WorksheetsCHAPTER 3 Working Capital and Cash Management
Total questions: 65
Worksheet time: 33mins
Short-term debt is frequently less expensive because it provides the borrower more security
TRUE
FALSE
The hedging principle involves the matching of the cash flow of an asset with the maturity of a financing source
TRUE
FALSE
Holding all other variables constant, as accounts receivable increases, the cash conversion cycle decreases.
TRUE
FALSE
A firm that continually finances part of its following a less-risky approach. permanent asset needs from short-term financing is
TRUE
FALSE
Sources of financing repaid in six months to one year are usually categorized as long-term
TRUE
FALSE
Major sources of secured credit include commercial banks, finance companies, and factors
TRUE
FALSE
Inventory loans are considered an unsecured source of financing
TRUE
FALSE
Minimizing working capital is accomplished by slowing down the cash conversion cycle
TRUE
FALSE
One factor that determines the amount of cash needed to satisfy a firm's transactions requirements is the firm's industry
TRUE
FALSE
The speculative motive for holding cash relates to the maintenance of balances to be used to satisfy possible, and indefinite, needs
TRUE
FALSE
The precautionary motive for holding cash is met to a large extent by the holding of a portfolio of liquid assets, not just cash
TRUE
FALSE
The precautionary motive for holding cash addresses the firm's desire to profit-making situations. take advantage of potential
TRUE
FALSE
Generally, the speculative motive is the least important component of a firm's preference for liquidity
TRUE
FALSE
Many manufacturing firms generate cash on a regular basis through the liquidation of scrap or obsolete inventory
TRUE
FALSE
Large cash investments minimize the chance of insolvency and enhance the firm's profitability
TRUE
FALSE
Management of a firm's liquidity involves management of the firm's investment in current assets
TRUE
FALSE
The minimum level of inventory the firm plans to hold for the foreseeable future is a temporary asset investment
TRUE
FALSE
The hedging principle involves matching the cash flow from an asset with the cash flow requirements of the financing used
TRUE
FALSE
Current asset investments are always financed with temporary assets
TRUE
FALSE
Working capital refers to investment in current assets, while net working capital is the difference between current assets and current liabilities
TRUE
FALSE
The use of current assets subjects the firm to greater liquidity risk due to uncertainty
TRUE
FALSE
The use of short-term debt provides flexibility in financing since the firm is only paying interest when it is actually using the borrowed funds
TRUE
FALSE
A firm can reduce net working capital by substituting long-term financing, such as bonds, with short-term financing, such as one-year notes payable
TRUE
FALSE
Notes payable is a spontaneous source of financing
TRUE
FALSE
Investing in additional marketable securities and inventories creates higher profitability and lower liquidity
TRUE
FALSE
A firm that increases its investment in bonds increases its liquidity
TRUE
FALSE
There is a risk-return trade-off involved in managing a firm's liquidity
TRUE
FALSE
Net working capital provides a very useful summary measure of a firm's short-term financing decisions
TRUE
FALSE
Managing a firm's liquidity is basically the same as managing a firm's net working capital
TRUE
FALSE
Trade credit is a source of spontaneous financing
TRUE
FALSE
Which of the following is most consistent with the hedging principle in working capital management?
Fixed assets should be financed with short-term notes payable
Inventory should be financed with preferred stock
Accounts receivable should be financed with short-term lines of credit
Borrow on a floating rate basis to finance investments in permanent assets
With regard to the hedging principle, which of the following assets should be financed with permanent sources of financing?
Machinery
Expansion of inventory to meet seasonal demands
Machinery and expansion of inventory to meet seasonal demands
Minimum level of accounts receivable required year round, machinery, and minimum level of cash required for year-round operations
Which of the following is a spontaneous source of financing?
Accrued wages
Preferred stock
Trade credit
Both Accrued wages and Trade credit
Accounts receivable and inventory self-liquidate through the cycle.
spontaneous account
net working capital
cash conversion
sales-to-receivables collection
Which of the following is considered a source of spontaneous financing?
Trade credit
Inventories
Accounts payable
Both Trade credit and Accounts payable
With regard to the hedging principle, which of the following assets should be financed with current liabilities?
Minimum level of cash required for year-round operations
Expansion of accounts receivable to meet seasonal demands
Machinery used to produce a firm's inventory
Both Minimum level of cash required for year-round operations and Expansion of accounts receivable to meet seasonal demands
Trade credit is an example of which of the following sources of financing?
Spontaneous
Temporary
Permanent
Both Spontaneous and Temporary
Which of the following is a spontaneous source of financing?
Accounts payable
Accounts payable and wages and salaries payable
Accounts payable and inventories
Accounts payable, wages and salaries payable, and accrued interest
Which of the following types of financing offers the firm the greatest degree of flexibility?
Bands
Preferred stock
Short-term lines of credit
Long-term notes payable
Which of the following actions would improve a firm's liquidity?
