Chapter 15 TB Flashcards by Stussy Aubrey

Short-term financial management is concerned with management of a firm’s current assets and current liabilities to achieve a balance between profitability and risk.

T or F?

TRUE

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Firms are able to reduce financing costs or increase the funds available for expansion by maximizing the amount of funds tied up in working capital.

T or F?

TRUE

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A long-term trend in U.S. companies is that ________.

A) firms are increasing their investments in current assets relative to total assets, and most of this increase has occurred as firms increase their cash holdings
B) firms are increasing their investments in current assets relative to total assets, and most of this increase has occurred as firms increase their inventory balances
C) firms are decreasing their investments in current assets relative to total assets, and most of this decrease has occurred as firms decrease their cash holdings
D) firms are decreasing their investments in current assets relative to total assets, and most of this decrease has occurred as firms decrease their inventory balances

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On average in recent years, U.S. firms have been increasing their cash balances relative to total assets.

T or F?

TRUE

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Working capital refers to a firm’s long-term capital.

T or F?

FALSE

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The more predictable a firm’s cash inflows, the more net working capital it will need.

T or F?

FALSE

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As firms are unable to match cash inflows to outflows with certainty, most of them need current liabilities.

T or F?

FALSE

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When current assets exceed current liabilities, a firm has negative net working capital.

T or F?

FALSE

When current assets exceed current liabilities, a firm has positive net working capital.

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Net working capital can be defined as the portion of a firm’s current assets financed with long-term funds.

T or F?

FALSE

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A firm that is unable to pay its bills as they come due is said to be insolvent.

T or F?

TRUE

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In general, the greater a firm’s current assets relative to its short-term obligations, the better able it will be to pay its bills as they come due.

T or F?

TRUE

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As the ratio of current assets to total assets increases, a firm’s risk increases.

T or F?

FALSE

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Too much investment in current assets reduces firm’s profitability, whereas too little investment in current assets increases the risk of not being able to pay debts as they come due.

T or F?

TRUE

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A firm is said to be insolvent when its total assets is less than its total liabilities and stockholders’ equity.

T or F?

FALSE

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An increase in current assets increases net working capital, thereby reducing the risk of insolvency.

T or F?

TRUE

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Assuming that the level of total assets remains unchanged, the effect of a decrease in the ratio of current assets to total assets is an increase in a firm’s risk of insolvency.

T or F?

TRUE

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The goal of working capital management is to ________.

A) achieve a balance between short-term and long-term liabilities so that they add to the achievement of a firm’s overall goals
B) achieve a balance between a firm’s non-current assets and non-current liabilities
C) achieve a balance between profitability and risk that contributes positively to a firm’s value
D) achieve a balance between short-term and long-term assets so that they add to the achievement of a firm’s overall goals

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The purpose of managing current assets and current liabilities is to ________.

A) achieve a balance between short-term and long-term financing of a firm
B) achieve as low a level of current liabilities as possible
C) achieve a balance between profitability and risk that contributes to a firm’s value
D) achieve as high a level of current liabilities as possible

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Net working capital is defined as ________.

A) total assets minus total liabilities
B) total liabilities minus total assets
C) current liabilities minus current assets
D) current assets minus current liabilities

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Which of the following is true of net working capital?

A) When current assets of a firm exceed its current liabilities,a firm is said to have negative net working capital.
B) When current assets of a firm are less than its total assets,a firm is said to have positive net working capital.
C) When current assets of a firm exceed its current liabilities,a firm is said to have positive net working capital.
D) When current assets of a firm exceed its total assets,the firm is said to have negative net working capital.

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The conversion of current assets ________.

A) from cash to receivables to inventory provides the cash used to pay non-current liabilities
B) from inventory to receivables to marketable securities provides the cash used to buy plant and equipment
C) from inventory to receivables to cash provides the cash used to pay current liabilities
D) from cash to receivables to inventory provides the cash used to repurchase stock

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Current liabilities can be viewed as ________.

A) debts that mature in a period of one year or less
B) liabilities which represent a firm’s long-term financing
C) sources of cash inflows from the operating activities of a firm
D) funds used to finance the noncurrent assets’ portion of a firm

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Which of the following is true of current assets?

A) The time of conversion of current assets to more liquid form is relatively unpredictable.
B) They are used to fund long-term operations and pay long-term expenses.
C) They are more profitable because they add more value to the product than that provided by fixed assets.
D) They are sources of short-term financing for a firm.

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In general, the more net working capital a firm has, ________.

A) the greater its risk
B) the lower its risk
C) the less likely are creditors to lend to the firm
D) the lower its level of long-term funds

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A(n) ________ in current assets increases net working capital, thereby ________ the risk of insolvency. A) decrease; increasing B) increase; increasing C) increase; reducing D) decrease; reducing

A decrease in current assets and an increase in current liabilities will ________ net working capital, thereby ________ the risk of insolvency. A) increase; increasing B) decrease; increasing C) increase; reducing D) decrease; reducing

When a portion of a firm's fixed assets are financed with current liabilities, ________. A) the firm will have positive net working capital B) the net working capital will decrease C) the current ratio will increase D) the firm will have negative net working capital

Which of the following is true of the impact of cash flows on net working capital? A) The higher the cash inflows lower is the net working capital. B) The lower the cash outflows lower is the net working capital. C) The more predictable the cash inflows of a firm, the more current assets a firm needs. D) The more predictable the cash inflows of a firm, the easier is the working capital management.

In working capital management, risk is measured by the probability that a firm will be ________. A) unable to pay annual dividends to stockholders B) unable to pay its bills as they come due C) unable to repay its long-term obligations D) unable to earn profits from day-to-day operations

If a firm increases its current assets relative to total assets, ________. A) it increases return and reduces risk B) it increases return and increases risk C) it reduces return and reduces risk D) it reduces return and increases risk

The cash conversion cycle of a firm is the length of time from the beginning of the production process to the collection of cash from the sale of finished products. | T or F?

FALSE

The operating cycle is the recurring transition of a firm's working capital from cash to inventories and inventories to receivables and back to cash. | T or F?

