B3-5 Flashcards Preview

BEC BECKER MCQ > B3-5 > Flashcards

Flashcards in B3-5 Deck (27):
1

A working capital technique, which delays the outflow of cash, is:

a.

A draft.

b.

Compensating balances.

c.

A lock-box system.

d.

Factoring.

Choice "a" is correct. The use of a draft delays a cash disbursement and increases payable float.

Choice "d" is incorrect. Factoring is the sale of accounts receivable to a factor. This has no effect on cash disbursements.

Choice "c" is incorrect. A lock-box system is used to accelerate the inflow of funds.

Choice "b" is incorrect. Compensating balances are a bank requirement related to a loan. The bank will require a certain balance be maintained in cash. This amount cannot be used for working capital purposes.

2

The optimal level of inventory would be affected by all of the following, except the:

a.

Cost per unit of inventory.

b.

Current level of inventory.

c.

Lead time to receive merchandise ordered.

d.

Cost of placing an order for merchandise.

 

Choice "b" is correct. The current level of inventory has no impact on the optimal level of inventory.

Choices "a", "d", and "c" are incorrect. The optimal level of inventory is affected by:

The time required to receive inventory.

The cost per unit of inventory, which will have a direct impact on inventory carrying costs.

The cost of placing on order impacts order frequency, which affects order size and optimal inventory levels.

3

Which of the following inventory management techniques focuses on a set of procedures to determine inventory levels for demand-dependent inventory types such as work-in-process and raw materials?

a.

Materials requirements planning.

b.

Economic order quantity.

c.

Safety stock reorder point.

d.

Cycle counting.

Choice "a" is correct. Materials requirements planning (MRP) is an inventory management technique that projects and plans inventory levels in order to control the usage of raw materials in the production process. MRP primarily applies to work in process and raw materials.

Choice "d" is incorrect. Cycle counting is an inventory auditing procedure, not an inventory control technique.

Choice "c" is incorrect. Safety stock is a concept applied to both manufacturing and finished goods inventory to ensure that supply requirements are met. Safety stock is not limited to or designed for work in process and raw materials inventory.

Choice "b" is incorrect. Economic order quantity (EOQ) is an inventory model that attempts to minimize both ordering and carrying costs. The objective of the EOQ is to compute the quantity to order, not to comprehensively plan the requirements of production inventories.

4

Which one of the following would increase the working capital of a firm?

a.

Payment of a thirty-year mortgage payable with cash.

b.

Cash collection of accounts receivable.

c.

Cash payment of accounts payable.

d.

Refinancing of accounts payable with a two-year note payable.

 

Choice "d" is correct. Working capital (WC) increases only if current assets are increased or current liabilities are decreased. Exchanging accounts payable (current liability) for a two-year note payable (long-term liability) would decrease current liabilities and increase working capital.

Choice "b" is incorrect. This would not impact WC.

Choice "c" is incorrect. This would not have an impact on WC (decrease of both CA and CL).

Choice "a" is incorrect. This would decrease WC

5

A company purchases inventory on terms of net 30 days and resells to its customers on terms of net 15 days. The inventory conversion period averages 60 days. What is the company's cash conversion cycle?

a.

105 days.

b.

15 days.

c.

75 days.

d.

45 days.

 

Choice "d" is correct. The cash conversion cycle is equal to the inventory conversion period plus the receivables collection period less the payables deferral period. It can be thought of as how long it takes for a company to buy inventory on credit from a vendor, sell that inventory on credit, collect cash for the sale, and use the proceeds to pay the vendor for the purchase. For this company, the cash conversion cycle will be 60 + 15 – 30 = 45 days.

Choice "b" is incorrect. This answer choice incorrectly subtracts (rather than adds) the receivables collection period.

Choice "c" is incorrect. This answer choice fails to take the payables deferral period into account.

Choice "a" is incorrect. This answer choice incorrectly adds (rather than subtracts) the payables deferral period.

