finance data bank

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.

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.

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 statements above are correct.

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.

a. Depreciation expense is not explicitly included, but depreciation effects are implicitly included in estimated tax payments.

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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.

Which of the following statements is most correct?
a. A cash management system which minimizes collections float and maximizes disbursement float is better than one with higher collections float and lower disbursement float.
b. A cash management system which 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 an identical 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. The statements above are all false.

Which of the following statements is most correct?
a. A good cash management system would inimize 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 1980's, the prime interest rate hit a high of 21 percent. In 1995 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 which 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.

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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.

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.

Analyzingdays 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.

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.

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.

Firms generally choose to finance temporary net operating working capital with shortterm debt because
a. Matching the maturities of assets and liabilities reduces risk.
b. Short-term interest rates have traditionally been more stable than long-term interest rates.
c. A firm that borrows heavily long-term is more apt to be unable to repay the debt than a firm that borrows heavily short-term.
d. The yield curve has traditionally been downward sloping.
e. Sales remain constant over the year, and financing requirements also remain constant

Which of the following statements is most correct?
a. Trade credit is provided to a business only when purchases are made.
b. Commercial paper is a form of short-term financing that is primarily used by large,
financially stable companies.
c. Short-term debt, while often cheaper than long-term debt, exposes a firm to the
potential problems associated with rolling over loans.
d. Statements b and c are correct.
e. All of the statements above are correct.

Which of the following statements is incorrect?
a. Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate.
b. Accruals are "free" in the sense that no explicit interest is paid on these funds.
c. A conservative approach to working capital will result in all permanent assets being financed using long-term securities.
d. The risk to the firm of borrowing with short-term credit is usually greater than with long-term debt. Added risk can stem from greater variability of interest costs on short-term debt.
e. Bank loans have a lower interest rate than commercial paper.

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.)

Which of the following statements concerning commercial paper is incorrect?
a. Commercial paper is generally written for terms less than 270 days.
b. Commercial paper generally carries an interest rate below the prime rate.
c. Commercial paper is sold to money market mutual funds, as well as to other financial
institutions and nonfinancial corporations.
d. Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate.
e. Commercial paper is a type of unsecured promissory note issued by large, strong
firms.

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.

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.