Preliminary Examination Flashcards
A change in credit policy has caused an increase in sales, an increase in discounts taken, a reduction of the investment in accounts receivable, and a reduction in the number of doubtful accounts. Based on this information, we know that: (E)
a. Net profit has increased
b. The average collection period has decreased
c. Gross profit has declined
d. The size of the discount offered has decreased.
e. The bad debt loss percentage has increased.the firm
b. The average collection period has decreased
The operating cycle is influenced by all of the following factors EXCEPT:
a) Inventory turnover rate
b) Accounts receivable turnover
c) Accounts payable turnover
d) The company’s long-term debt repayment schedule
d) The company’s long-term debt repayment schedule
Which of the following strategies would most likely be associated with a highly aggressive working capital policy?
a) Financing short-term needs with long-term debt
b) Maintaining large cash reserves for emergencies
c) Relying on trade credit and short-term loans to finance current assets
d) Keeping inventories and receivables at high levels to ensure liquidity
c) Relying on trade credit and short-term loans to finance current assets
Which of the following best describes the operating cycle?
a) The time it takes to convert raw materials into cash
b) The time it takes to convert cash into raw materials and back into cash
c) The length of time between the purchase of inventory and the collection of cash from receivables
d) The time taken to pay off accounts payable
c) The length of time between the purchase of inventory and the collection of cash from receivables
Zap Company follows an aggressive financing policy in its working capital management whileZing Corporation follows a conservative financing policy. Which one of the following statements is correct?
A. Zap has low ratio of short-term debt to total debt while Zing has a high ratio of short-term debt to total debt.
B. Zap has a low current ratio while Zing has a high current ratio.
C. Zap has less liquidity risk while Zing has more liquidity risk.
D. Zap finances short-term assets with long-term debt while Zing finances short-term
B. Zap has a low current ratio while Zing has a high current ratio.
Which of the following working capital management policies would be most appropriate for a company that operates in a highly volatile market?
a) Conservative policy
b) Aggressive policy
c) Moderate policy
d) No working capital policy
a) Conservative policy
Compared to other firms in the industry, a company that maintains a conservative working capital policy will tend to have a
a. Greater percentage of short-term financing
b. Greater risk of needing to sell current assets to repay debt
c. Higher ratio of current assets to fixed assets
d. Higher total asset turnover
c. Higher ratio of current assets to fixed assets
In the context of working capital management, the conservative policy would typically:
a) Maintain high levels of cash and current assets to avoid liquidity risk
b) Use more short-term debt to finance operations
c) Focus on quick inventory turnover
d) Minimize the level of cash and receivables on hand
a) Maintain high levels of cash and current assets to avoid liquidity risk
Other things held constant, which of the following would tend to reduce the cash conversion cycle?
a. Carry a constant amount of receivables as sales decline.
b. Place larger orders for raw materials to take advantage of price breaks.
c. Take all discounts that are offered.
d. Continue to take all discounts that are offered and pay on the net date.
e. Offer longer payment terms to customers.
d. Continue to take all discounts that are offered and pay on the net date.
An enterprise plans to produce a new product, which will typically be sold to other firms on credit. The cash conversion cycle resulting from this new product can be measured as the length of time from
a. Cash purchases of raw materials to the collection of accounts receivable.
b. Cash purchases of raw materials to the time the final product is completed.
c. Cash purchases of raw materials to the sale of the product.
d. When the product is completed to the sale of the product.
a. Cash purchases of raw materials to the collection of accounts receivable.
The cash conversion cycle (CCC) can be shortened by:
a) Increasing the accounts payable turnover
b) Reducing inventory turnover
c) Lengthening the average collection period
d) Increasing the average payment period to suppliers
a) Increasing the accounts payable turnover
Which of the following would increase risk?
A. Raise the level of working capital.
B. Decrease the amount of inventory by formulating an effective inventory policy.
C. Increase the amount of short-term borrowing.
D. Increase the amount of equity financing.
C. Increase the amount of short-term borrowing.
Temporary working capital supports
A. the cash needs of the company.
B. payment of long term debt.
C. acquisition of capital equipment.
D. seasonal peaks.
D. seasonal peaks.
The longer the firm’s accounts payable period, the:
A. longer the firm’s cash conversion cycle is.
B. shorter the firm’s inventory period is.
C. more the delay in the accounts receivable period.
D. less the firm must invest in working capital.
E. Increase the amount of equity financing.
E. Increase the amount of equity financing.
As a company becomes more conservative with respect to working capital policy, it would tend to have a(n)
a. Increase in the ratio of current liabilities to noncurrent liabilities.
b. Decrease in the operating cycle.
c. Decrease in the quick ratio
d. Increase in the ratio of current assets to noncurrent assets
d. Increase in the ratio of current assets to noncurrent assets
Firms generally choose to finance temporary current assets with short-term debt because
a. matching the maturities of assets and liabilities reduces risk under some circumstances, and also because short-term debt is often less expensive than long-term capital
b. short-term interest rates have traditionally been more stable than long-term interest rates
c. a firm that borrows heavily on a long-term basis is more apt to be unable to repay the debt than a firm that borrows short term
d. the yield curve is normally downward sloping
e. short-term debt has a higher cost than equity capital.
a. matching the maturities of assets and liabilities reduces risk under some circumstances, and also because short-term debt is often less expensive than long-term capital
Which one of the following provides a spontaneous source of financing. (E)
a. Accounts payable.
b. Mortgage bonds.
c. Accounts receivable.
d. Debentures.
a. Accounts payable.
Which of the following is a direct consequence of effective working capital management?
a) Improved profitability and return on assets
b) Increased short-term borrowing requirements
c) Decreased inventory turnover
d) Higher levels of retained earnings
No correct answers
Firms generally choose to finance temporary assets with short-term debt because (M)
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. The yield curve has traditionally been downward sloping.
e. Sales remain constant over the year, and financing requirements also remain constant.
a. Matching the maturities of assets and liabilities reduces risk.
Which of the following statements is CORRECT
a. Net working capital is defined as current assets minus the difference between current liabilities and notes payable, and any increase in the current ratio automatically indicates that net working capital has increased
b. Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks associated with using short-term financing.
c. If a company follows a policy of “matching maturities,” this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt.
d. Net working capital is defined as current assets minus the difference between current liabilities and notes payable, and any decrease in the current ratio automatically indicates that net working capital has decreased
e. If a company follows a policy of “matching maturities,” this means that it matches its use of short-term debt with its use of long-term debt.
b. Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks associated with using short-term financing.
What is the impact of seasonality on working capital management?
a) It has no impact on working capital.
b) It increases the need for liquidity during peak periods.
c) It reduces the need for working capital during off-seasons.
d) Both b and c.
d) Both b and c.
A company with a negative working capital may be:
a) Efficiently managing its short-term assets and liabilities
b) Facing difficulties in paying off its short-term obligations
c) Having an overly conservative working capital policy
d) Generating too much cash from operations
b) Facing difficulties in paying off its short-term obligations
A decrease in the firm’s receivable turnover ratio means that
A. It is collecting credit sales more quickly than before
B. Cash purchases of raw materials to the collection of accounts receivable.
C. It is collecting credit sales more slowly than before.
D. Sales have gone up.
E. Inventories have gone up.
A. It is collecting credit sales more quickly than before
Which of the following transactions causes an increase in working capital?
a. Sale of merchandise on credit at a price above cost.
b. Sale of marketable securities at a price below cost.
c. Collection of an account receivable.
d. Return to supplier of defective merchandise purchased on credit. Full credit allowed by supplier.
a. Sale of merchandise on credit at a price above cost.
