a. True
b. False
Answer: b. False
Question: Which of the following statements is CORRECT?
Answer Options:
a. The statement of cash flows reflects cash flows from operations, but it does not reflect the effects of buying or selling fixed assets.
b. The statement of cash flows shows where the firm’s cash is located; indeed, it provides a listing of all banks and brokerage houses where cash is on deposit.
c. The statement of cash flows reflects cash flows from continuing operations, but it does not reflect the effects of changes in working capital.
d. The statement of cash flows reflects cash flows from operations and from borrowings, but it does not reflect cash obtained by selling new common stock.
e. The statement of cash flows shows how much the firm’s cash, the total of currency, bank deposits, and short-term liquid securities (or cash equivalents), increased or decreased during a given year.
Answer: e
Question: The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its current assets.
a. True
b. False
Answer: 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: Which of the following factors could explain why Michigan Energy’s cash balance increased even though it had a negative cash flow last year?
Answer Options:
a. The company sold a new issue of bonds.
b. The company made a large investment in new plant and equipment.
c. The company paid a large dividend.
d. The company had high depreciation expenses.
e. The company repurchased 20% of its common stock.
Answer: a
Question: Which of the following actions would be likely to shorten the cash conversion cycle?
a. Adopt a new manufacturing process that speeds up the conversion of raw materials to finished goods from 20 days to 10 days.
b. Change the credit terms offered to customers from 3/10, net 30 to 1/10, net 50.
c. Begin to take discounts on inventory purchases; we buy on terms of 2/10, net 30.
d. Adopt a new manufacturing process that saves some labor costs but slows down the conversion of raw materials to finished goods from 10 days to 20 days.
e. Change the credit terms offered to customers from 2/10, net 30 to 1/10, net 60.
Answer Options:
a. Adopt a new manufacturing process that speeds up the conversion of raw materials to finished goods from 20 days to 10 days.
b. Change the credit terms offered to customers from 3/10, net 30 to 1/10, net 50.
c. Begin to take discounts on inventory purchases; we buy on terms of 2/10, net 30.
d. Adopt a new manufacturing process that saves some labor costs but slows down the conversion of raw materials to finished goods from 10 days to 20 days.
e. Change the credit terms offered to customers from 2/10, net 30 to 1/10, net 60.
Answer: a
Question: Which of the following statements is NOT CORRECT?
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 management will result in most if not all permanent assets being financed with long-term capital.
d. The risk to a firm that borrows with short-term credit is usually greater than if it borrowed using long-term debt. This added risk stems from the greater variability of interest costs on short-term debt and possible difficulties with rolling over short-term debt.
e. Bank loans generally carry a higher interest rate than commercial paper.
Answer Options:
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 management will result in most if not all permanent assets being financed with long-term capital.
d. The risk to a firm that borrows with short-term credit is usually greater than if it borrowed using long-term debt. This added risk stems from the greater variability of interest costs on short-term debt and possible difficulties with rolling over short-term debt.
e. Bank loans generally carry a higher interest rate than commercial paper.
Answer: a
Question: In finance, we are generally more interested in cash flows than in accounting profits. Free cash flow (FCF) is calculated as after-tax operating income plus depreciation less the sum of capital expenditures and changes in net operating working capital.
Answer Options:
a. True
b. False
Answer: a. True
Question: Money markets are markets for
a. Foreign currencies.
b. Consumer automobile loans.
c. Common stocks.
d. Long-term bonds.
e. Short-term debt securities such as Treasury bills and commercial paper.
Answer: e
Question: Which of the following statements is CORRECT?
a. If a security analyst saw that a firm’s days sales outstanding (DSO) was higher than the industry average, and was increasing and trending still higher, this would be interpreted as a sign of strength.
b. A high average DSO indicates that none of its customers are paying on time. In addition, it makes no sense to evaluate the firm’s DSO with the firm’s credit terms.
c. There is no relationship between the days’ sales outstanding (DSO) and the average collection period (ACP). These ratios measure entirely different things.
d. A reduction in accounts receivable would have no effect on the current ratio, but it would lead to an increase in the quick ratio.
e. If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days’ sales outstanding will decline.