6

Cash Co. is seeking to establish better controls over its cash receipts. As part of its strategy, the company establishes a single bank as its central depository. This technique is known as:

a.

Zero balance account banking.

b.

Concentration banking.

c.

Compensating balances.

d.

Lockbox banking.

Choice "b" is correct. Concentration banking is the method by which a single bank is designated as a central bank as a means of controlling receipts.

Choice "d" is incorrect. A lockbox system generally relates to expediting deposits over a specific group of transactions. The technique arranges for the direct mailing of customers' remittances to a bank's post office box and subsequent deposit.

Choice "a" is incorrect. Zero balance account banking represents an account that maintains a zero balance. Zero balance accounts are accompanied by a master or parent account that serves to fund any negative balance and is designed to maximize the availability of idle cash, not control receipts.

Choice "c" is incorrect. Compensating balances are minimum balances maintained by a bank customer in lieu of bank charges. Amounts may serve to eliminate fees or to effectively collateralize credit lines, not to establish better controls over cash receipts.

7

Which of the following assumptions is associated with the economic order quantity formula?

a.

The carrying cost per unit will vary with quantity ordered.

b.

The cost of placing an order will vary with quantity ordered.

c.

Periodic demand is known.

d.

The purchase cost per unit will vary based on quantity discounts.

 

Choice "c" is correct. The economic order quantity formula (EOQ) assumes that periodic demand is known. Annual sales volume is a crucial variable in the EOQ formula.

Choice "a" is incorrect. The carrying cost per unit is anticipated to remain constant.

Choice "b" is incorrect. The cost of placing an order is anticipated to remain constant.

Choice "d" is incorrect. The purchase price per unit is not a component of EOQ.

8

An increase in which of the following should cause management to reduce the average inventory?

a.

The cost of placing an order.

b.

The annual demand for the product.

c.

The cost of carrying inventory.

d.

The lead time needed to acquire inventory.

 

Choice "c" is correct. An increase in the cost of carrying inventory would lead to a reduction in average inventory. Suppose item A is required to be refrigerated so that it will not spoil. If electricity prices are rising, management would prefer to have a lower inventory of item A on hand because of the electricity (i.e., carrying) cost of that item.

Choice "a" is incorrect. An increase in the cost of placing an order would lead to an increase in average inventory. Management would increase the amount of inventory per order to reduce the number of orders, thereby causing the company to on average hold more inventory. 

Choice "b" is incorrect. Increased demand would likely increase average inventory to avoid stockout costs. 

Choice "d" is incorrect. An increase in lead-time would likely lead to an increase in average inventory. A higher safety stock likely would be needed to accommodate the lead-time to ensure that requirements are met.

9

Bell Co. changed from a traditional manufacturing philosophy to a just-in-time philosophy. What are the expected effects of this change on Bell's inventory turnover and inventory as a percentage of total assets reported on Bell's balance sheet?

~Inventory turnover
~Inventory percentage
a.

Increase

Decrease

b.

Decrease

Decrease

c.

Decrease

Increase

d.

Increase

Increase

 

Choice "a" is correct. In a just-in-time system, products are produced just-in-time to be sold. Therefore, JIT systems maintain a much smaller level of inventory when compared to traditional systems. Inventory turnover (cost of goods sold divided by average inventory) increases with a switch to JIT, and inventory as a percentage of total assets decreases.

Choices "b", "c", and "d" are incorrect based on the above explanation.

10

Each of the following items is included when computing a firm's target cash conversion cycle, except the:

a.

Inventory conversion period.

b.

Average collection period.

c.

Cash discount period.

d.

Payables deferral period.

Choice "c" is correct. The cash conversion cycle does not include the cash discount period. Cash discounts would be considered as a component of receivables collections and payables deferrals. The cash conversion cycle is the sum of the inventory conversion and receivable collection periods minus the payables deferral period shown as follows:

Cash
Conversion
Cycle

=

Inventory
Conversion
Period

+

Receivables
Collection
Period

Payables
Deferral
Period

Choice "a" is incorrect. The inventory conversion period is included in the cash conversion cycle as illustrated in the formula above.

