a. True
b. False
Answer: True
Question: Which of the following statements is CORRECT?
a. The ratio of long-term debt to total capital is more likely to experience seasonal fluctuations than is either the DSO or the inventory turnover ratio.
b. If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE.
c. An increase in the DSO, other things held constant, could be expected to increase the total assets turnover ratio.
d. An increase in the DSO, other things held constant, could be expected to increase the ROE.
e. An increase in a firm’s total debt to total capital ratio, with no changes in its sales or operating costs, could be expected to lower its profit margin.
Answer: e. An increase in a firm’s total debt to total capital ratio, with no changes in its sales or operating costs, could be expected to lower its profit margin.
Question: As of the end of 2014, which of the following statements must be CORRECT?
Answer Options:
a. The firm increased its short-term bank debt in 2014.
b. The firm issued long-term debt in 2014.
c. The firm issued new common stock in 2014.
d. The firm repurchased some common stock in 2014.
e. The firm had negative net income in 2014.
Answer: c
Question: Which of the following statements is CORRECT?
a. A firm that makes 90% of its sales on credit and 10% for cash is growing at a constant rate of 10% annually. Such a firm will be able to keep its accounts receivable at the current level, since the 10% cash sales can be used to finance the 10% growth rate.
b. In managing a firm’s accounts receivable, it is possible to increase credit sales per day yet still keep accounts receivable fairly steady, provided the firm can shorten the length of its collection period (its DSO) sufficiently.
c. Because of the costs of granting credit, it is not possible for credit sales to be more profitable than cash sales.
d. Since receivables and payables both result from sales transactions, a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio.
e. Other things held constant, if a firm can shorten its DSO, this will lead to a higher current ratio.
Answer Options:
a. A firm that makes 90% of its sales on credit and 10% for cash is growing at a constant rate of 10% annually. Such a firm will be able to keep its accounts receivable at the current level, since the 10% cash sales can be used to finance the 10% growth rate.
b. In managing a firm’s accounts receivable, it is possible to increase credit sales per day yet still keep accounts receivable fairly steady, provided the firm can shorten the length of its collection period (its DSO) sufficiently.
c. Because of the costs of granting credit, it is not possible for credit sales to be more profitable than cash sales.
d. Since receivables and payables both result from sales transactions, a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio.
e. Other things held constant, if a firm can shorten its DSO, this will lead to a higher current ratio.
Answer: b
Question: Which of the following statements is CORRECT?
a. If a firm has high current and quick ratios, this always indicates that the firm is managing its liquidity position well.
b. If a firm sold some inventory for cash and left the funds in its bank account, its current ratio would probably not change much, but its quick ratio would decline.
c. If a firm sold some inventory on credit, its current ratio would probably not change much, but its quick ratio would decline.
d. If a firm sold some inventory on credit as opposed to cash, there is no reason to think that either its current or quick ratio would change.
e. 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.
Answer: e. 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.
Question: Which of the following statements is most consistent with efficient inventory management? The firm has a
a. below-average inventory turnover ratio.
b. low incidence of production schedule disruptions.
c. below-average total assets turnover ratio.
d. relatively high current ratio.
e. relatively low DSO.
Answer Options:
a. below-average inventory turnover ratio.
b. low incidence of production schedule disruptions.
c. below-average total assets turnover ratio.
d. relatively high current ratio.
e. relatively low DSO.
Answer: b
Question: Which of the following statements is CORRECT?
a. 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.
b. In general, it’s better to have a low inventory turnover ratio than a high one, as a low one 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.
c. If a firm’s fixed assets turnover ratio is significantly lower than its industry average, this could indicate that it uses its fixed assets very efficiently or is operating at over capacity and should probably add fixed assets.
d. The more conservative a firm’s management is, the higher its total debt to total capital ratio is likely to be.
e. The days sales outstanding ratio tells us how long it takes, on average, to collect after a sale is made. The DSO can be compared with the firm’s credit terms to get an idea of whether customers are paying on time.
Answer: e. The days sales outstanding ratio tells us how long it takes, on average, to collect after a sale is made. The DSO can be compared with the firm’s credit terms to get an idea of whether customers are paying on time.
Question: The days sales outstanding tells us how long it takes, on average, to collect after a sale is made. The DSO can be compared with the firm’s credit terms to get an idea of whether customers are paying on time.
a. True
b. False
Answer: a. True
Question: An increase in accounts receivable represents an increase in net cash provided by operating activities because receivables will produce cash when they are collected.
Answer Options:
a. True
b. False
Answer: False
Question: Which of the following statements is NOT CORRECT?
a. A company may hold a relatively large amount of cash and marketable securities if the uncertainty about the volume of sales, profits, and cash flows during the coming year.
b. Credit policy has an impact on working capital because it influences both sales and the time before receivables are collected.
c. The cash budget is useful to help estimate future financing needs, especially the need for short-term working capital loans.
d. If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10, net 30 to net 60.
e. Managing working capital is important because it influences financing decisions and the firm’s profitability.
Answer Options:
a. A company may hold a relatively large amount of cash and marketable securities if the uncertainty about the volume of sales, profits, and cash flows during the coming year.
b. Credit policy has an impact on working capital because it influences both sales and the time before receivables are collected.
c. The cash budget is useful to help estimate future financing needs, especially the need for short-term working capital loans.
d. If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10, net 30 to net 60.
e. Managing working capital is important because it influences financing decisions and the firm’s profitability.
