conversion period.
D. Adopting a new inventory system that increases the inventory
conversion period.

A

C

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47
Q

If everything else remains constant and a firm increases its cash
conversion cycle, its profitability will likely
A. Decrease
B. Increase
C. . Increase if earnings are positive
D. Not be affected

A

A

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48
Q

An increase in sales resulting from an increased cash discount for
prompt payment would be expected to cause a(n):
A. increase in the operating cycle.
B. decrease in the cash conversion cycle.
C. increase in the average collection period.
D. decrease in the purchase discount taken.

A

B

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49
Q

An objective of cash management is to
A. Maximize the cash balance to avoid the risk of illiquidity.
B. Minimize the cash balance to maximize the return from idle
cash.
C. Reserve as much cash as possible for potential investment
opportunities.
D. Invest cash for a return while retaining sufficient liquidity to satisfy future needs.

A

D

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50
Q

All of the following are valid reasons for a business to hold cash
and marketable securities except to
A. maintain a precautionary balance.
B. satisfy compensating balance requirements.
C. earn maximum returns on investment assets.
D. maintain adequate cash needed for transactions.

A

C

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51
Q

The transaction motive for holding cash is the
A. A safety cushion
B. Compensating balance requirements
C. Daily operating requirements
D. None of the given choices

A

C

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52
Q

A typical objective sought in the effective management of a
company’s cash could be expressed as follows:
A. To minimize the corporate investment in the accounts
receivable.
B. To attain that level of profit margin per sales pesos and
receivables turnover that maximizes sales.
C. To provide the means of paying off accounts when due and
thereby helping to maintain the firm’s credit rating.
D. To coordinate the activities of the manufacturing and the
marketing areas so that the corporation can maximize its
profits.

A

C

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53
Q

A precautionary motive for holding excess cash is
A. To enable a company to have cash to meet emergencies that
may arise periodically
B. To enable a company to meet the cash demands from the
normal flow of business activity
C. To enable a company to avail itself of a special inventory
purchase before process rise to higher levels.
D. To avoid having to use the various types of lending
arrangements available to cover projected cash deficits

A

A

54
Q

The risk in our economy which is typically associated with the
holding of cash is referred to as
A. business risk.
B. market risk.
C. market rate risk.
D. purchasing power risk.

A

D

55
Q
A
56
Q

The difference between the cash balance on the firm’s books and
the balance shown on the bank statement is called:
A. a float
B. a safety cushion
C. the compensating balance
D. none of the given choices

A

A

57
Q

Which of the following is true about a firm’s float?
A. A firm strives to minimize the float for both cash receipts and
cash disbursements.
B. A firm strives to maximize the float for both cash receipts and
cash disbursements.
C. A firm strives to maximize the float for cash disbursements and
minimize the float for cash receipts.
D. A firm strives to maximize the float for cash receipts and
minimize the float for cash disbursements.

A

C

58
Q

Which of the following actions would not be consistent with good
management?
A. Minimizes the use of float.
B. Increased synchronization of cash flows.
C. Use of checks and drafts in distributing funds.
D. Maintaining an average cash balance equal to that required as
a compensating balance or that which minimizes total cost.

A

A

59
Q

The following practices will impact the cash flow of the company:
1. Sales personnel are unequivocally responsible for collecting
their credit sales
2. Sales commissions are based on collected invoices
3. Statement of accounts receivable are reconciled with customers
and regularly sent for confirmation
4. Automatic transfer of funds is arranged with banks regarding
deposits of branches.
Of the above, which will result to a better cash flow?
A. Statement 4 only
B. Statements 3 and 4 only
C. Statements 1, 3 and 4 only
D. All Statements

A

A

60
Q

The collection of accounts receivable can be accelerated by the
use of
A. a lockbox system
B. bank drafts
C. remittance advices
D. turnaround documents

A

A

61
Q

Which of the following cash management techniques focuses on
cash disbursements?
A. Depository transfer checks
B. Lockbox system
C. Preauthorized checks
D. Zero-balance accoun

