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[i]. Other things held constant, which of the following
will cause an increase in working capital?

a. Cash is used to buy marketable securities.
b. A cash dividend is declared and paid.
c. Merchandise is sold at a profit, but the sale
is on credit.
d. Long-term bonds are retired with the proceeds
of a preferred stock issue.
e. Missing inventory is written off against
retained earnings.

[ii]. Which of the following statements is most
correct?

a. The current ratio is calculated as net working
capital divided by current liabilities.
b. Gross working capital represents current assets
used in operations.
c. Net working capital is defined as current
assets minus current liabilities.
d. Statements b and c are correct.
e. Statements a, b, and c are correct.

[iii]. Helena Furnishings wants to sharply reduce its
cash conversion cycle. Which of the following steps would reduce its cash conversion
cycle?

a. The company increases its average inventory
without increasing its sales.
b. The company reduces its DSO.
c. The company starts paying its bills sooner,
which reduces its average accounts payable without reducing its sales.
d. Statements a and b are correct.
e. All of the statements above are correct.

[iv]. Which of the following is typically part of
the cash budget?

a. Payments lag.
b. Payment for plant construction.
c. Cumulative cash.
d. Statements a and c are correct.
e. All of the above statements are correct.

[v]. Which of the following statements concerning
the cash budget is correct?

a. Depreciation expense is not explicitly
included, but depreciation effects are implicitly included in estimated tax
payments.
b. Cash budgets do not include financial expenses
such as interest and dividend payments.
c. Cash budgets do not include cash inflows from
long?term sources such as bond issues.
d. Statements a and b are correct.
e. Statements a and c are correct.

[vi]. Which of the following items should a company
explicitly include in its monthly cash budget?

a. Its monthly
depreciation expense.
b. Its cash proceeds from
selling one of its divisions.
c. Interest paid on its
bank loans.
d. Statements b and c are
correct.
e. All of the statements
above are correct.

[vii]. Which of the following statements is most
correct?

a. A cash management system that minimizes
collections float and maximizes disbursement float is better than one with
higher collections float and lower disbursement float.
b. A cash management system that maximizes
collections float and minimizes disbursement float is better than one with
lower collections float and higher disbursement float.
c. The use of a lockbox is designed to minimize
cash theft losses. If the cost of the
lockbox is less than theft losses saved, then the lockbox should be installed.
d. Other things held constant, a firm will need a
smaller line of credit if it can arrange to pay its bills by the 5th of each
month than if its bills come due uniformly during the month.
e. None of the statements above is correct.

[viii]. Which of the following statements about current
asset management is most correct?

a. A positive net float means that a company has
more cash available for its use than the amount shown in the company’s books.
b. Use of a lockbox reduces the possibility that
petty cash will be lost.
c. Depreciation has an impact on the cash budget.
d. Statements a and c are correct.
e. All of the statements above are correct.

[ix]. Which of the following statements is most
correct?

a. A good cash management system would minimize
disbursement float and maximize collections float.
b. If a firm begins to use a well-designed lockbox
system, this will reduce its customers’ net float.
c. In the early 1980s, the prime interest rate hit
a high of 21 percent. In 2000 the prime rate was considerably lower. That sharp
interest rate decline has increased firms’ concerns about the efficiency of
their cash management programs.
d. If a firm can get its customers to permit it to
pay by wire transfers rather than having to write checks, this will increase
its net float and thus reduce its required cash balances.
e. A firm that has such an efficient cash
management system that it has positive net float can have a negative checkbook
balance at most times and still not have its checks bounce.

[x]. A lockbox plan is

a. A method for safe-keeping of marketable
securities.
b. Used to identify inventory safety stocks.
c. A system for slowing down the collection of
checks written by a firm.
d. A system for speeding up a firm’s collections
of checks received.
e. Not described by any of the statements above.

[xi]. Which of the following is not a situation
that might lead a firm to hold marketable securities?

a. The firm has purchased a fixed asset that will
require a large write-off of depreciable expense.
b. The firm must meet a known financial
commitment, such as financing an ongoing construction project.
c. The firm must finance seasonal operations.
d. The firm has just sold long-term securities and
has not yet invested the proceeds in earning assets.
e. None of the statements above is correct. (All
of the situations might lead the firm to hold marketable securities.)

[xii]. Analyzing days sales outstanding (DSO) and the
aging schedule are two common methods for monitoring receivables. However, they
can provide erroneous signals to credit managers when

a. Customers’ payments patterns are changing.
b. Sales fluctuate seasonally.
c. Some customers take the discount and others do
not.
d. Sales are relatively constant, either
seasonally or cyclically.
e. None of the statements above is correct.

[xiii]. Which of the following is not commonly regarded
as being a credit policy variable?

a. Credit period.
b. Collection policy.
c. Credit standards.
d. Cash discounts.
e. All of the statements above are credit policy
variables.

[xiv]. If easing a firm’s credit policy lengthens the
collection period and results in a worsening of the aging schedule, then why do
firms take such actions?

a. It normally stimulates sales.
b. To meet competitive pressures.
c. To increase the firm’s deferral period for
payables.
d. Statements a and b are correct.
e. All of the statements above are correct.