Selling stock and reducing accounts payable
Selling stock to purchase equipment
Selling bonds and purchasing machinery
Both Selling stock and reducing accounts payable, and Selling bonds and purchasing machinery
The goal of working capital management is to
achieve a balance between a firm's non-current assets and non-current liabilities
achieve a balance between profitability and risk that contributes positively to a firm's value
achieve a balance between short-term and long-term assets so that they add to the achievement of a firm's overall goals
achieve a balance between short-term and long-term liabilities so that they add to the achievement of a firm's overall goals
A firm can reduce its cash conversion cycle by
increasing the operating cycle
increasing the average age of inventory
increasing the average collection period
increasing the average payment period
Other factors remaining constant, an increase in the average payment period will
decrease the operating cycle
not affect the operating cycle
not affect the cash conversion cycle
increase the average collection period
A decrease in collection efforts by a firm will result in investment in accounts receivable, expenditures in sales volume, in bad debt expenses, and in the in collection
an increase, an increase, an increase; a decrease
an increase, a decrease, an increase, an increase
an increase, a decrease, an increase, a decrease
a decrease, a decrease; a decrease; an increase
The aggressive financing strategy is a method while the conservative financing strategy is a method.
high-profit, high-risk; low-profit, low-risk
low-profit, high-risk; high-profit, low-risk
high-profit, low-risk; low-profit, high-risk
low-profit, low-risk; high-profit, high-risk
Credit management is difficult enough for managers of purely domestic companies, and these tasks become much more complex for companies that operate internationally.
This is partly because international operations typically expose a firm to exchange rate risk.
It is also due to the dangers and delays involved in shipping goods long distances and in having to cross at least two international borders.
Both are correct
Both are incorrect
The following practices or system could extend the cash disbursement, except
lockbox system
playing the float
auto debit transfer
centralization of disbursement
The reason of holding cash that leads to the use of cash balances to take advantage of bargain purchases on materials or unusual cash discounts
Transaction motive
Speculative motive
Precautionary motive
All of the above
The goal is to minimize the length of the cash conversion cycle, which minimizes negotiated liabilities. This goal can be realized through use of the following strategies except
Turn over inventory as quickly as possible without stockouts that result in lost sales.
Pay accounts payable as slowly as possible without damaging the firm's credit rating.
Collect accounts receivable as quickly as possible without losing sales from high-pressure collection techniques.
Manage mail, processing, and clearing time to increase them when collecting from customers and to reduce them when paying suppliers.
The average collection period includes the following
The time from the purchase of inventory until the customer mails the payment
The time from when the payment is mailed until the firm collected funds in its bank account.
The time from the payment of inventory purchased until the customer mails the payment
None of the above
Determining the level of working capital for a firm requires
changing the capital structure and dividend policy of the firm.
maintaining short-term debt at the lowest possible level because it is generally more expensive than long-term debt.
offsetting the benefit of current assets and current liabilities against the probability of technical insolvency.
evaluating the risks associated with various levels of fixed assets and the types of debts used to finance these assets.
The following are desirable cash in cash management, except
cash is collected at the earliest time possible.
all sales are properly receipted and promptly deposited intact.
most sales are on cash basis and receivables are aged current.
post-dated checks from customers are not deposited on time upon delivery.
Which of the following actions is likely to reduce the length of a firm's cash conversion cycle?
Reducing the amount of time the firm takes to pay its suppliers.
Increasing the average days sales outstanding on its accounts receivable.
Adopting a new inventory system that reduces the inventory conversion period.
Adopting a new inventory system that increases the inventory conversion period.
A precautionary motive for holding excess cash is to
enable a company to have cash to meet emergencies that may arise periodically.
enable a company to meet cash demands from the normal flow of business activity.
enable a company to avail itself of a special inventory purchase before prices rise to higher level.
avoid having to use various types of lending arrangements available to cover periodic cash deficits.
If everything else remains constant and a firm increases its cash conversion cycle, its profitability will likely
increase
decrease
not be affected
increase if earnings are positive
When managing cash and short-term investments, a corporate treasurer is primarily concerned with
minimizing taxes.
liquidity and safety.
maximizing the rate of return.
investing in treasury bonds since they have no default risk.
Which of the following is true about a firm's float?
A firm strives to minimize the float for both cash receipts and cash disbursements.
A firm strives to maximize the float for both cash receipts and cash disbursements.
A firm strives to minimize the float for cash receipts and maximize the float for cash disbursements.
A firm strives to maximize the float for cash receipts and minimize the float for cash disbursements.
Which of the following investments generally pay the highest return?
treasury bills
treasury notes
commercial papers
money market accounts
Which of the following is true about electronic funds transfer from a cash flow standpoint?
It is never beneficial from a cash flow standpoint.
It is always beneficial from a cash flow standpoint.
It is beneficial from a cash receipts standpoint but not form a cash disbursements standpoint
It is beneficial from a cash disbursement standpoint but not form a cash receipts standpoint.
The working capital financing policy that subjects the firm to the greatest risk of being unable to meet the firm's maturing obligations is the policy that finances
fluctuating current assets with long-term debt.
permanent current assets with long-term debt.
fluctuating current assets with short-term debt.
permanent current assets with short-term debt.
Which of the following is not a major function in cash management?
maximizing sales
cash flow control
cash surplus investment
obtaining financing services
All of the following are valid reasons for a business to hold cash and marketable securities, except
to meet future needs.
to satisfy compensating balance requirements.
to earn maximum returns on investments assets.
to maintain adequate cash needed for transactions.
All of the following statements in regard to working capital are correct, except
Profitability varies inversely with liquidity.
Current liabilities are an important source of financing for small firms.
The hedging approach for financing involves matching maturities of debt with specific financing needs.
Financing permanent inventory buildup with long-term debt an example of an aggressive working capital policy.
A lock-box system
accelerates the inflow of funds.
provides security for late night deposits.
reduces the need for compensating balances.
Reduces the risk of having checks lost in the mail.
Net working capital is the difference between
fixed assets and fixed liabilities.
total assets and total liabilities.
shareholders' investment and cash
current assets and current liabilities.