Choice "d" is incorrect. The payables deferral period is included in the cash conversion cycle as illustrated in the formula above.

Choice "b" is incorrect. The average (receivables) collection period is included in the cash conversion cycle as illustrated in the formula above.

11

The following information is available on market interest rates:

The risk-free rate of interest   2%

Inflation premium    1%

Default risk premium   3%

Liquidity premium   2%

Maturity risk premium   1%

What is the market rate of interest on a one-year U.S. Treasury bill?

a.

6%

b.

3%

c.

5%

d.

7%

 

Choice "b" is correct. The market rate of interest on a one year U.S. Treasury bill is comprised of the risk free rate of return and an inflation premium. The fact pattern gives this information as follows:

Risk free rate of interest   2%

Inflation premium   1%

Market rate of interest on one-year T-bill   3%

Choice "c" is incorrect. The market rate of interest on a one year U.S. Treasury bill is 3% based on the fact pattern provided and is comprised of the risk free rate of return and an inflation premium. It does not represent a combination of rates that might include the default, liquidity or maturity premium.

Choice "a" is incorrect. The market rate of interest on a one year U.S. Treasury bill is 3% based on the fact pattern provided and is comprised of the risk free rate of return and an inflation premium. It does not represent a combination of rates that might include the default, liquidity or maturity premium.

Choice "d" is incorrect. The market rate of interest on a one year U.S. Treasury bill is 3% based on the fact pattern provided and is comprised of the risk free rate of return and an inflation premium. It does not represent a combination of rates that might include the default, liquidity or maturity premium.

12

The CFO of a company is concerned about the company's accounts receivable turnover ratio. The company currently offers customers terms of 3/10, net 30. Which of the following strategies would most likely improve the company's accounts receivable turnover ratio?

a.

Pledging the accounts receivable to a finance company.

b.

Entering into a factoring agreement with a finance company.

c.

Changing customer terms to 1/10, net 30.

d.

Changing customer terms to 3/20, net 30.

Choice "b" is correct. The accounts receivable turnover ratio is expressed as Sales ÷ Accounts Receivable. A reduction in accounts receivable would serve to improve (increase) the turnover ratio. Factoring (selling) receivables would serve to reduce the amount of accounts receivable (indicating more rapid collections) thereby increasing (improving) the company's accounts receivable turnover ratio.

Choice "a" is incorrect. Pledging accounts receivable does not impact either sales or accounts receivable. There would be no improvement in the accounts receivable turnover ratio.

Choice "c" is incorrect. Changing the customer terms from 3/10, net 30 to 1/10, net 30 would actually reduce discount incentives to pay timely. Accounts receivable would likely remain the same or be higher. There would be no improvement in the company's accounts receivable turnover ratio.

Choice "d" is incorrect. Changing the customer terms from 3/10, net 30 to 3/20, net 30 would actually reduce incentives to pay timely by increasing the amount of time in which the customer could capitalize on the discount. Accounts receivable would likely remain the same or be higher. There would be no improvement in the company's accounts receivable turnover ratio.

13

Which of the following ratios would most likely be used by management to evaluate short-term liquidity?

a.

Return on total assets.

b.

Acid test (quick) ratio.

c.

Sales to cash.

d.

Accounts receivable turnover.

 

Choice "b" is correct. The acid test ratio evaluates short-term liquidity. 

Choice "a" is incorrect. Return on total assets evaluates the profitability of a firm.

Choice "c" is incorrect. This is a distracter option. The sales to cash ratio does not evaluate liquidity.

Choice "d" is incorrect. Accounts receivable turnover is an activity ratio used to evaluate the efficiency of the firm. The number of days in the year, 365, divided by the accounts receivable turnover equals "days of sales outstanding."

14

Which of the following ratios is appropriate for the evaluation of accounts receivable?

a.

Current ratio.

b.

Collection to debt ratio.

c.

Return on total assets.

d.