Answer: d
Question: An increase in accounts receivable represents an increase in net cash provided by operating activities because receivables will produce cash when they are collected.
Answer Options:
a. True
b. False
Answer: b. False
Question: Which of the following statements is CORRECT?
a. A reduction in inventories would have no effect on the current ratio.
b. If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase.
c. A firm that increases its sales while holding its inventories constant, then, other things held constant, its fixed assets turnover ratio will decline.
d. A reduction in the inventory turnover ratio will generally lead to an increase in the ROE.
e. If a firm increases its sales while holding its inventories constant, then, other things held constant, its fixed assets turnover ratio will increase.
Answer: b. If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase.
Question: The inventory turnover and current ratio are related. The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.
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: A lockbox plan is
a. used to protect cash, i.e., to keep it from being stolen.
b. used to identify inventory safety stocks.
c. used to slow down the collection of checks our firm writes.
d. used to speed up the collection of checks received.
e. used primarily by firms where currency is used frequently in transactions, such as fast food restaurants, and less frequently by firms that receive payments as checks.
Answer Options:
a. used to protect cash, i.e., to keep it from being stolen.
b. used to identify inventory safety stocks.
c. used to slow down the collection of checks our firm writes.
d. used to speed up the collection of checks received.
e. used primarily by firms where currency is used frequently in transactions, such as fast food restaurants, and less frequently by firms that receive payments as checks.
Answer: d
Question: Which of the following statement completions is CORRECT? If the yield curve is upward sloping, then the marketable securities held in a firm’s portfolio, assumed to be held for emergencies, should
a. consist mainly of long-term securities because they pay higher rates.
b. consist mainly of short-term securities because they pay higher rates.
c. consist mainly of U.S. Treasury securities to minimize interest rate risk.
d. consist mainly of short-term securities to minimize interest rate risk.
e. be balanced between long- and short-term securities to minimize the adverse effects of either an upward or a downward trend in interest rates.
Answer Options:
a. consist mainly of long-term securities because they pay higher rates.
b. consist mainly of short-term securities because they pay higher rates.
c. consist mainly of U.S. Treasury securities to minimize interest rate risk.
d. consist mainly of short-term securities to minimize interest rate risk.
e. be balanced between long- and short-term securities to minimize the adverse effects of either an upward or a downward trend in interest rates.
Answer: d
Question: Which of the following statements is CORRECT?
Answer Options:
a. Most rapidly growing companies have positive free cash flows because cash flows from existing operations generally exceed fixed asset purchases and changes to net operating working capital.
b. Changes in working capital have no effect on free cash flow.
c. Free cash flow (FCF) is defined as follows:
FCF = EBIT(1 – T) + Depreciation
– Capital expenditures required to sustain operations
– Required changes in net operating working capital.
d. Free cash flow (FCF) is defined as follows:
FCF = EBIT(1 – T) + Capital expenditures.
e. Managers should be less concerned with free cash flow than with accounting net income. Accounting net income is the “bottom line” and represents how much the firm can distribute to all its investors, both creditors and stockholders.
Answer: c
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: Safeco’s current assets total to $20 million versus $10 million of current liabilities, while Risico’s current assets are $10 million versus $20 million of current liabilities. Both firms would like to “window dress” their end-of-year financial statements. Which of the following actions is CORRECT?
a. Safeco could sell $10 million of marketable securities to reduce current liabilities.
b. Risico could use $10 million of cash to reduce long-term debt.
c. Risico could use $10 million of cash to reduce current liabilities.
d. Safeco could sell $10 million of inventories for cash to pay off some current liabilities.
e. None of the actions would improve the current ratios of the firms.
Answer: c. Risico could use $10 million of cash to reduce current liabilities.
Question: Which of the following statements is CORRECT?
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: 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: The inventory turnover and current ratio are related. The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.
a. True
b. False
Answer: a. True
Question: Which of the following statements is 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 developed separately, and although they are both important to the firm, one does not affect the other.
c. Since depreciation is a non-cash charge, it neither appears on nor has any effect on the cash budget.
d. The target cash balance should be set such that it need not be adjusted for seasonal patterns and unanticipated fluctuations in receipts, although it should be changed to reflect long-term changes in the firm’s operations.
e. The typical cash budget reflects interest paid on loans as well as income from the investment of surplus cash. These numbers, as well as other items on the cash budget, are expected values; hence, actual results might vary from the budgeted amounts.
Answer Options:
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 developed separately, and although they are both important to the firm, one does not affect the other.
c. Since depreciation is a non-cash charge, it neither appears on nor has any effect on the cash budget.
d. The target cash balance should be set such that it need not be adjusted for seasonal patterns and unanticipated fluctuations in receipts, although it should be changed to reflect long-term changes in the firm’s operations.
e. The typical cash budget reflects interest paid on loans as well as income from the investment of surplus cash. These numbers, as well as other items on the cash budget, are expected values; hence, actual results might vary from the budgeted amounts.
Answer: e
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: Considered alone, which of the following would increase a company’s current ratio?
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.