A

C

62
Q

A working capital technique that increases the payable float and
therefore delays the outflow of cash is
A. A draft
B. A lockbox system
C. Concentration banking
D. Electronic Data Interchange

A

A

63
Q

A method of delaying the disbursement of cash by a corporation
with a liquidity problem would be to
A. install a lock box program
B. utilize a concentration banking program
C. take as many cash discounts as possible
D. pay its bills through the use of bank drafts

A

D

64
Q

An automated clearing house (ACH) electronic transfer is a(an)
A. Computer-generated deposit ticket verifying deposit of funds
B. Electronic payment to a company’s account at a concentration
bank
C. Check like instrument drawn against the payer and not against
the bank.
D. Check that must be immediately cleared by the Banko Sentral
ng Pilipinas

A

B

65
Q

Which of the following is true about electronic funds transfer from
a cash flow standpoint?
A. It is never beneficial from a cash flow standpoint
B. It is always beneficial from a cash flow standpoint
C. It is beneficial from a cash receipts standpoint but not from a
cash disbursements standpoint
D. It is beneficial from a cash disbursements standpoint but not
from a cash receipts standpoint

A

C

66
Q

The primary reason financial analysts often focus on net cash
inflows rather than profits when evaluating company performance
is that
A. net cash inflows are not subject to distortion.
B. net cash inflows indicate the company’s liquidity
C. net cash inflows measure the present value of profits.
D. net cash inflows are subject to less distortion than profits

A

D

67
Q

The cash budget is one of the prime instruments used to aid in the
cash management process and
A. Is basically a longer term forecasting mechanism.
B. provides a quick method of projecting profits for manufacturing
firms.
C. Is rather inflexible and consequently, cannot be adjusted very
well for risk.
D. Aids in determining when cash deficits and cash surpluses are
expected to arise within the budget period.

A

D

68
Q

The most direct way to prepare a cash budget for a manufacturing
firm is to include
A. projected sales, credit terms and net income.
B. projected net income, depreciation and goodwill amortization.
C. projected purchases, percentages of purchases paid, and net
income.
D. projected sales and purchases, percentages of collections, and terms of payments.

A

D

69
Q

For a manufacturing firm, the most direct way of preparing a cash
budget requires incorporation of the following, except
A. sales projections and credit terms.
B. collection percentages and other cash receipts.
C. projected net income and depreciation expenses.
D. estimated purchases and payment terms and other cash
disbursements

A

C

70
Q

Franklin Inc., is a medium-size manufacturer of toys that makes
25% of it sales to Mel Company, a major national discount retailing
firm. Mel will be requiring Franklin and other suppliers to use
Electronic Data Interchange (EDI) for inventory replenishment and
trade payment transactions as opposed to the paper-based
systems previously used. Franklin would consider all of the
following to be advantages using EDI in its dealings with Mel
except
A. Reduction in payment float
B. Better status of deliveries and payment
C. Access to Mel’s inventory balances of Franklin’s products.
D. Compatibility with Franklin’s other procedure and systems

A

D

71
Q

When a company is evaluating whether the ratio of cash and
marketable securities to total assets should be high or low, its
decisions will be based upon Cabrera
A. cost of capital considerations.
B. financial leverage considerations.
C. operating leverage
considerations.
D. risk-profitability
trade-off considerations.

A

D

72
Q

When managing cash and short-term investments, a corporate
treasurer is primarily concerned with
A. Liquidity & safety
B. Maximizing taxes.
C. Maximizing the rate of return.
D. Investing in Treasury bonds since they have no default mix.

A

A

73
Q

The most important considerations with respect to short-term
investments are
A. Growth and value
B. Return and risk
C. Return and value
D. Risk and liquidity

A

D

74
Q

Investment instruments used to invest temporarily idle cash
balances should have the following characteristics:
A. low default risk, low marketability, and a short term to maturity.
B. high expected return, readily marketable, and no maturity date.
C. low default risk, readily marketable, and a short term to
maturity.
D. high expected return, low marketability, and a short term to
maturity

A

C

75
Q

The primary factor to consider when evaluating any investment
alternative as a use for short-term excessive cash is the
a. yield-to-maturity
b. tax payable on the return
c. maturity date
d. safety of principal

A

D

76
Q

In the process of investing of surplus cash, the term “riding the
yield curve” refers to
A. purchasing only the longest maturities for given rates of return.
B. adherence to the liquidity-preference theory of securities
investments.
C. swapping different maturities for similar quality debt securities
in order to obtain higher yields.
D. diversifying a securities portfolio so that the firm has an equal
balance of long-term versus short-term securities.

