Question 1

Prior to establishing trade credit,the firm is required to make extended formal agreements with the company.

Accepted Answer

A) True 
 B)False

Question 2

With regard to the self-liquidating debt,which of the following assets should be financed with permanent sources of financing?

Accepted Answer

A)  Machinery
B)  Expansion of inventory to meet seasonal demands
C)  Machinery and expansion of inventory to meet seasonal demands
D)  Minimum level of accounts receivable required year round,machinery,and minimum level of cash required for year-round operations

Question 3

J.B.'s Wholesale Club has current assets of $12.25 million and current liabilities of $14 million.Which of the following is possible.

Accepted Answer

A)  J.B.makes efficient use of its current assets.
B)  J.B.may be at some risk of being unable to pay its bills.
C)  J.B.appears to be overinvesting in current assets.
D)  Either or both A and B may be true.

Question 4

Increasing the use of short-term debt versus long-term debt financing will increase profit.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements regarding a line of credit is true?

Accepted Answer

A)  The purpose for which the money is being borrowed must be stated by the borrower.
B)  A line of credit agreement usually fixes the interest rate that will be applied to any extensions of credit.
C)  A line of credit agreement is a legal commitment on the part of the bank to provide the stated credit.
D)  Such agreements usually cover the borrower's fiscal year.

Question 6

Which of the following would NOT be considered an unsecured loan?

Accepted Answer

A)  Accrued tax payments
B)  Line of credit
C)  Transaction loans
D)  Factored accounts receivable

Question 7

Which of the following is an advantage of trade credit?

Accepted Answer

A)  Trade credit is conveniently obtained as a normal part of the firm's operations.
B)  No formal agreements are generally involved in extending credit.
C)  The amount of credit extended expands and contracts with the needs of the firm.
D)  All of the above.

Question 8

Briefly describe at least three useful tools for maintaining control over accounts receivable.

Accepted Answer

Ratio analysis: by tracking the average ...

Question 9

When faced with a surplus of cash,most firms should stretch their trade accounts.

Accepted Answer

A) True 
 B)False

Question 10

Trade credit is a source of spontaneous financing.

Accepted Answer

A) True 
 B)False

Question 11

If revenues can be forecast to fall within a tight range of outcomes,then the ratio of cash and near-cash to total assets will be greater for the firm than if the prospective cash inflows might be expected to vary over a wide range.

Accepted Answer

A) True 
 B)False

Question 12

The risk of a firm not being able to pay its bills on time is called:

Accepted Answer

A)  illiquidity.
B)  insolvency.
C)  capital inadequacy.
D)  float.

Question 13

Net working capital refers to which of the following?

Accepted Answer

A)  Current assets
B)  Current assets minus current liabilities
C)  Current assets minus inventory
D)  Current assets divided by current liabilities
E)  Current assets minus inventory divided by current liabilities

Question 14

Which of the following could offset the higher risk exposure a company would face if it s current ratio and net working capital were relatively low.?

Accepted Answer

A)  Its current assets would need to be highly liquid.
B)  Its accounts receivable collection policy could increase the average collection period.
C)  It could offer no discounts for early payment by its customers.
D)  It could buy back some of its shares in the open market in order to reduce its equity.

Question 15

The correct equation for calculating the cost of short-term credit is:

Accepted Answer

A)  rate = interest/(principal × time) .
B)  rate = (principal × time) /interest.
C)  rate = principal/(time × interest) .
D)  rate = principal × interest × time.

Question 16

A negotiable certificate of deposit (CD)is a marketable receipt for funds deposited in a bank.

Accepted Answer

A) True 
 B)False

Question 17

A quite risky working capital management policy would have a high ratio of:

Accepted Answer

A)  short-term debt to bonds and equity.
B)  short-term debt to total debt.
C)  bonds to property,plant,and equipment.
D)  short-term debt to equity.

Question 18

Which of the following would be considered an issue that is related to the management of working capital?

Accepted Answer

A)  How much inventory should the firm maintain?
B)  How should a firm finance its current assets?
C)  To whom should the firm grant trade credit?
D)  All of the above

Question 19

A company which foregoes the discount when credit terms are 4/15 net 70 is essentially borrowing money from his supplier for an additional:

Accepted Answer

A)  40 days.
B)  55 days.
C)  70 days.
D)  85 days.

Question 20

Lines of credit involve fixed rates of interest.

Accepted Answer

A) True 
 B)False

Exam 18: Working Capital Management

Which of the following is an advantage of trade credit?

Correct AnswerverifiedShow Answer

Net working capital refers to which of the following?

Correct AnswerverifiedShow Answer

Lines of credit involve fixed rates of interest.

Correct AnswerverifiedShow Answer

A company which foregoes the discount when credit terms are 4/15 net 70 is essentially borrowing money from his supplier for an additional:

Correct AnswerverifiedShow Answer

Which of the following would NOT be considered an unsecured loan?

Correct AnswerverifiedShow Answer

The correct equation for calculating the cost of short-term credit is:

Correct AnswerverifiedShow Answer

The risk of a firm not being able to pay its bills on time is called:

Correct AnswerverifiedShow Answer

If revenues can be forecast to fall within a tight range of outcomes,then the ratio of cash and near-cash to total assets will be greater for the firm than if the prospective cash inflows might be expected to vary over a wide range.

Correct AnswerverifiedShow Answer

Increasing the use of short-term debt versus long-term debt financing will increase profit.

Correct AnswerverifiedShow Answer

When faced with a surplus of cash,most firms should stretch their trade accounts.

Correct AnswerverifiedShow Answer

Which of the following would be considered an issue that is related to the management of working capital?

Correct AnswerverifiedShow Answer

Prior to establishing trade credit,the firm is required to make extended formal agreements with the company.

Correct AnswerverifiedShow Answer

J.B.'s Wholesale Club has current assets of $12.25 million and current liabilities of $14 million.Which of the following is possible.

Correct AnswerverifiedShow Answer

Which of the following could offset the higher risk exposure a company would face if it s current ratio and net working capital were relatively low.?

Correct AnswerverifiedShow Answer

Which of the following statements regarding a line of credit is true?

Correct AnswerverifiedShow Answer

Briefly describe at least three useful tools for maintaining control over accounts receivable.

Correct AnswerverifiedRatio analysis: by tracking the average ...View AnswerShow Answer

Trade credit is a source of spontaneous financing.

Correct AnswerverifiedShow Answer

A negotiable certificate of deposit (CD)is a marketable receipt for funds deposited in a bank.

Correct AnswerverifiedShow Answer

A quite risky working capital management policy would have a high ratio of:

Correct AnswerverifiedShow Answer

With regard to the self-liquidating debt,which of the following assets should be financed with permanent sources of financing?

Correct AnswerverifiedShow Answer

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Ratio analysis: by tracking the average ...
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