TRUE

The operating cycle is the length of time a firm's cash is tied up between payment for production inputs and receipt of payment from the sale of the resulting finished product. | T or F?

FALSE

By efficiently managing a firm's operating and cash conversion cycles, the financial manager can maintain a high level of cash investment and thereby contribute toward maximization of share value. | T or F?

FALSE

A firm's operating cycle (OC) is simply the sum of the average age of inventory (AAI) and the average payment period (APP). | T or F?

FALSE

The cash conversion cycle is the total number of days in the operating cycle less the average payment period for inputs to production. | T or F?

TRUE

A negative cash conversion cycle (CCC) means the average payment period (APP) exceeds the operating cycle (OC). | T or F?

TRUE

The ability to purchase production inputs on credit allows a firm to partially offset the length of time resources are tied up in the operating cycle. | T or F?

TRUE

The cash conversion cycle of a firm is the difference between the number of days resources are tied up in the operating cycle and the average number of days the firm can delay making payment on the production inputs purchased on credit. | T or F?

TRUE

A positive cash conversion cycle means that a firm must obtain financing to support the cash conversion cycle. | T or F?

TRUE

The cash conversion cycle is the sum of average age of the inventory and average collection period minus average payment period. | T or F?

TRUE

Nonmanufacturing firms are more likely to have positive cash conversion cycles; they generally carry smaller, faster-moving inventories and often sell their products for cash. | T or F?

FALSE ## Footnote Nonmanufacturing firms are more likely to have negative cash conversion cycles; they generally carry smaller, faster-moving inventories and often sell their products for cash.

The aggressive funding strategy is a strategy by which a firm finances its current assets with short-term funds and its fixed assets with long-term funds. | T or F?

FALSE

If a firm's sales are constant, its investment in operating assets should also be constant, and the firm will have only a permanent funding requirement. | T or F?

TRUE

The conservative funding strategy is a strategy by which a firm finances at least its seasonal requirements, and possibly some of its permanent requirements, with short-term funds and the balance of its permanent requirements with long-term funds. | T or F?

FALSE ## Footnote The aggressive funding strategy is a strategy by which a firm finances at least its seasonal requirements, and possibly some of its permanent requirements, with short-term funds and the balance of its permanent requirements with long-term funds.

Under an aggressive funding strategy, a firm funds its seasonal requirements with short-term debt and its permanent requirements with long-term debt. | T or F?

TRUE

One aspect of risk associated with the aggressive strategy's maximum use of short-term financing is the fact that changing short-term interest rates can result in significantly higher borrowing. | T or F?

TRUE

The aggressive funding strategy is a strategy by which a firm finances all projected funds requirements with long-term funds and uses short-term financing only for emergencies or unexpected outflows.

FALSE ## Footnote The conservative funding strategy is a strategy by which a firm finances all projected funds requirements with long-term funds and uses short-term financing only for emergencies or unexpected outflows.

The aggressive funding strategy is risky due to its minimum level of net working capital, high dependency on short-term sources of funds, and the changing short-term interest. | T or F?

TRUE

Under conservative funding strategy, short-term financing is used only to finance an emergency, an unexpected outflow of funds, and the variable portion of a firm's current assets. | T or F?

FALSE

The risk of the conservative funding requirements is low because of its high level of net working capital, and the fact that the strategy does not require a firm to use any of its limited short-term borrowing capacity. | T or F?

TRUE

Under a conservative funding strategy, the firm funds both its seasonal and its permanent requirements with long-term debt. | T or F?

TRUE

When implementing the cash management strategies, a firm should avoid damaging a firm's credit rating by overstretching accounts payable. | T or F?

FALSE

The ________ of a firm is the amount of time required for a company to convert cash invested in its operations to cash received as a result of its operations. A) cash turnover B) cash conversion cycle C) average age of inventory D) average collection period

The ________ of a firm is the amount of time that elapses from the point when the firm inputs material and labor into the production process to the point when cash is collected from the sale of the finished product that contains these production inputs. A) cash conversion cycle B) average age of inventory C) operating cycle D) average collection period

The ________ is the length of time from the point when raw materials are purchased on account to the point when payment is made to the supplier of the goods. A) cash conversion cycle B) average payment period C) average age of inventory D) average collection period

The ________ is the time period that elapses from the point when a firm uses the raw materials in manufacturing a finished good to the point when the finished good is sold. A) cash turnover B) cash conversion cycle C) average age of inventory D) average collection period

The ________ is the time period that elapses from the point when a firm sells a finished good on account to the point when the receivable is collected. A) cash conversion cycle B) average payment period C) average age of inventory D) average collection period

A firm can reduce its cash conversion cycle by ________. A) increasing the average age of inventory B) increasing the average collection period C) increasing the operating cycle D) increasing the average payment period

Other factors remaining constant, an increase in the average collection period will result in ________. A) an increase in the operating cycle B) an increase in the average payment period C) a decrease in the operating cycle D) a decrease in the average payment period

Other factors remaining constant, an increase in the average payment period will ________. A) increase the average collection period B) decrease the operating cycle C) not affect the cash conversion cycle D) not affect the operating cycle

Other factors remaining constant, a decrease in the average age of inventory will result in ________. A) a decrease in the average collection period B) a decrease in the cash conversion cycle C) an increase in the cash conversion cycle D) an increase in the average collection period

Other factors remaining constant, an increase in the average payment period will result in ________. A) a decrease in the average collection period B) a decrease in the cash conversion cycle C) an increase in the cash conversion cycle D) an increase in the average collection period

Which of the following elements is required for the calculation of cash conversion cycle? A) current assets ratio B) average cost of goods sold C) average collection period D) cash flows from operations

One way to improve the cash conversion cycle is to ________. A) speed up collections B) slow down credit approvals C) slow down inventory turnover D) speed up payments

A firm with highly unpredictable sales revenue would best choose ________ funding strategy to minimize risk. A) the aggressive B) the conservative C) the trade-off D) a seasonal

Certain financing plans are termed conservative when ________. A) short-term financing is used frequently B) working capital is relatively high C) current assets are relatively low D) risk is increased

Which of the following is true of an aggressive funding strategy of a firm? A) Under an aggressive funding strategy, a firm funds it seasonal requirements with bonds and long-term loans. B) Under an aggressive funding strategy, a firm funds its seasonal requirements with short-term debt. C) Under an aggressive funding strategy, a firm funds both its seasonal and its permanent requirements with long-term debt. D) Under an aggressive funding strategy, a firm funds it permanent requirements with commercial paper and notes payable.