Answer: e. If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days’ sales outstanding will decline.
Question: Which of the following items is NOT normally considered to be a current asset?
Answer Options:
a. Accounts receivable.
b. Inventory.
c. Bonds.
d. Cash.
e. Short-term, highly-liquid, marketable securities.
Answer: c
Question: A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio?
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.
c. Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year.
d. Issue new stock, then use some of the proceeds to purchase additional inventory and hold the remainder as cash.
e. Use cash to increase inventory holdings.
Answer: d. Issue new stock, then use some of the proceeds to purchase additional inventory and hold the remainder as cash.
Question: In finance, we are generally more interested in cash flows than in accounting profits. Free cash flow (FCF) is calculated as after-tax operating income plus depreciation less the sum of capital expenditures and changes in net operating working capital.
Answer Options:
a. True
b. False
Answer: True
Question: A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio?
a. Offer price reductions along with generous credit terms that would (1) enable the firm to sell some of its excess inventory and (2) lead to an increase in accounts receivable.
b. Issue new common stock and use the proceeds to increase inventories.
c. Speed up the collection of receivables and use the cash generated to increase inventories.
d. Use some of its cash to purchase additional inventories.
e. Issue new common stock and use the proceeds to acquire additional fixed assets.
Answer: c. Speed up the collection of receivables and use the cash generated to increase inventories.
Question: If a bank loan officer were considering a company’s loan request, which of the following statements would you consider to be CORRECT?
a. The lower the company’s inventory turnover ratio, other things held constant, the lower the interest rate the bank would charge the firm.
b. Other things held constant, the higher the days sales outstanding ratio, the lower the interest rate the bank would charge.
c. Other things held constant, the lower the total debt to total capital ratio, the lower the interest rate the bank would charge.
d. The lower the company’s TIE ratio, other things held constant, the lower the interest rate the bank would charge.
e. Other things held constant, the lower the current ratio, the lower the interest rate the bank would charge the firm.
Answer: c. Other things held constant, the lower the total debt to total capital ratio, the lower the interest rate the bank would charge.
Question: A lockbox plan is most beneficial to firms that
a. have suppliers who operate in many different parts of the country.
b. have widely dispersed manufacturing facilities.
c. have a large marketable securities portfolio, and cash, to protect.
d. receive payments in the form of currency, such as fast food restaurants, rather than in the form of checks.
Answer Options:
a. have suppliers who operate in many different parts of the country.
b. have widely dispersed manufacturing facilities.
c. have a large marketable securities portfolio, and cash, to protect.
d. receive payments in the form of currency, such as fast food restaurants, rather than in the form of checks.
Answer: a
Question: Last year Besset Company’s operations provided a negative cash flow, yet the cash shown on its balance sheet was a positive amount. How could this occur?
a. The company sold some of its fixed assets.
b. The company had high amortization expenses.
c. The company had a decrease in its inventory level.
d. The company had a large increase in its accounts payable.
e. The company had a large increase in its accounts receivable.
Answer Options:
a. The company sold some of its fixed assets.
b. The company had high amortization expenses.
c. The company had a decrease in its inventory level.
d. The company had a large increase in its accounts payable.
e. The company had a large increase in its accounts receivable.
Answer: d. The company had a large increase in its accounts payable.
Question: In general, it’s better to have a low inventory turnover ratio than a high one, as a low ratio indicates that the firm has an adequate stock of inventory relative to sales and thus will not lose sales as a result of running out of stock.
a. True
b. False
Answer: False
Question: The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its current assets.
a. True
b. False
Answer: a. True
Question: Which of the following would indicate an improvement in a company’s financial position, holding other things constant?
a. The inventory and total assets turnover ratios both decline.
b. The total debt to total capital ratio increases.
c. The profit margin declines.
d. The times-interest-earned ratio declines.
e. The current and quick ratios both increase.
Answer: e. The current and quick ratios both increase.
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