Days sales outstanding.

 

Choice "d" is correct. Among the ratios listed, the ratio that is appropriate for the evaluation of accounts receivable is the number of days sales are outstanding. Sales are related to accounts receivable, so the more days the sales are outstanding, the longer the receivables are outstanding.

Choice "c" is incorrect. Return on total assets is not appropriate for the evaluation of accounts receivable. It is appropriate for the evaluation of return and of total assets, but not for the evaluation of account receivable specifically.

Choice "b" is incorrect. The collection to debt ratio has nothing to do with the evaluation of accounts receivable.

Choice "a" is incorrect. The current ratio is appropriate for the evaluation of liquidity (one of the ways to evaluate liquidity) but has nothing to do with the evaluation of accounts receivable, other than that accounts receivable is in the numerator of the current ratio.

15

Amicable Wireless, Inc. offers credit terms of 2/10, net 30 for its customers. Sixty percent of Amicable's customers take the 2% discount and pay on day 10. The remainder of Amicable's customers pay on day 30. How many days' sales are in Amicable's accounts receivable?

a.

20

b.

18

c.

12

d.

6

 

Choice "b" is correct. Days' sales in accounts receivable may be calculated as:

Days' sales = Ending accounts receivable / Average daily sales

That formula will not work in this case because the necessary information is not provided. However, enough information about payments is provided so that the total days' sales can be determined on a weighted average basis. In this question, nobody pays before the 10th day and 60% of the customers pay on the 10th day, so there are 10 × 0.60, or 6 day's sales there. The other 40% of the customers pay on the 30th day so there are 30 × 0.40, or 12 day's sales there. The total is 18 days sales.

Choice "d" is incorrect. This answer is calculated from just the 60% of the customers who pay on the 10th day. The others have to be included also.

Choice "c" is incorrect. This answer is calculated from just the 40% of the customers who pay on the 30th day. The others have to be included also.

Choice "a" is incorrect. This answer is calculated by as the difference between the 30th day and the 10th day. The answer does not take into account how many customers pay when.

16

In inventory management, the safety stock will tend to increase if the:

a.

Cost of running out of stock decreases.

b.

Carrying cost increases.

c.

Variability of lead-time increases.

d.

Fixed order cost decreases.

Choice "c" is correct. If lead times became more variable, the amount of safety stock needed to reduce the risk of stock outs will increase.

Choice "b" is incorrect. A high carrying cost would decrease safety stock.

Choice "a" is incorrect. A lower stockout cost would decrease safety stock.

Choice "d" is incorrect. If order costs decrease, then inventory will be ordered more frequently and less safety stock will be needed.

17

Green, Inc., a financial investment-consulting firm, was engaged by Maple Corp. to provide technical support for making investment decisions. Maple, a manufacturer of ceramic tiles, was in the process of buying Bay, Inc., its prime competitor. Green's financial analyst made an independent detailed analysis of Bay's average collection period to determine which of the following?

a.

Return on equity.

b.

Liquidity.

c.

Financing.

d.

Operating profitability.

Choice "b" is correct. A company's average collection period is used to evaluate the liquidity of the firm through the calculation of the cash conversion cycle. Liquidity measurements focus on the ability of the company to meet obligations as they come due.

Choice "c" is incorrect. Average collection period does not evaluate financing.

Choice "a" is incorrect. Average collection period does not evaluate return on equity. Various returns on investment ratios would be used to evaluate return on equity.

Choice "d" is incorrect. Average collection period does not evaluate operating profitability. Gross margin measurements would give an indication of profitability.

18

As a company becomes more conservative with respect to working capital policy, it would tend to have a (n):

a.

Decrease in the operating cycle.

b.

Increase in the ratio of current liabilities to noncurrent liabilities.

c.

Increase in the ratio of current assets to noncurrent assets.

d.

Decrease in the quick ratio.

RULE: Working capital policy is deemed to be more conservative as an increasing portion of an organization's long-term assets, permanent current assets, and temporary current assets are funded by long-term financing.