A

C

77
Q

Which one of the following investment alternatives is commonly
used to hold cash earmarked to meet a firm’s short term periodic
variation in cash needs?
A. Treasury Bills
B. Treasury stock.
C. High grade, corporate debentures.
D. High grade, corporate mortgage bonds.

A

A

78
Q

In smaller business where the management of cash is but one of
numerous functions performed by the treasurer, various cost
incentives and diversification arguments suggest that surplus cash
should be invested in
A. banker’s acceptances.
B. commercial paper.
C. corporate bonds.
D. money market mutual funds.

A

D

79
Q

Which of the following investments generally pay the highest
return?
A. Commercial paper
B. Money market accounts
C. Treasury bills
D. Treasury notes

A

A

80
Q

Short-term securities issued by the Federal Housing Administration
are known as
A. Agency securities
B. Banker’s acceptance
C. Commercial paper
D. Repurchase agreements

A

A

81
Q

Which one of the following is not a characteristic of a negotiable
certificate of deposit? Negotiable certificates of deposit
A. Have a secondary market for investors.
B. Are regulated by the Banko Sentral ng Pilipinas
C. Are usually sold in denominations of a minimum of P100,000
D. Have yields considerably greater than bankers’ acceptances
and commercial paper

A

D

82
Q

All of the following are alternative marketable securities suitable
for investment except
A. RP Treasury Bills
B. Eurodollars
C. Commercial paper
D. Convertible bonds

A

C

83
Q

One of the responsibilities of a financial manager is to make
efficient use of idle cash for short periods of time. Which one of the
following would not qualify as a satisfactory investment for idle
cash?
A. Bangko Sentral Treasury Bills
B. Common stocks of Manila Corporation
C. Negotiable certificates of deposit.
D. Prime commercial paper

A

B

84
Q

Which of the following investments is not likely to be a proper
investment for temporary idle cash?
A. Treasury bills
B. Commercial paper
C. Treasury bonds due within one year
D. Initial public offering of an established profitable conglomerate

A

D

85
Q

The term short selling is the
A. Selling of a security that is not owned by the seller.
B. Selling of a security that was purchased by borrowing money
from a banker.
C. Betting that stock will increase by a certain amount within a
given period of time.
D. Selling of all the share you own in a company in an anticipation
that the price will decline dramatically.

A

A

86
Q

. The economic order quantity (EOQ) formula can be adapted in
order for a firm to determine the optimal mix between cash and
marketable securities. The EOQ model assumes all of the following
except that
A. Cash flow requirements are random.
B. The total demand for cash is known with certainty.
C. An opportunity cost is associated with holding cash, beginning
with the first peso.
D. The cost of a transaction is independent of the peso amount of
the transaction and interest rates are constant over the short
run.

A

A

87
Q

Which of the following is/are true in relation to the Baumol model
of cash management?
A. The optimal cash balance falls when intent rates rise.
B. The optimal cash balance rises when interest rates rise.
C. The optimal cash balance rises when brokerage fees rise.
D. Both A and C are correct.

A

D

88
Q

If a corporation held a marketable equity security for one year, the
total return on investment for this security would be
A. the sum of cash dividends for the year divided by the purchase
price
B. the capital gain (loss) on the stock for the year divided by the
purchase price.
C. the earnings per share on the stock for the year divided by the
purchase price.
D. the sum of the cash dividends received plus any capital gain
(loss) for the year divided by the purchase price.

