Deck 22: Managing the Firms Assets

Question 1

Accounts receivable are sometimes called near cash because they can be converted to cash whenever a business needs to do so.

Answer 1

False

Question 2

In a practice known as pledging, a business sells its accounts receivable to a finance company, and the finance company assumes any bad-debt risk.

Answer 2

False

Question 3

Revenue and cash receipts are always recorded at the time a sale is made.

Answer 3

False

Question 4

The date on which accounts receivable are collected affects the working-capital cycle.

Question 5

The disadvantage of accounts receivable financing is its negative impact on cash flow.

Question 6

Net profit is the difference between cash inflows and outflows.

Question 7

Working-capital management focuses on the attractiveness of long-run investment opportunities.

Question 8

Capital budgeting primarily involves short-term decisions on the part of management.

Question 9

Aging accounts receivable can indicate troublesome accounts.

Question 10

In a healthy business, cash flow is typically even.

Question 11

The payback period technique shows the number of years it will take to recover the cash outlay of an investment.

Question 12

During the cash conversion period, the firm no longer has the benefit of the financing provided by the supplier.

Question 13

Pledging accounts receivable may limit a firm's ability to borrow from a bank because this practice removes a prime asset from the firm's available collateral.

Question 14

A firm's working-capital cycle refers to the flow of cash to purchase and sell fixed assets.

Question 15

Net working capital includes cash and accounts receivable, among other things.

Question 16

Although the owner of a small business does not make long-term investment decisions often, capital budgeting is nonetheless important to the successful operation of the firm.

Question 17

The accounting return on investment technique reveals how many dollars in average profits are generated per dollar of investment.

Question 18

Improperly managed stockpiling is harmful to cash flow and should be minimized if possible.

Question 19

Net cash flow should be equated with net profit.

Question 20

The cash conversion period is the time period between ordering inventory and receiving cash for its sale.

Question 21

The discounted cash flow technique measures the present value of future benefits from an investment as compared to the investment outlay.

Question 22

The net present value method discounts future after-tax profits back to the present day.

Question 23

Accounting profits are not identical to actual cash flows.

Question 24

A firm will have difficulty attracting investors if investments in the firm have internal rates of return below an investor's required rate of return.

Question 25

Calculations of net present value ignore the time value of money.

Question 26

The payback period technique measures how long it will take to recover the initial cash outlay and the total amount of interest unearned over the payback period as an opportunity cost.

Question 27

The payback period technique measures how long it will take to recover the initial cash outlay of an investment.

Question 28

In using the net present value method, one does not consider the time value of money.

Question 29

The payback period technique deals with accounting profits in measuring how long it will take to recover the initial cash outlay of an investment.

Question 30

Accounting return on investment equals the average annual after-tax profits per year divided by the average book value of the investment.

Question 31

Discounted cash flow techniques consider the time value of money.

Question 32

The internal rate of return method estimates the rate of return that can be expected from a contemplated investment.

Question 33

A project with a positive net present value is acceptable for investment.

Question 34

Use of the accounting return on investment technique answers the question, "How long will it take to recover the original investment outlay?"

Question 35

A disadvantage of the accounting return on investment technique is that it ignores the time value of money.

Question 36

The net present value method takes the time value of money into account in evaluating an investment.

Question 37

If the internal rate of return is less than the firm's cost of capital, the project should be accepted because capital for the project can be obtained more cheaply than usual.

Question 38

The payback period technique does not consider the time value of money.

Question 39

A strength of the accounting return on investment technique is that it is based on accounting profits rather than cash flows received.

Question 40

A firm's cost of capital is simply the interest rate it must pay on its loans.

Question 41

Which of the following is not directly involved in a firm's management of its working capital?

A) Inventory
B) Fixed assets
C) Accounts receivable
D) Accounts payable

Question 42

Discounted cash flow techniques take into consideration that cash received today is more valuable than cash received at a later date.

Question 43

Net cash flow

A) is the difference between cash inflows and outflows.
B) is the difference between revenues and expenses.
C) is the same as net profit.
D) has little impact on a firm's financial well-being.

Question 44

The payback period technique measures how long it will take to recover the initial cash outlay of an investment.

Question 45

Net cash flow and net profit are

A) opposites.
B) different.
C) identical.
D) identical after adjustment for depreciation.

Question 46

Which of the following is not a part of managing working capital?

A) Capital budgeting
B) Cash flows
C) Accounts receivable analysis
D) Accounts payable analysis

Question 47

Accounts payable ____ cash available for the firm.

A) increase the amount of
B) reduce the amount of
C) have no effect on the
D) represent all of the

Question 48

Accounts receivable financing might include

A) pledging receivables and factoring.
B) loaning money against receivables and aging accounts receivable.
C) providing cash discounts and charging interest on delinquent accounts.
D) aging accounts receivable and using the most effective methods for collecting overdue accounts.

Question 49

The cash conversion period is the time between

A) placement of an order and cash payment for it.
B) receipt of inventory and cash payment for it.
C) cash payment for inventory and collection of accounts receivable.
D) sale of inventory and cash collection of accounts receivable.

Question 50

The limited use of discounted cash flow tools by a small firm probably has more to do with the nature of the small firm itself than it does with the owners' willingness to learn.

Question 51

When a business sells its accounts receivable to a finance company, this is called

A) selling short.
B) factoring.
C) mortgaging the future.
D) pledging receivables.

Question 52

Capital budgeting analysis helps managers make decisions about long-term investments.