Choice "c" is correct. An increase in the ratio of current assets to non-current assets would be indicative of an increasingly conservative working capital policy. With no other information, an increase in current assets would indicate that a growing percentage of current assets are financed by non current liabilities and that, nominally, the absolute amount of working capital and the current ratio is improving.

Choice "b" is incorrect. An increase in the ratio of current liabilities to noncurrent liabilities would indicate that an increasing portion of our assets are funded by current liabilities, a more aggressive approach to working capital management.

Choice "a" is incorrect. A decrease in the operating cycle implies that the time to convert inventory into sales (receivables) and receivables into cash has decreased. Assuming no change in liabilities or sales, a decreased operating cycle infers declining current asset balances, greater funding of assets by current liabilities and a more aggressive rather than conservative working capital policy.

Choice "d" is incorrect. A decrease in the quick ratio would indicate that either temporary current assets are decreasing (and are therefore increasingly funded by current liabilities, indicating a more aggressive working capital policy) or that current liabilities are increasing, signaling a decrease in the amount of non-current liabilities used to fund temporary current assets, a sign of an increasingly aggressive working capital policy.

19

Which of the following transactions would increase the current ratio and decrease net profit?

a.

A federal income tax payment due from the previous year is paid.

b.

A dividend is paid.

c.

Vacant land is sold for less than the net book value.

d.

A long-term bond is retired before maturity at a discount.

Choice "c" is correct. The current ratio is current assets divided by current liabilities. The sale of land would increase cash and therefore current assets without increasing current liabilities. This would increase the current ratio. Furthermore, the sale of land at a loss would decrease net profit.

Choice "a" is incorrect. The payment of a tax payment would not decrease net profit because the expense was accrued last year.

Choice "d" is incorrect. The use of cash to retire a long-term bond would reduce current assets without reducing current liabilities. This would reduce the current ratio.

Choice "b" is incorrect. As above, this would reduce cash without reducing current liabilities.

20

The amount of inventory that a company would tend to hold in stock would increase as the:

a.

Length of time that goods are in transit decreases.

b.

Variability of sales decreases.

c.

Cost of running out of stock decreases.

d.

Cost of carrying inventory decreases.

Choice "d" is correct. The amount of inventory that a company would tend to hold in stock would increase as the cost of carrying inventory decreases.

The amount of inventory that a company would tend to hold in stock would decrease as the:

b.

Variability of sales decreases.

c.

Cost of running out of stock decreases.

a.

Length of time that goods are in transit decreases.

21

Foster Inc. is considering implementing a lock-box collection system at a cost of $80,000 per year. Annual sales are $90 million, and the lock-box system will reduce collection time by 3 days. If Foster can invest funds at 8 percent, should it use the lock-box system? Assume a 360-day year.

a.

No, producing a loss of $20,000 per year.

b.

No, producing a loss of $140,000 per year.

c.

No, producing a loss of $60,000 per year.

d.

Yes, producing savings of $60,000 per year.

 

Choice "a" is correct. No, do not use the lock-box system, which produces a loss of $20,000 per year.

 
Lock-box cost $ 80,000
 
Investment income 60,000*
 
Loss per year $ 20,000

* 60,000 = (3 days / 360 days) × $90,000,000 × .08

22

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:

a.

Fluctuating current assets with long-term debt.

b.

Permanent current assets with short-term debt.

c.

Fluctuating current assets with short-term debt.

d.

Permanent current assets with long-term debt.

 

Choice "b" is correct. The working capital financing policy that finances permanent current assets with short-term debt subjects the firm to the greatest risk of being unable to meet the firm's maturing obligations.

Choices "a" and "d" are incorrect. The use of long-term debt financing produces the smallest risk of being unable to meet maturing obligations.

Choice "c" is incorrect. Although financing fluctuating current assets with short-term debt exposes the firm to some risk, it is not the greatest or the smallest.

23

Why would a firm generally choose to finance temporary assets with short-term debt?

a.