An increase in the current asset to total asset ratio will result in ________. A) an increase in profit B) an increase in risk C) a decrease in risk D) a decrease in profit

A decrease in the current asset to total asset ratio will result in ________. A) an increase in risk B) a decrease in risk C) an increase in profit D) a decrease in profit

An increase in the current liabilities to total assets ratio will result in ________. A) an increase in risk B) a decrease in risk C) an increase in profit D) a decrease in profit

An decrease in the current liabilities to total assets ratio will result in ________. A) an increase in risk B) an increase in profit C) a decrease in risk D) a decrease in profit

An increase in the average payment period will ________ the operating cycle and ________ the cash conversion cycle. A) increase; decrease B) decrease; decrease C) decrease; not affect D) not affect; decrease

The difference between the number of days resources are tied up in the operating cycle and the number of days a firm can use spontaneous financing before payment is made is the ________. A) cash conversion cycle B) average payment period C) operating cycle D) average age of inventory

A decrease in the production time to manufacture a finished good will result in ________. A) an increase in the average age of inventory B) a decrease in the cash conversion cycle C) an increase in the cash conversion cycle D) a decrease in the average age of inventory

A negative cash conversion cycle ________. A) means that the operating cycle exceeds the average inventory period B) means that the average payment period exceeds the operating cycle C) indicates that a firm is shortening its average payment period and lengthening its average collection period D) indicates that a firm is shortening its average age of inventory and average payment period

A firm may have a negative cash conversion cycle if it carries ________. A) very little inventory and sells its products on credit B) high inventory and sells its products on credit C) very little inventory and sells its products for cash D) high inventory and sells its products for cash

Improvements to cash management include ________. A) a reduction in the cash turnover B) a reduction in the cash conversion cycle C) an increase in the average age of inventory D) an increase in the credit period allowed to customers

In an aggressive financing strategy, a firm anticipating a large increase in sales for the coming period should finance the increase in working capital with ________. A) the sale of common stock B) the sale of a bond issue C) a line of credit D) a long-term note from the bank

The aggressive financing strategy is risky in two aspects: a firm operates with a possibility of ________, and an inability to engage in ________ when needed. A) insolvency; short-term borrowing B) interest rate swings; short-term borrowing C) low earnings; long-term borrowing D) fixed interest rate; long-term borrowing

In theory, the conservative financing strategy ignores ________. A) all current liabilities B) the spontaneous forms of short-term financing C) all current assets D) the high risk associated with external financing

In economic conditions characterized by a scarcity of short-term funds, a firm would best choose the ________ financing strategy. A) aggressive B) conservative C) permanent D) seasonal

A risk of the ________ financing strategy is unpredictable interest expense. A) aggressive B) conservative C) permanent D) seasonal

The ________ financing strategy requires a firm to pay interest on excess funds borrowed but not needed throughout the entire year. A) aggressive B) conservative C) permanent D) seasonal

The aggressive financing strategy is a ________ method while the conservative financing strategy is a ________ method. A) high-profit, high-risk; low-profit, low-risk B) high-profit, low-risk; low-profit, high-risk C) low-profit, high-risk; high-profit, low-risk D) low-profit, low-risk; high-profit, high-risk

In economic conditions characterized by short-term interest rates which exceed long-term interest rates, the financing strategy that would maximize profits is ________ strategy. A) the aggressive B) the conservative C) the trade-off D) a seasonal

A firm with a very low current ratio in comparison to the industry standard could lower the risk of unavailable short-term funds by moving toward ________ financing strategy. A) the aggressive B) the conservative C) a permanent D) a seasonal

A firm which uses the aggressive financing strategy plans to purchase a major fixed asset financed with a loan. The most likely consequence of this action is ________. A) a decrease in the current ratio B) an increase in net working capital C) a decrease in the risk of insolvency D) an increase in long-term debt

A firm which uses the aggressive financing strategy plans to purchase raw materials in large quantities to take price discounts. The firm will finance the purchase with a long-term loan. The most likely consequence of this action is ________. A) a decrease in the current ratio B) an increase in net working capital C) an increase in risk of insolvency D) a decrease in net working capital

Only a firm's permanent financing requirement (and not the seasonal requirement) is financed with ________ in the aggressive funding strategy. A) long-term debt B) T-bills C) retained earnings D) accounts payable

A firm's financing requirements can be separated into ________. A) current liabilities and short-term funds B) current assets and fixed assets C) current liabilities and long-term debt D) seasonal and permanent

The basic strategies for determining the appropriate financing mix are ________. A) seasonal and permanent funding B) short-term and long-term financing C) aggressive and conservative funding D) current and non-current liabilities

If a firm uses an aggressive financing strategy, ________. A) it increases return and increases risk B) it increases return and decreases risk C) it decreases return and increases risk D) it decreases return and decreases risk

One major risk a firm assumes in an aggressive financing strategy is ________. A) the possibility that collections will be slower than expected B) the possibility that long-term funds may not be available when needed C) the possibility that short-term funds may not be available when needed D) the possibility that it will run out of cash

The basic strategies that should be employed by a business firm in managing cash includes ________. A) paying accounts payable as early as possible B) turning over inventory as quickly as possible, avoiding stockouts C) operating in a fashion that requires maximum cash D) extending the credit period allowed to customers

For minimizing the cash conversion cycle, a firm should ________. A) grant longer credit terms to customers to maintain healthy business relations B) pay off accounts payables as fast as possible to gain credibility C) turn over inventory as quickly as possible without stockouts D) increase mail managing, processing, and clearing time when collecting from customers

Because managing inventory is just like managing any other investment, decisions about the level of inventory should be guided by the effect of inventory levels on sales. | T or F?

