Answer Options:
a. Reduce the company’s days sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment.
b. Use cash to repurchase some of the company’s own stock.
Answer:
a. Reduce the company’s days sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment.
Question: Accruals are “spontaneous” funds arising automatically from a firm’s operations, but unfortunately, due to law and economic forces, firms have little control over the level of these accounts.
Answer Options:
a. True
b. False
Answer:
a. True
Question: Helena Furnishings wants to reduce its cash conversion cycle. Which of the following actions should it take? a. Increases average inventory without increasing sales. b. Take steps to reduce the DSO. c. Start paying its bills sooner, which would reduce the average accounts payable but not affect sales. d. Sell common stock to retire long-term bonds. e. Sell an issue of long-term bonds and use the proceeds to buy back some of its common stock.
Answer Options:
a. Increases average inventory without increasing sales.
b. Take steps to reduce the DSO.
c. Start paying its bills sooner, which would reduce the average accounts payable but not affect sales.
d. Sell common stock to retire long-term bonds.
e. Sell an issue of long-term bonds and use the proceeds to buy back some of its common stock.
Answer:
b
Question: As a rule, managers should try to always use the free component of trade credit but should use the costly component only if the cost of this credit is lower than the cost of credit from other sources.
Answer Options:
a. True
b. False
Answer:
a. True
Question: A loss incurred by a corporation A) Must be carried forward unless the company has had 2 loss years in a row. B) Can be carried back 2 years, then carried forward up to 20 years following the loss. C) Can be carried back 5 years and forward 3 years. D) Cannot be used to reduce taxes in other years except with special permission from the IRS. E) Can be carried back 3 years or forward 10 years, whichever is more advantageous to the firm.
Answer:
B
Question: Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive current asset financing strategy because of the inherent risks of using short-term financing.
Answer Options:
a. True
b. False
Answer:
a. True
Question: Which of the following statements is CORRECT? a. Trade credit is provided only to relatively large, strong firms. b. Commercial paper is a form of short-term financing that is primarily used by large, strong, financially stable companies. c. Short-term debt is favored by firms because, while it is generally more expensive than long-term debt, it exposes the borrowing firm to less risk than long-term debt. 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 typically offered at a long-term maturity of at least five years.
Answer Options:
a. Trade credit is provided only to relatively large, strong firms.
b. Commercial paper is a form of short-term financing that is primarily used by large, strong, financially stable companies.
c. Short-term debt is favored by firms because, while it is generally more expensive than long-term debt, it exposes the borrowing firm to less risk than long-term debt.
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 typically offered at a long-term maturity of at least five years.
Answer:
b
Question: A revolving credit agreement is a formal line of credit. The firm must generally pay a fee on the unused balance of the committed funds to compensate the bank for the commitment to extend those funds.
Answer Options:
a. True
b. False
Answer:
a. True
Question: Other things held constant, which of the following would tend to reduce the cash conversion cycle? a. Carry a constant amount of receivables as sales decline. b. Place larger orders for raw materials to take advantage of price breaks. c. Take all discounts that are offered. d. Continue to take all discounts that are offered and pay on the net date. e. Offer longer payment terms to customers.
Answer Options:
a. Carry a constant amount of receivables as sales decline.
b. Place larger orders for raw materials to take advantage of price breaks.
c. Take all discounts that are offered.
d. Continue to take all discounts that are offered and pay on the net date.
e. Offer longer payment terms to customers.
Answer:
d
Question: Changes in a firm’s collection policy can affect sales, working capital, and profits.
Answer Options:
a. True
b. False
Answer:
a. True
Question: Which of the following statements is CORRECT? a. In the statement of cash flows, a decrease in accounts receivable is subtracted from net income in the operating activities section. b. Dividends do not show up in the statement of cash flows because dividends are considered to be a financing activity, not an operating activity. c. In the statement of cash flows, a decrease in accounts payable is subtracted from net income in the operating activities section. d. In the statement of cash flows, depreciation is subtracted from net income in the operating activities section. e. In the statement of cash flows, a decrease in inventories is subtracted from net income in the operating activities section.
