general business data bank

[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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