A

D

89
Q

The primary objective in the management of accounts receivable is
A. to realized no bad debts because of the opportunity cost
involved.
B. to provide the treasurer of the corporation with sufficient cash
to pay the company’s bills on time.
C. to coordinate the activities of manufacturing, marketing, and
financing so that the corporation can maximize its profits.
D. to achieve that combination of sales volume, bad debt
experience, and receivables turnover that maximizes the profits
of the corporation.

A

D

90
Q

An objective accounts receivable management is to have both the
optimal amounts of receivables outstanding and bad debts. This
balance requires the trade-off between the benefit of more credit
sales and
A. the cost of sales.
B. more bad debts.
C. a high accounts receivable turnover.
D. the cost of accounts receivables, such as collection, interest
and cost of bad debts.

A

D

91
Q

The average collection period for a firm measures the number of
days
A. Beyond a typical account becomes delinquent
B. For a typical check to “clear” through the banking system.
C. After a typical credit sale is made until the firm receives the
payment.
D. Beyond the end of the credit period before a typical customer
payment is received.

A

C

92
Q

The average collection period for a firm measures the number of
days after a typical credit sale is made until the firm receives the
payment. It should be related to the firm’s credit terms. For
example, a firm that allows 2/10, net 30 should have an average
collection period of
A. ten days.
B. twenty days.
C. thirty days.
D. somewhere between ten days and thirty days.

A

D

93
Q

An increase in the firm’s collection period means
A. the firm’s current ratio is increasing.
B. the firm’s collection expenses have fallen.
C. the firm’s receivables turnover ratio is increasing.
D. the firm has become less efficient in the collection of its
receivables.

A

D

94
Q

Which of the following represents a firm’s average gross
receivables balance?
I. Average age in days of receivables × average daily sales
II. Average daily sales × average collection period
III. Annual credit sales ÷ accounts receivable turnover

A. I ONLY
B. II ONLY
C. I AND II ONLY
D. I, II, AND III

A

D

95
Q

Which of the following represents a firm’s average gross
receivables balance?
I. Days sales in receivables x accounts receivable turnover.
II. Average daily sales x average collection period.
III. Net sales / average gross receivables.

A. I ONLY
B. II ONLY
C. I AND II ONLY
D. II AND III ONLY

A

C

96
Q

At any point in time, the level of accounts receivable on a
corporate balance sheet is least affected by which one of the
following factors?
A. “Tight money.”
B. Credit standards of the seller.
C. Collection practices of the seller.
D. Length of the company’s production process.

A

D

97
Q

The level of accounts receivable will most likely increase as:
A. Cash sales increase and number of days sales
B. Credit limits are expanded, credit sales increase, and credit
terms remain the same
C. Credit limits are expanded, cash sales increase, and aging of
the receivables is improved
D. Cash sales increase, current receivables ratio to past due
increases, credit limits remain the same.

A

B

98
Q

Changing a firm’s credit terms from 2/20, net/60 to 2/10, net/30
will generally
A. increase average collection period and increase sales.
B. reduce the average collection period and reduce sales.
C. increase the average collection period and reduce sales.
D. reduce the average collection period and increase sales.

A

B

99
Q

In a set of comparative financial statements, you observed a
gradual decline in the net to gross ratio, (i.e., between net sales
and gross sales). This indicates that:
A. Sales volume is decreasing.
B. The discount period is being lengthened.
C. There is stiffening in the grant of discounts to the customers.
D. There is adherence to the collection policies of the company

A

B

100
Q

An aging of accounts receivable measures the
A. ability of the firm to meet short-term obligations.
B. average length of time that receivables have been outstanding.
C. percentage of sales which have been collected after a given
time period.
D. amount of receivables that have been outstanding for given
lengths of time.

A

D

101
Q

The goal of credit policy is to
A. Maximize sales.
B. Minimize bad debts losses.
C. Minimize collection expenses.
D. Extend credit to the point where marginal profits equal marginal
costs.

A

D

102
Q

It is held that the level of accounts receivable that the firm has
or holds reflects both the volume of a firm’s sales on account and a
firm’s credit policies. Which one of the following items is not
considered as part of the firm’s credit policies?
A. The length of time for which credit is extended.
B. The size of the quantity discount that will be offered.
C. The minimum risk group to which credit should be extended.
D. The extent (in terms of money) to which a firm will go to collect
an account.