Matching the maturities of assets and liabilities reduces risk.

b.

Short-term interest rates have traditionally been more stable than long-term interest rates.

c.

A firm that borrows heavily long term is more apt to be unable to repay the debt than a firm that borrows heavily short term.

d.

Financing requirements remain constant.

Choice "a" is correct. Matching the maturities of current assets with liabilities as they come due is designed to ensure liquidity and reduce risk of cash shortages. Temporary assets (such as inventories, generally, and seasonal inventories, specifically) might be financed with short term debt such that the earnings from the sales of those temporary assets could be used to liquidate the related obligations as they come due and ensure that cash is available to meet cash flow requirements.

Choice "b" is incorrect. Interest rate risks would likely motivate a firm to use longer term financing than short-term financing.

Choice "c" is incorrect. Matching cash inflows with cash outflows are more influential in determining a firm's ability to repay debt rather than the length of the obligation.

Choice "d" is incorrect. Long-term rather than short-term debt promotes consistent finance charges. The requirements for financing itself are driven by business practice, not by the maturity of financial instruments used.

24

A company has equity of $9,000. Long-term debt is $1,900. Net working capital, other than cash, is $2,500. Fixed assets are $2,200. What amount of cash does the company have?

a.

$6,800

b.

$7,400

c.

$2,400

d.

$6,200

 

Choice "d" is correct. Total assets must equal total liabilities plus shareholders' equity. For this company, liabilities equal $1,900 and equity equals $9,000. Consequently, total liabilities and equity equal $10,900, and therefore assets must total $10,900. If net working capital (current assets minus current liabilities) other than cash is $2,500, and fixed assets are $2,200, then cash must be $6,200.

Assets = Cash ($6,200) + Net working capital ($2,500) + Fixed assets ($2,200) = $10,900.

Choice "b" is incorrect. This answer choice incorrectly subtracts long-term debt from equity and fixed assets from net working capital other than cash, and then adds the two amounts together.

Choice "a" is incorrect. This answer choice ignores the long-term debt and the net working capital other than cash amounts.

Choice "c" is incorrect. This answer choice incorrectly subtracts the long-term debt from the equity total

25

Which of the following effects would a lockbox most likely provide for receivables management?

a.

Minimized collection float.

b.

Maximized collection float.

c.

Minimized disbursement float.

d.

Maximized disbursement float.

 

Choice "a" is correct. A lockbox system expedites cash inflows (minimizes collection float) by having a bank receive payments from a company's customers directly, via mailboxes to which the bank has access. Payments that arrive in these mailboxes are deposited into the company's account immediately.

Choice "b" is incorrect. Lockboxes minimize rather than maximize collection float.

Choices "c" and "d" are incorrect. Lockbox systems relate to collection rather than disbursement float.

26

Farrow Co. is applying for a loan in which the bank requires a quick ratio of at least 1. Farrow's quick ratio is 0.8. Which of the following actions would increase Farrow's quick ratio?

a.

Paying an existing account payable.

b.

Selling obsolete inventory at a loss.

c.

Purchasing inventory through the issuance of a long-term note.

d.

Implementing stronger procedures to collect accounts receivable at a faster rate.

 

Choice "b" is correct. Selling obsolete inventory at a loss would increase the quick ratio. The reduction of inventory values and recording of a loss would have no impact on quick assets. The addition of cash, however, would increase cash with no impact on current liabilities. The quick ratio would improve. 

Choice "c" is incorrect. Purchasing inventory through the issuance of a long term note would have no impact on the quick ratio. Inventory is excluded from the numerator and long term debt is excluded from the denominator.

Choice "d" is incorrect. Collection rates of receivables would have no impact on the quick ratio. Although more rapid collections improve the quality of assets, they would not increase the total amount. The quick ratio would remain unchanged as accounts receivable are converted into cash.

Choice "a" is incorrect. Paying existing accounts payable would serve to reduce the quick ratio. Reduction of the numerator and denominator of a fraction less than one serves to reduce its value.

27