Question 53

Which of the following is sometimes called near cash?

A) Accounts payable
B) Inventory
C) Accounts receivable
D) Pledges

Question 54

The accounting return on investment technique compares the average before tax profits a firm expects to receive with the average book value of the investment.

Question 55

Liquidity has very little significance to small firms.

Question 56

Management of working capital focuses attention on

A) cash, accounts receivable, inventory, and accounts payable.
B) cash, accounts receivable, and fixed assets.
C) cash, fixed assets, and inventory.
D) accounts receivable, accounts payable, and long-term investments.

Question 57

The net present value (NPV) technique estimates the current value of the cash that will flow into the firm in the future and deducts the initial outlay.

Question 58

Which of the following is not an asset used to calculate net operating working capital?

A) Accruals
B) Accounts receivable
C) Cash
D) Inventories

Question 59

The life cycle of receivables begins with which of the following stages?

A) A credit sale
B) The processing of an invoice by a customer
C) Funds remittance
D) Collection

Question 60

Cash deposits during a month less checks written during the same period equal

A) net cash flow.
B) net profit.
C) operating profit.
D) net working capital.

Question 61

Failure to take cash discounts from suppliers

A) typically makes little difference to a firm's financial well-being, since a business does not pay a high rate for use of a supplier's money.
B) typically makes a big difference to a firm's financial well-being, since a business pays a high rate for use of a supplier's money.
C) has no effect on cash flow.
D) will result in negative credit reports.

Question 62

The accounting return on investment technique is characterized by the fact that

A) it is simple to calculate.
B) it is based on actual cash flows received.
C) it takes into account the time value of money.
D) it is a relatively unpopular technique.

Question 63

The payback period and accounting return on investment techniques

A) recognize the economic life of a project.
B) ignore the time value of money.
C) consider only the return for the first year of the investment.
D) are more difficult to use than the net present value method.

Question 64

The measurement techniques mentioned in the textbook include all of the following except

A) accounting return on investment.
B) payback period.
C) discounted cash flow technique.
D) the current accounts approach.

Question 65

Average annual after-tax profits per year divided by the average book value of the investment equals

A) average investment capability.
B) average investment outlay.
C) accounting return on investment.
D) payback period.

Question 66

Long-term investments are the focus of

A) cash budgeting.
B) investment planning.
C) capital budgeting.
D) corporate planning.

Question 67

The question "How does the present value of future benefits from the investment compare to the initial investment outlay?" is answered using

A) analysis of long-term investment.
B) investment outlay valuation.
C) ratio analysis.
D) discounted cash flow analysis.

Question 68

The question "How long will it take to recover the original investment outlay?" is answered using

A) accounting ratio analysis.
B) the payback period.
C) net present value.
D) discounted cash flow.

Question 69

Which of the following questions do all types of capital budgeting techniques try to answer?

A) Is the investment too expensive?
B) Do the future benefits from the investment exceed the cost of making the investment?
C) Will the investment's time requirements fit the needs of the company?
D) Will the firm's cash flows be adequate to pay for the investment?

Question 70

Popularity, use of cash flows rather than accounting profits, and failure to consider the time value of money characterize

A) the payback period technique.
B) discounted cash flow techniques.
C) the investment outlay valuation technique.
D) long-term investment analysis.

Question 71

Discounted cash flow techniques answer which of the following questions?

A) How much average profit is generated per dollar of average investment?
B) Do the cash returns of the investment exceed the cash outlays?
C) How long will it take to recover the original investment outlay?
D) How does the present value of future benefits from the investment compare to the investment outlay?

Question 72

The amount of time it takes to recover the original cost of an investment is computed using

A) the payback period technique.
B) the periodic investment recovery technique.
C) the investment return technique.
D) the ratio analysis technique.

Question 73

The terms 3/10, net 30 offer

A) a 3 percent discount on purchases paid for within 30 days.
B) a 30 percent discount on purchases paid for within 30 days.
C) a 3 percent discount on purchases paid for within 10 days.
D) a 30 percent discount on purchases paid for within 10 days.

Question 74

Failure to recognize the time value of money is a weakness of

A) the internal rate of return method.
B) the accounting return on investment technique.
C) the net present value method.
D) discounted cash flow techniques.

Question 75

Jack should use ____ to answer the question "How does the present value of future benefits from the investment compare to the initial investment outlay?"

A) the analysis of long-term investment method
B) the investment outlay reduce valuation method
C) an extended ratio analysis
D) a discounted cash flow analysis

Question 76

An understanding of the present value of a future dollar is important when one is using

A) the payback period method.
B) discounted cash flow techniques.
C) the accounting return on investment technique.
D) the investment outlay valuation technique.

Question 77

Wilbur is attempting to raise some quick cash for his business by selling its accounts receivable to a finance company, this is called

A) selling short.
B) factoring.
C) mortgaging the future.
D) pledging receivables.

Question 78

Inventory is called an "evil" because it

A) ties up funds that are not actively productive.
B) reduces cash when it is sold.
C) is subject to deterioration.
D) is a large asset for many firms.

Question 79

The main purpose of capital budgeting is to help managers make decisions about

A) long-term investments.
B) short-term investments.
C) discounts to offer to customers.
D) nonfinancial constraints on expansion.

Question 80

The question "How many dollars in average profits are generated per dollar of average investment?" is answered using

A) accounting return on investment.
B) investment outlay valuation.
C) net present value.
D) internal rate of return.