A

B

103
Q

The one item listed below that would warrant the least amount
of consideration in credit and collection policy decisions is the
A. cash discount given.
B. credit period.
C. quality of accounts accepted.
D. quantity discount given.

A

D

104
Q

All but which of the following is considered in determining credit
policy?
A. Accounts payable deferral period
B. Collection efforts
C. Credit limits
D. Credit standards

A

A

105
Q

Which of the following describes a firm’s credit criteria?
A. The diligence to collect slow-paying accounts.
B. The percentage of discount allowed for early payment.
C. The length of time a buyer is given to pay for purchase.
D. The required financial strength of acceptable customers.

A

D

106
Q

The procedures followed by the firm for ensuring payment of its
accounts receivables are called its
A. Collection policy
B. Credit policy
C. Discount policy
D. Payables policy

A

A

107
Q

Which of the following statements is most correct? If a company
lowers its DSO, but no changes occur in sales or operating costs,
then the company
A. might well end up with a lower debt ratio.
B. might well end up with a higher debt ratio.
C. would probably end up with a higher ROE.
D. total asset turnover ratio would probably decline.

A

A

108
Q

Following are ways of accelerating collection of accounts
receivables, except
A. shorten credit terms.
B. minimize negative float.
C. age accounts receivables.
D. offer special discounts to those who pay promptly

A

C

109
Q

A company’s president requested the credit and collection
manager to submit proposals on the company’s credit policy. The
credit and collection manager submitted two proposals. In both
proposals, sales, profits, and collection period will change although
by different periods. Bad debts experience will remain the same
despite the proposed changes. In making a decision on which
proposal should be implemented, the president should consider the
following factors, except
A. the cost of short-term credit.
B. the company’s current bad debts experience.
C. the impact of the proposed changes on the current customers
of the company.
D. the change in credit terms to be imposed by banks which
provide short-term financing to the company.

A

B

110
Q

A change in credit policy accelerated the collection of accounts receivable. As a result, the company experienced the following,
except
A. a decrease in bad debts.
B. a decrease in the receivables balance.
C. an increase in the average collection period.
D. an increase in discounts taken by customers

A

C

111
Q

A change in a seller’s credit policy has caused the following:
 Sales decreased
 Discounts taken decreased
 Investment in accounts receivable increased
 The number of doubtful accounts increased
Based on this information, we can say that
A. Net profit has decreased
B. Gross profit has increased
C. The average collection period has increased
D. The company increased the rate of discount offered

A

C

112
Q

A strict credit and collection policy is in place in Star Company.
As Finance Director you are asked to advise on the property of
relaxing the credit standards in view of stiff competition in the
market. Your advise will be favorable if:
A. The competitor will do the same thing to prevent lost sales.
B. The projected margin from increased sales will exceed the cost
of the incremental receivables.
C. The account receivable level is improving so the company can
afford the carrying cost of receivables.
D. There is a decrease in the distribution level of your product and
a more aggressive stance is necessary to retain market share.

A

B

113
Q

A change in credit policy has caused an increase in discounts
taken, a decrease in the amount of bad debts, and a decrease in
the investment in accounts receivable. Based upon this
information, the company’s
A. working capital has decreased.
B. average collection period has decreased.
C. percentage discount offered has decreased.
D. accounts receivable turnover has decreased.

A

B.

114
Q

A change in credit policy has caused an increase in sales, an
increase in discounts taken, a reduction in the investment in
accounts receivables, and a reduction in the number of doubtful
accounts. Based on this information we know that
A. The net profit has increased.
B. The bad debt percentage has increased.
C. The average collection period has decreased.
D. The size of the discount offered has decreased

A

C

115
Q

The credit and collection policy of Levy Company provides for
the imposition of credit block when the credit line is exceeded
and/or the account is past due. During the month, because of the
campaign to achieve volume targets, the general manager has
waived the credit block policy in a number of instances involving
big volume accounts. The likely effect of this move is
A. Increase in the level or receivables only.
B. Deterioration of aging of receivables only.
C. Decrease in collections during the month the move was done.
D. Deterioration of aging of receivables and increase in the level of
receivables.