FALSE

The ABC system is an inventory management technique for determining the optimal order quantity for an item of inventory. | T or F?

FALSE

The reorder point is the point at which a firm receives orders. | T or F?

FALSE

Safety stocks are extra inventories that can be drawn down when actual lead times and/or usage rates are greater than expected. | T or F?

TRUE

In the ABC system of inventory management, the two-bin method or system could be utilized to control C items.

TRUE

In EOQ model, the average inventory is defined as the order quantity divided by 2. | T or F?

TRUE

The economic order quantity (EOQ) is the order quantity which minimizes the carrying costs per unit per period. | T or F?

FALSE

In the EOQ model, if carrying costs increase while all other costs remain unchanged, the number of orders placed would be expected to increase. | T or F?

FALSE ## Footnote In the EOQ model, if carrying costs increase while all other costs remain unchanged, the number of orders placed would be expected to decrease.

In the EOQ model, the total cost is minimized at the point where the order costs and carrying costs are equal. | T or F?

TRUE

The reorder point is an inventory management system that compares production needs to available inventory balances and determines when orders should be placed for various items on a firm's bill of materials. | T or F?

FALSE

Since its objective is to minimize inventory investment, a Just-in-Time (JIT) system uses no, or very little, safety stocks. | T or F?

TRUE

A popular extension of materials requirement planning is manufacturing resource planning II, which integrates data from numerous areas such as finance, accounting, marketing, engineering, and manufacturing using a sophisticated computer system. | T or F?

TRUE

A popular extension of materials requirement planning is inventory integration automation II, which integrates data from numerous areas such as finance, accounting, marketing, engineering, and manufacturing using a sophisticated computer system. | T or F?

FALSE

The objective for managing inventory is to ________. A) turn over inventory as quickly as possible without losing sales from stockouts B) improve the average collection period without affecting the sales C) make payment for the inventory as slowly as possible without losing suppliers D) reduce the time taken to process inventory into finished goods and increase sales

Which of the following is true of inventory level? A) A purchasing manager would purchase higher inventories when prices are low and lower inventories when prices are high irrespective of inventory requirement. B) A marketing manager would like to have smaller inventories of finished products to ensure production of goods as per customer specification. C) A financial manager would keep inventory levels low to ensure that the firm's money is not unwisely invested in excess resources. D) A manufacturing manager would keep raw materials inventories low to ensure use of latest materials in production process.

Which of the following is true of maintaining appropriate inventory levels? A) A financial manager's general disposition toward inventory levels is to keep them low. B) A marketing manager would like to have low inventories of a firm's finished products. C) A manufacturing manager would keep raw materials inventories low for the sake of lower unit production costs. D) A purchasing manager prefers lower level of inventories than are actually needed at the time.

When maintaining appropriate inventory level, a purchasing manager should ________. A) keep the inventory level low, to ensure that the firm's money is not being unwisely invested in excess resources B) ensure that all orders could be filled quickly, eliminating the need for back orders due to stockouts C) implement the production plan to acquire the desired amount of finished goods available on time at a low cost D) maintain adequate amount of inventory on hand at desired times and at a favorable price

The ________ is a technique that divides inventory into three groups, according to dollar investment. A) JIT system B) ABC system C) EOQ model D) LIFO model

In the ABC system of inventory management, the ________ method could be utilized to control C items. A) basic economic order quantity B) materials requirement planning C) two-bin D) just-in-time

In the ABC system of inventory management, the ________ method or system is appropriate for managing B items. A) basic economic order quantity B) materials requirement planning C) two-bin D) just-in-time

The ________ is an inventory technique that takes into account various operating and financial costs to determine the order quantity for a specific inventory item. A) JIT system B) ABC system C) EOQ model D) LIFO model

A computerized inventory system that simulates needed materials requirements for the finished product, and then compares production needs to available inventory balances to determine when orders should be placed is the ________. A) basic economic order quantity system B) materials requirement planning system C) just-in-time system D) red-line method

The philosophy of the ________ is that a firm would have only work-in-process inventory. A) basic economic order quantity system B) materials requirement planning system C) just-in-time system D) LIFO method

The total cost of a firm's inventory is found by summing the ________. A) order cost and the marginal cost of a firm's inventory B) order cost and the carrying cost of a firm's inventory C) order cost and the actual cost of a firm's inventory D) carrying cost and the marginal cost of a firm's inventory

Which of the following is an example of carrying cost? A) insurance of goods in transit B) transportation cost C) insurance cost D) cost of inventory

The ________ uses no, or very little, safety stock. A) basic economic order quantity system B) materials requirement planning system C) just-in-time system D) FIFO method

In the EOQ model, ________ costs are the variable costs per unit of holding an item of inventory for a specified time period. A) marginal B) order C) carrying D) processing

The economic order quantity (EOQ) is the order quantity which minimizes ________. A) the order cost per order B) the total inventory costs C) the carrying costs per unit per period D) order quantity in units

In the EOQ model, if the size of order increases, the ________. A) carrying cost will increase B) order cost will remain unchanged C) order cost will increase D) storage cost will decrease

The ________ is an inventory management technique that compares production needs to available inventory balances and determines when orders should be placed for various material inputs. A) ABC system B) EOQ model C) MRP system D) JIT system

The ________ is an inventory management technique that minimizes inventory investment by having materials inputs arrive at exactly the time they are needed for production. A) ABC system B) FIFO method C) MRP system D) JIT system

A popular extension of materials requirement planning that integrates data from numerous areas such as accounting, finance, engineering, and manufacturing using a sophisticated computer system is called ________. A) computerized materials integration II B) manufacturing resource planning II C) inventory allocation planning II D) inventory integration planning II

One of the components of a cash conversion cycle is the average collection period. | T or F?

TRUE

A firm's credit selection is the process of determining the minimum requirements for extending credit to a customer. | T or F?