Answer Options:
a. In the statement of cash flows, a decrease in accounts receivable is subtracted from net income in the operating activities section.
b. Dividends do not show up in the statement of cash flows because dividends are considered to be a financing activity, not an operating activity.
c. In the statement of cash flows, a decrease in accounts payable is subtracted from net income in the operating activities section.
d. In the statement of cash flows, depreciation is subtracted from net income in the operating activities section.
e. In the statement of cash flows, a decrease in inventories is subtracted from net income in the operating activities section.
Answer:
c
Question: Considered alone, which of the following would increase a company’s current ratio?
Answer Options:
a. An increase in net fixed assets.
b. An increase in accrued liabilities.
c. An increase in notes payable.
d. An increase in accounts receivable.
e. An increase in accounts payable.
Answer:
d. An increase in accounts receivable.
Question: Accruals arise automatically from a firm’s operations and are “free” capital in the sense that no explicit interest must normally be paid on accrued liabilities.
Answer Options:
a. True
b. False
Answer:
a. True
Question: Amram Company’s current ratio is 2.0. Considered alone, which of the following actions would lower the current ratio? a. Borrow using short-term notes payable and use the proceeds to reduce accruals. b. Borrow using short-term notes payable and use the proceeds to reduce long-term debt. c. Use cash to reduce accruals. d. Use cash to reduce short-term notes payable. e. Use cash to reduce accounts payable.
Answer:
e. Use cash to reduce accounts payable.
Question: With a “self-liquidating,” approach to financing involves obtaining the funds for permanent current assets with a combination of long-term capital and short-term capital that varies depending on the level of interest rates. When short-term rates are relatively high, short-term assets will be financed with long-term debt to reduce costs.
Answer Options:
a. True
b. False
Answer:
b. False
Question: If a firm buys on terms of 2/10, net 30, it should pay as early as possible during the discount period to lower its cost of capital.
Answer Options:
a. True
b. False
Answer:
a. True
Question: A firm’s new president wants to strengthen the company’s financial position. Which of the following actions would make it financially stronger? a. Increase accounts receivable while holding sales constant. b. Increase EBIT while holding sales and assets constant. c. Increase accounts payable while holding sales constant. d. Increase notes payable while holding sales constant. e. Increase inventories while holding sales constant.
Answer:
b. Increase EBIT while holding sales and assets constant.
Question: The calculated cost of trade credit can be reduced by paying late.
Answer Options:
a. True
b. False
Answer:
b. False
Question: Inventory management is largely self-contained in the sense that very little coordination among the sales, purchasing, and production personnel is required for successful inventory management.
Answer Options:
a. True
b. False
Answer:
b. False
Question: The four primary elements in a firm’s credit policy are (1) credit standards, (2) discounts offered, (3) credit period, and (4) collection policy.
Answer Options:
a. True
b. False
Answer:
a. True
Question: If a firm has set up a revolving credit agreement with a bank, the risk to the firm of being unable to obtain funds when needed is lower than if it had an informal line of credit.
Answer Options:
a. True
b. False
Answer:
a. True
Question: The risk to the firm of borrowing using short-term credit is usually greater than if it used long-term debt. Added risk stems from (1) the greater variability of interest costs on short-term than long-term debt and (2) the fact that even if its long-term prospects are good, the firm’s lenders may not be willing to renew short-term loans if the firm is temporarily unable to repay those loans.
Answer Options:
a. True
b. False
Answer:
a. True
Question: A decline in a firm’s inventory turnover ratio suggests that it is improving both its inventory management and its liquidity position, i.e., that it is becoming more liquid. a. True b. False
Answer:
b. False
Question: If a firm sold some inventory on credit, its current ratio would probably not change much, but its quick ratio would increase. a. True b. False
Answer:
a. True
Question: Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable securities? a. The firm must make a known future payment, such as paying for a new plant that is under construction. b. The firm is going from its peak sales season to its slack season, so its receivables and inventories will experience a seasonal decline. c. The firm is going from its slack season to its peak sales season, so its receivables and inventories will experience seasonal increases.
Answer Options:
a. The firm must make a known future payment, such as paying for a new plant that is under construction.
b. The firm is going from its peak sales season to its slack season, so its receivables and inventories will experience a seasonal decline.
c. The firm is going from its slack season to its peak sales season, so its receivables and inventories will experience seasonal increases.
Answer:
c