A

D

116
Q

If a firm had been extending trade credit on a 2/10, net/30 basis,
what changes would be expected on the balance sheet of its
customer if the firm went to a net cash 30 policy?
A. Decreased in cash.
B. Increased receivables.
C. Decreased receivables.
D. Increased payables and increased bank loan.

A

D

117
Q

Which one of the following statements is most correct if a seller
extends credit to a purchaser for a period of time longer than the
purchaser’s operating cycle? The seller
A. Has no need for a stated discount rate or credit period.
B. Is, in effect financing more than just the purchaser’s inventory
needs.
C. Can be certain that the purchaser will be able to convert the inventory into cash before payment is due.
D. Will have a lower of accounts receivable than those companies
whose credit period is shorter than the purchaser’s operating
cycle

A

B

118
Q

Which one of the following represents methods for converting
accounts receivable to cash?
A. Factoring, pledging, and electronic funds transfers
B. Trade discounts, collection agencies, and credit approval
C. Cash discounts, electronic funds transfers, and credit approval
D. Cash discounts, collection agencies, and electronic funds
transfers

A

D

119
Q

Inventory management is the formulation and administration of
plans and policies to efficiently and satisfactorily meet production
and merchandising requirements and minimize costs relative to inventories. One of its objectives is to

A
120
Q

A. maximize sales.
B. minimize production costs.
C. maximize the units in inventory.
D. maintain inventory at a level that best balances the estimates
of actual savings, the cost of carrying additional inventory and
the efficiency of inventory control.

A

D

121
Q

Economic order quantity model and two-bin system are
commonly used controls for a company’s material function. Those
controls primarily relate to what part of the cycle?
A. Material requirements
B. Physical storage
C. Production distribution
D. Raw materials acceptance

A

A

122
Q

Companies that adopt just-in-time purchasing systems often
experience
A. an increase in carrying costs.
B. fewer deliveries from suppliers.
C. a reduction in the number of suppliers.
D. a greater need for inspection of goods as the goods arrive

A

C

123
Q

The goal of managing working capital, such as inventory, should
be to minimize the
A. opportunity cost of capital
B. costs of carrying inventory
C. amount of spoilage or pilferage
D. aggregate of carrying and shortage costs

A

D

124
Q

Which inventory costing system will result in a high inventory
turnover ratio in a period of rising prices?
A. FIFO C. Periodic
B. LIFO D. Perpetu

A

B

125
Q

A company would be willing to have a low inventory turnover
ratio if the:
A. carrying cost of inventory is high
B. cost of stock out is high
C. inventory order costs is low
D.lead time is short

A

C

126
Q

Which of the following will not affect the budgeting of order
getting costs?
A. Location of distribution warehouses
B. Market research and test
C. Policies and action
of competitors
D. Sales promotion policies

A

A

127
Q

Order-filling costs, as opposed to order-getting costs, include all
but which of the following items?
A. Credit check of new customs
B. Packing and shipping of sales order
C. Mailing catalogs to current customer
D. Collection of payments for sales order

A

C

128
Q

The control of order filling costs
A. Can be accomplished through the use of flexible budget
standards
B. Is related to pricing decisions, sales promotions, and customer
reaction
C. Is not crucial because the costs are typically fixed and not
subject to frequent changes
D. Is not crucial because the costs order-filling routine is
entrenched and external influences are minimal.

A

A

129
Q

Inventory costs, in addition to the costs of the purchased items,
have been traditionally classified as follows, except
A. carrying costs.
B. order costs.
C. order-filling costs.
D. stockout costs.

A

C

130
Q

The ordering costs associated with inventory management
include
A. Shipping costs, obsolescence, setup costs, and capital invested
B. Insurance costs, purchasing costs, shipping costs, and spoilage.
C. Obsolescence, setup costs, quantity discounts lost, and storage
costs.
D. Purchasing costs, shipping costs, setup costs, and quantity
discounts lost

A

D

131
Q
A

MAS 3 (1 decks)

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