TRUE

Credit analysts usually analyze an applicant's creditworthiness by using the dimensions of credit such as character, capacity, capital, collateral, and conditions. | T or F?

TRUE

Credit selection involves application of techniques for determining which customers should receive credit. | T or F?

TRUE

A firm's credit standards are the minimum requirements for extending credit to a customer. | T or F?

TRUE

By increasing collection expenditures, a firm can decrease bad debt losses up to a point, beyond which bad debts cannot be economically reduced. | T or F?

TRUE

The average investment of a firm in accounts receivable is equal to the firm's total variable cost of annual sales divided by its average collection period. | T or F?

FALSE ## Footnote The average investment of a firm in accounts receivable is equal to the firm's total variable cost of annual sales divided by its accounts receivable turnover.

The objective for managing accounts receivable is to avoid credit sales as much as possible. | T or F?

FALSE

In analyzing an applicant's creditworthiness, a credit manager typically gives primary attention to two of the five C's of credit—collateral and condition—since they represent the most basic requirements for extending credit to an applicant. | T or F?

FALSE

One of the key inputs to the final credit decision is a credit analyst's subjective judgment of a firm's creditworthiness since it can provide a better feel of a firm's operation than any quantitative figures. | T or F?

FALSE

A firm's credit selection procedures must be established on a sound economic basis that considers the costs of investigating the creditworthiness of a customer and the expected size of its credit purchases. | T or F?

TRUE

A firm's credit standard is a procedure for ranking an applicant's overall credit strength, derived as a weighted average of scores on key financial and credit characteristics. | T or F?

FALSE ## Footnote A firm's credit scoring is a procedure for ranking an applicant's overall credit strength, derived as a weighted average of scores on key financial and credit characteristics.

As credit standards are relaxed, sales are expected to increase and the investment in accounts receivable is expected to decrease. | T or F?

FALSE

The turnover of accounts receivable can be calculated by dividing 365 days by average collection period. | T or F?

TRUE

Increasing the length of the credit period can increase sales, but both the investment in accounts receivable and bad debt expenses are likely to increase as well. | T or F?

TRUE

If a firm relaxes its credit standards, the volume of accounts receivable increases and so does the firm's carrying cost. | T or F?

TRUE

A relaxation of credit standards is expected to affect profits positively due to lower carrying costs, whereas tightening credit standards would affect profits negatively as a result of higher carrying costs. | T or F?

FALSE

The increase in bad debts associated with tightening credit standards raises bad debt expenses and has a negative impact on profits. | T or F?

FALSE

The cost of marginal investment in accounts receivable can be calculated by finding the difference between the average investment in accounts receivable before and after the introduction of the changes in credit standards. | T or F?

FALSE

The cost of marginal bad debts is found by multiplying a firm's opportunity cost by the difference between the level of bad debts before and after the relaxation of credit standards. | T or F?

FALSE

The key dimension of credit selection which analyzes an applicant's record of meeting past obligations is ________. A) collateral B) capacity C) character D) capital

________ is a procedure resulting in a number reflecting an applicant's credit strength, derived as a weighted average of the scores obtained on a variety of key financial and credit characteristics. A) Credit scoring B) Aging of receivables C) CAPM D) The economic order quantity model

The key dimension of credit selection which analyzes an applicant's ability to repay the requested credit focused on cash flows available is ________. A) collateral B) capital C) conditions D) capacity

________ are established to evaluate a customer's creditworthiness and to determine the minimum requirements for extending credit to a customer. A) Lines of credit B) Credit limits C) Collection agencies D) Credit standards

Which of the following is true of credit scoring? A) It audits the amount of assets the applicant has available for use in securing the credit. B) It specifies the terms of sale for customers who have been extended credit by a firm. C) It is an ongoing review of a firm's accounts receivable to determine whether customers are paying according to the stated credit terms. D) It applies statistically derived weights to an applicant's scores on key financial and credit characteristics.

The key dimension of credit selection which analyzes the amount of assets an applicant has available for use in securing the credit is ________. A) capital B) collateral C) capacity D) conditions

Which of the following is one of the five C's of credit? A) coordination B) cost C) character D) control

A credit applicant's ________ reflects its ability to repay the requested credit. A) character B) capacity C) capital D) collateral

A credit applicant's ________ is his or her financial strength as reflected by his or her debt relative to equity. A) character B) capacity C) capital D) collateral

A credit applicant's ________ reflects his or her record of meeting past obligations. A) condition B) capacity C) control D) character

Which of the following is true of a credit applicant's character? A) It reflects a credit applicant's ability to repay his debt obligation. B) It reflects a credit applicant's past payment history. C) It reflects the level of liquid assets available with a credit applicant. D) It reflects any unique conditions surrounding a credit applicant's transaction.

As credit standards are relaxed, sales are expected to ________ and the investment in accounts receivable is expected to ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

As credit standards are tightened, sales are expected to ________ and the investment in accounts receivable is expected to ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

Which of the following major variables should be considered when evaluating proposed changes in credit standards? A) level of inventories B) accounts payable C) level of liquid assets D) bad debt expenses

An applicant's capacity to repay its requested credit can be found by ________. A) analyzing financial statements B) checking bank account balances C) analyzing tax payment history D) checking the covenants

When a firm's credit standards are relaxed ________. A) its sales are expected to decrease with a corresponding increase in costs B) its costs are expected to decrease with a corresponding decrease in sales C) its costs are expected to increase faster than sales if the standards are not relaxed D) its profit contribution from sales will be greater than the cost contribution

If the level of bad debt attributable to credit policy is relatively constant, increasing collection expenditures can be expected to reduce bad debts. | T or F?

TRUE

2/15 net 45 translates as 2 percent of the balance is due in 15 days; the remaining balance is due in 45 days. | T or F?

FALSE

If a firm increases its cash discount period, the firm's investment in accounts receivable due to non-discount takers now paying earlier is expected to decrease. | T or F?

TRUE

If a firm increases its cash discount period, the firm's investment in accounts receivable due to discount takers still getting cash discounts but paying later is expected to increase. | T or F?