[xv]. In the text, the “red-line method” refers to

a. The policy of drawing a red line around certain
neighborhoods on a map and then refusing to sell on credit to people who live
within those areas.
b. Restrictions imposed by companies that insure
credit risks.
c. The use in Dun & Bradstreet’s reports of a
red line to show the maximum amount of credit that should be extended to a
given customer; companies using this limit when they screen customers’ orders
are said to be using the “red-line method.”
d. A method of controlling inventories by drawing
a red line on the inside of a bin.
e. A method of controlling receivables by drawing
a red line on invoices of companies that are expected to pay late.

[xvi]. Which of the following might be attributed to
efficient inventory management?

a. High inventory turnover ratio.
b. Low incidence of production schedule
disruptions.
c. High total assets turnover.
d. Statements a and c are correct.
e. All of the statements above are correct.

[xvii]. Which of the following statements is most
correct?

a. Working capital management involves both setting
working capital policy and carrying out that policy in day-to-day operations.
b. The aging schedule is the cycle in which a firm
purchases inventory, sells goods on credit, and then collects accounts
receivable.
c. The best and most comprehensive picture of a
firm’s liquidity position is shown by its cash budget, which forecasts cash
inflows and outflows.
d. Statements a, b, and c are correct.
e. Statements a and c are correct.

Medium:

[xviii]. Ignoring cost and other effects on the
firm, which of the following measures would tend to reduce the cash conversion
cycle?

a. Maintain the level of receivables as sales
decrease.
b. Buy more raw materials to take advantage of
price breaks.
c. Take discounts when offered.
d. Forgo discounts that are currently being taken.
e. Offer a longer deferral period to customers.

[xix]. Which of the following actions are likely to
reduce the length of a company’s cash conversion cycle?

a. Adopting a new inventory system that reduces
the inventory conversion period.
b. Reducing the average days sales outstanding
(DSO) on its accounts receivable.
c. Reducing the amount of time the company takes
to pay its suppliers.
d. Statements a and b are correct.
e. All of the statements above are correct.

[xx]. Which of the following statements is most
correct?

a. The cash balances of most firms consist of
transactions, compensating, precautionary, and speculative balances. The total
desired cash balance can be determined by calculating the amount needed for
each purpose and then summing them together.
b. The easier a firm’s access to borrowed funds
the higher its precautionary balances will be, in order to protect against
sudden increases in interest rates.
c. For some firms, holding highly liquid
marketable securities is a substitute for holding cash because the marketable
securities accomplish the same objective as cash.
d. Firms today are more likely to rely on cash
than on reserve borrowing power or marketable securities for speculative
purposes because of the need to move quickly.
e. None of the statements above is correct.

[xxi]. Which of the following statements is most
correct?

a. Shorter-term cash budgets, in general, are used
primarily for planning purposes, while longer-term budgets are used for actual
cash control.
b. The cash budget and the capital budget are
planned separately and although they are both important to the firm, they are
independent of each other.
c. Since depreciation is a non-cash charge, it
does not appear on nor have an effect on the cash budget.
d. The target cash balance is set optimally such
that it need not be adjusted for seasonal patterns and unanticipated
fluctuations in receipts, although it is changed to reflect long-term changes
in the firm’s operations.
e. The typical actual cash budget will reflect
interest on loans and income from investment of surplus cash. These numbers are expected values and actual
results might turn out different.

[xxii]. A lockbox plan is most beneficial to firms that

a. Send payables over a wide geographic area.
b. Have widely disbursed manufacturing facilities.
c. Have a large marketable securities account to
protect.
d. Hold inventories at many different sites.
e. Make collections over a wide geographic area.

[xxiii]. Which of the following statement completions
is most correct? If the yield curve is upward sloping, then a firm’s marketable
securities portfolio, assumed to be held for liquidity purposes, should be

a. Weighted toward long-term securities because
they pay higher rates.
b. Weighted toward short-term securities because
they pay higher rates.
c. Weighted toward U. S. Treasury securities to
avoid interest rate risk.
d. Weighted toward short-term securities to avoid
interest rate risk.
e. Balanced between long- and short-term
securities to minimize the effects of either an upward or a downward trend in
interest rates.

[xxiv]. Which of the following statements is most
correct?

a. Poor synchronization of cash flows that results
in high cash management costs can be partially offset by increasing
disbursement float and decreasing collections float.
b. The size of a firm’s net float is primarily a
function of its natural cash flow synchronization and how it clears its checks.
c. Lockbox systems are used mainly for security
purposes as well as to decrease the firm’s net float.
d. If a firm can speed up its collections and slow
down its disbursements, it will be able to reduce its net float.
e. A firm practicing good cash management and
making use of positive net float will bring its check book balance as close to
zero as possible, but must never generate a negative book balance.

[xxv]. Which of the following statements is most
correct?

a. Compensating balance requirements apply only to
businesses, not to individuals.
b. Compensating balances are essentially costless
to most firms, because those firms would normally have such funds on hand to
meet transactions needs anyway.
c. If the required compensating balance is larger
than the transactions balance the firm would ordinarily hold, then the
effective cost of any loan requiring such a balance is increased.
d. Banks are prohibited from earning interest on
the funds they force businesses to keep as compensating balances.
e. None of the statements above is correct.

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