TRUE

If a firm's credit period is decreased, the sales volume, the investment in accounts receivable, and the bad debt expenses can be expected to increase. | T or F?

FALSE

When a firm initiates or increases a cash discount, the net effect on the accounts receivable investment is difficult to determine because the non-discount takers paying earlier will reduce the accounts receivable investment, while the new customer accounts will increase this investment. | T or F?

TRUE

The net effect of changes in a cash discount period is quite difficult to analyze because they are directly attributable to the three forces affecting a firm's investment in accounts receivable. | T or F?

TRUE

An increase in accounts receivable turnover due to an increase in collection efforts will decrease a firm's marginal investment in accounts receivable. | T or F?

TRUE

A decrease in collection efforts will result in an increase in sales volume, an increase in the investment in accounts receivable, an increase in bad debt expenses, and a decrease in collection expenditures. | T or F?

TRUE

Increased collection expenditures should reduce the investment in accounts receivable and bad debt expenses, increasing profits. | T or F?

TRUE

An aging schedule breaks down accounts receivable into groups on the basis of the first letter of the name of the company that owes on the account. | T or F?

FALSE

A company's ________ are the procedures followed to collect accounts receivable when they come due. A) collection policies B) credit scorings C) credit policies D) credit analysis

The most stringent step in the collection process is ________. A) letters B) personal visits C) collection agencies D) legal action

The first step in the collection of overdue accounts is ________. A) a letter B) contacting a collection agency C) legal actions D) a personal visit

2/15 net 45 translates as ________. A) 15 percent cash discount if paid in 2 days, net 45-day credit period B) 45 percent of account due in 15 days, payment prior to day 15 receives a 2 percent discount C) 2 percent cash discount if paid prior to 15 days, if customer does not take a cash discount, the balance is due in 45 days D) 2 percent of the balance is due in 15 days, the remaining balance is due in 45 days

A technique that provides an analyst with the information concerning the proportion of each type of account that has been outstanding for a specified period of time is called ________. A) credit analysis B) credit scoring C) aging of receivables D) the economic order quantity model

Which of the following is true of cash discount? A) It increases bad debts because after availing discounts all customers may not pay. B) It decreases the investment in accounts receivable and increases the per unit profit. C) It helps to speed up collections without putting pressure on customers. D) It reduces sales because the customers feel that the products are of inferior quality.

When a firm initiates or increases a cash discount, sales are expected to ________, the investment in accounts receivable is expected to ________, the bad debt expense is expected to ________, and the profit per unit is expected to ________. A) decrease; increase; increase; increase B) decrease; decrease; increase; increase C) increase; increase; decrease; decrease D) increase; decrease; decrease; decrease

When a firm decreases or cancels a cash discount, sales are expected to ________, the investment in accounts receivable is expected to ________, the bad debt expense is expected to ________, and the profit per unit is expected to ________. A) decrease; increase; increase; increase B) decrease; decrease; increase; increase C) increase; increase; decrease; decrease D) increase; decrease; decrease; decrease

If the cash discount period is increased, a firm's investment in accounts receivable is expected to ________. A) increase because existing customers attracted by the new policy will buy more products B) decrease because of nondiscount takers paying earlier to avail the cash discount C) decrease because discount takers will pay more in order to get more discount D) decrease because new customers will doubt the quality of product due to increase in discount

If the cash discount period is increased, a firm's investment in accounts receivable is expected to ________. A) increase because new customers attracted by the new policy will result in new accounts receivable B) decrease because new customers will doubt the quality of product due to increase in discount C) increase because existing discount takers will pay more to get more discount D) decrease because of existing discount takers will now pay earlier to avail the cash discount

Which of the following is true of changes in cash discount period? A) If a firm increases its cash discount period, the sales are expected to decrease, the bad debts are expected to decrease, and the profit per unit is expected to increase. B) If a firm decreases its cash discount period, the sales are expected to decrease, the bad debts are expected to decrease, and the profit per unit is expected to increase. C) If a firm increases its cash discount period, the sales are expected to increase, the bad debts are expected to decrease, and the profit per unit is expected to decrease. D) If a firm decreases its cash discount period, the sales are expected to decrease, the bad debts are expected to increase, and the profit per unit is expected to decrease.

Which of the following is true of changes in cash discount period? A) If a firm decreases its cash discount period, the sales are expected to decrease, the bad debts are expected to increase, and the profit per unit is expected to increase. B) If a firm decreases its cash discount period, the sales are expected to increase, the bad debts are expected to increase, and the profit per unit is expected to decrease. C) If a firm increases its cash discount period, the sales are expected to decrease, the bad debts are expected to decrease, and the profit per unit is expected to increase. D) If a firm increases its cash discount period, the sales are expected to increase, the bad debts are expected to decrease, and the profit per unit is expected to increase.

If a firm's credit period is increased, the sales volume can be expected to ________, the investment in accounts receivable can be expected to ________, and the bad debt expenses can be expected to ________. A) increase; decrease; decrease B) increase; increase; decrease C) increase; increase; increase D) decrease; decrease; decrease

If a firm's credit period is decreased, the sales volume can be expected to ________, the investment in accounts receivable can be expected to ________, and the bad debt expenses can be expected to ________. A) increase; decrease; decrease B) increase; increase; decrease C) increase; increase; increase D) decrease; decrease; decrease

An increase in collection efforts by a firm will result in ________ in sales volume, ________ in the investment in accounts receivable, ________ in bad debt expenses, and ________ in collection expenditures. A) an increase; a decrease; an increase; a decrease B) an increase; a decrease; a decrease; an increase C) an increase; a decrease; an increase; an increase D) a decrease; a decrease; a decrease; an increase

A decrease in collection efforts by a firm will result in ________ in sales volume, ________ in the investment in accounts receivable, ________ in bad debt expenses, and ________ in collection expenditures. A) an increase; an increase; an increase; a decrease B) an increase; a decrease; an increase; an increase C) an increase; a decrease; an increase; a decrease D) a decrease; a decrease; a decrease; an increase

An increase in accounts receivable turnover for a firm due to an increase in collection efforts will ________. A) decrease the firm's marginal investments in accounts receivable B) increase the firm's marginal investments in accounts receivable C) decrease the firm's collection expense D) increase the firm's bad debt expense

Receipts and disbursements management techniques are aimed at minimizing a firm's financing requirements by taking advantage of certain imperfections in the collection and payment system.

TRUE

The entire process resulting from a check issue and mail by a payer company to a payee company (i.e., mail float, processing float, and clearing float) is disbursement float to the payer company and is collection float to the payee company. | T or F?

TRUE

Processing float is the delay between the receipt of a check by a payee and its deposit in firm's account. | T or F?

TRUE

Mail float is the delay between the deposit of a check by a payee and the actual availability of the funds. | T or F?

FALSE ## Footnote Mail float is the time delay between when payment is placed in the mail and when it is received.

Assuming that a firm has done all it can to stimulate customers to pay promptly and to select vendors offering the most attractive and flexible credit terms, it can further speed collections and slow disbursements by taking advantage of the "float" existing in the collection and payment systems. | T or F?

TRUE

Float exists when a payee has received funds in a spendable form but these funds have not been withdrawn from the account of the payer. | T or F?

FALSE

Collection float is experienced by a payer and is a delay in the receipt of funds. | T or F?

FALSE

Disbursement float is experienced by a payee and is a delay in the actual withdrawal of funds. | T or F?

FALSE

Collection float results from the lapse between the time that a firm deducts a payment from its checking account ledger and the time that funds are actually withdrawn from its accounts. | T or F?

FALSE ## Footnote Disbursement float results from the lapse between the time that a firm deducts a payment from its checking account ledger and the time that funds are actually withdrawn from its accounts.

Disbursement float results from the delay between the time that a payer or customer deducts a payment from its checking account ledger (disburses it) and the time that a payee or vendor actually receives these funds in a spendable form. | T or F?

FALSE ## Footnote Collection float results from the delay between the time that a payer or customer deducts a payment from its checking account ledger (disburses it) and the time that a payee or vendor actually receives these funds in a spendable form.

A lockbox system is used to reduce collection float by shortening all three basic float components (i.e., mail, processing, and clearing). | T or F?

TRUE

Controlled disbursing involves the strategic use of mailing points and bank accounts to lengthen mail float and clearing float, respectively. | T or F?

TRUE

Controlled disbursing is a method of consciously anticipating the mail, processing, and clearing time involved with the payment process. | T or F?

FALSE

Playing the float involves the strategic use of mailing points and bank accounts to lengthen mail float and clearing float, respectively. | T or F?

FALSE ## Footnote Controlled disbursing involves the strategic use of mailing points and bank accounts to lengthen mail float and clearing float, respectively.

With the ACH (automated clearing house) credits, disbursement float is sacrificed because ACH transactions immediately draw down a company's payroll account on pay day. | T or F?

TRUE

The ACH (automated clearing house) debits are preauthorized electronic withdrawals from a payer's account. | T or F?

TRUE

Zero-balance accounts are checking accounts in which a zero balance is maintained and the bank automatically covers all checks presented against the accounts. | T or F?

FALSE

Federal agency issues are low-risk securities issued by government agencies but not guaranteed by the U.S. Treasury. | T or F?

TRUE

Eurodollar deposits are deposits of currency that are not native to the country in which the bank is located. | T or F?

TRUE

To be truly marketable, a security must have three basic characteristics: a ready market, risk-free, and safety of principal. | T or F?

FALSE

Marketable securities are short-term, interest-earning, money market instruments that can easily be converted into cash. | T or F?

TRUE

The yields on Treasury bills are generally higher than those on any other marketable securities due to their virtually risk-free nature. | T or F?

FALSE

Federal agency issues are obligations of the U.S. Treasury and are readily accepted as low-risk securities.

FALSE

Commercial paper is a short-term loan issued by commercial banks that have variable yields based on size, maturity, and prevailing money market conditions. | T or F?

FALSE ## Footnote Negotiable CD is a short-term loan issued by commercial banks that have variable yields based on size, maturity, and prevailing money market conditions.

A major decision confronting a business firm when purchasing marketable securities involves a trade-off between the opportunity to earn a return on idle funds during the holding period and the brokerage costs associated with the purchase and sale of marketable securities. | T or F?

TRUE

Treasury notes generate lower returns than U.S. Treasury bills. | T or F?

FALSE

Most federal agency issues have short maturities and offer slightly higher yields than U.S. Treasury issues having similar maturities. | T or F?

TRUE

The yields on negotiable certificates of deposit are typically above those on U.S. Treasury issues and comparable to the yields on commercial paper with similar maturities. | T or F?

TRUE

In exchange for the tailor-made maturity date provided by the repurchase agreement, a bank or security dealer provides a return slightly below than obtainable through outright purchase of similar marketable securities. | T or F?

TRUE

The higher yields on Eurodollar deposits compared with nearly all other marketable securities, governmental or nongovernmental, with similar maturities are attributable to (1) the fact that the depository banks are generally less closely regulated than U.S. banks and are therefore more risky, and (2) some foreign exchange risk may be present.

TRUE

When managing accounts payable, a good strategy would be to ________. A) pay as early as possible creating better credit rating for a firm B) pay as slowly as possible without damaging a firm's credit rating C) pay big customers early to maintain good relations and small customers on a later date D) pay only when a firm has adequate funds to meet its liabilities

Delaying the payment of accounts payable in order to improve cash management is known as ________. A) ACH transfers B) stretching payables C) credit scoring D) lockbox system

________ refers to funds that have been dispatched by a payer but are not in a form that can be spent by the payee. A) Banker's acceptance B) Float C) A direct send D) Lockbox

________ float is the delay between the receipt of a check and the actual deposit of it into a firm's account. A) Disbursement B) Deposit C) Processing D) Clearing

Float is important in the cash conversion cycle of a firm because ________. A) its presence reduces a firm's average collection period B) its presence reduces a firm's average payment period C) its presence lengthens both a firm's average collection period and its average payment period D) its presence reduces the investment that a firm must make in its cash conversion cycle

________ float results from the delay between the time when a customer deducts a payment from the checking account ledger and the time when the vendor actually receives the funds in a spendable form. A) Mail B) Processing C) Collection D) Disbursement

Which of the following is true of collection float? A) It represents the time delay between when payment is placed in the mail and when it is received. B) It represents the time between receipt of a payment and its deposit into a firm's account. C) It results from the lapse between the time when a firm deducts a payment from its checking account ledger and the time when funds are actually withdrawn from its account. D) It results from the delay between the time when a customer deducts a payment from the checking account ledger and the time when the vendor actually receives the funds in a spendable form.

Controlled disbursing ________. A) reduces a firm's average collection period B) is a popular technique for effectively managing inventory to keep its level low C) is a popular technique for increasing payment float D) reduces a firm's average payment period

________ float results from the lapse between the time when a firm deducts a payment from its checking account ledger and the time when funds are actually withdrawn from its account. A) Mail B) Processing C) Collection D) Disbursement

________ involves the strategic use of mailing points and bank accounts to lengthen mail and clearing floats. A) A direct send B) Concentration banking C) A lockbox D) Controlled disbursing

A ________ is an unsigned check drawn on one of a firm's bank accounts and deposited into its account at another bank. A) direct send B) wire transfer C) depository transfer check D) preauthorized check

A ________ is an electronic communication that, via bookkeeping entries, removes funds from the payer's bank and deposits them in an account of the payee's bank. A) direct send B) wire transfer C) depository transfer check D) preauthorized check

________ are short-term money market instruments that can be easily converted into cash. A) Preferred stocks B) Treasury bonds C) Accounts receivable D) Marketable securities

To be truly marketable, a security must ________. A) be highly rated by a credit rating agency B) have the characteristics of a callable bond C) be readily convertible into cash D) have a maturity of 10 years or more

________ are obligations of the U.S. Treasury with common maturities of 91 to 182 days and that have a strong secondary market. A) Treasury notes B) Treasury bills C) Federal agency issues D) Banker's acceptances

________ are obligations of the U.S. Treasury with common maturities of one to ten years. A) Treasury notes B) Treasury bills C) Federal agency issues D) Banker's acceptances

________ are not obligations of the U.S. government, but most purchasers feel that they are implicitly guaranteed by the federal government. A) Treasury notes B) Treasury bills C) Federal agency issues D) Banker's acceptances

Which of the following securities is a government issue? A) eurodollar deposits B) repurchase agreements C) certificate of deposits D) federal agency issues

Which of the following is a short-term, unsecured promissory note issued by a corporation with a very high credit standing? A) negotiable certificate of deposit B) repurchase agreement C) money market mutual fund D) commercial paper

Which of the following is an attribute of a banker's acceptance? A) It is an unsecured note of issuer with large denominations. B) It has a maturity of 1 day to 3 years. C) Its risk and return is higher than U.S. Treasury issues. D) It is issued by a corporation with a high credit standing.

________ are funds denominated in U.S. dollars and deposited in banks located outside the United States. A) Negotiable certificates of deposit B) Eurodollar deposits C) Banker's acceptances D) Money market mutual funds

A ________ is a professionally managed portfolio of marketable securities and is sold in fractional parts. A) negotiable certificate of deposit B) repurchase agreement C) money market mutual fund D) commercial paper issue

Nongovernmental issues typically have slightly higher yields than government issues with similar maturities because ________. A) they experience little or no loss in value over time B) of the slightly higher risk associated with them C) the yields are guaranteed by the federal government D) of having stronger secondary market

Which of the following is a nongovernmental issue? A) euro-dollar deposit B) Treasury bill C) Treasury bond D) gilt fund

Funds on deposit at commercial banks having variable maturities and yields based on size, maturity, and prevailing money market conditions are ________. A) negotiable certificates of deposit B) commercial paper C) savings accounts D) money market mutual funds

________ float is the time that elapses between the deposit of a check by the payee and the actual availability of funds. A) Mail B) Processing C) Clearing D) Disbursement

Which of the following is true of a repurchase agreement? A) It results from a bank guarantee of a business transaction; sold at discount from maturity value. B) It provides a return slightly below that obtainable through outright purchase of similar marketable securities. C) It is issued by professional portfolio management companies. D) Its maturity period lies between 1 to 10 years.

The yield on commercial paper is generally higher than the yield on ________. A) preferred stock B) a corporate bond C) common stock D) a Treasury bill

Which of the following instruments demonstrates the safety of principal characteristic common to marketable securities? A) common stock B) derivatives C) options D) Treasury bonds

A security experiencing little or no loss in value over time is said to have ________. A) safety of return B) safety of principal C) safety of maturity D) risk of payments

Federal agency issues ________. A) are obligations of U.S. treasury B) generate slightly higher returns than corporate bonds C) generate slightly higher returns than U.S. Treasury issues D) don't have strong secondary market

Sound cash management techniques would support ________. A) minimizing collection float, maximizing disbursement float, and minimizing the cash conversion cycle B) minimizing collection float, maximizing disbursement float, and minimizing the cash turnover C) maximizing collection float, minimizing disbursement float, and minimizing operating cash flow D) minimizing collection float, maximizing disbursement float, and maximizing investing cash flow

The risk of an investment in a Eurodollar deposit is partially due to ________. A) the fact that the center of the Eurodollar market is in London B) the fact that the majority of these deposits are not in the form of U.S. dollars C) the presence of some foreign exchange risk D) the fact that these instruments only pay interest at maturity

Which of the following is true of a Eurodollar deposit? A) Eurodollar deposits tend to provide yields below nearly all other marketable securities with similar maturities due to their low risk. B) Eurodollar deposits are non-negotiable and pay interest only at maturity, hence the yield is higher than on other marketable securities with similar maturities. C) Eurodollar deposits tend to provide yields above nearly all other marketable securities with similar maturities due to the higher risk. D) Eurodollar deposits tend to provide higher yields above nearly all other marketable securities with similar maturities due to the absence of an active secondary market.