Deck 25: Management of Current Assets

Question 1

According to the EOQ model, doubling the sales also doubles the desired level of inventory.​

Answer 1

False

Question 2

A doubling of carrying costs will cut in half the economic order quantity.​

Answer 2

False

Question 3

Since not all new credit sales will be collected, that implies the firm should not grant credit.​

Answer 3

False

Question 4

Aging accounts receivable is one means to identify slow paying accounts.​

Question 5

Excess inventory costs the firm because it uses the firm's sources of finance.​

Question 6

The use of short-term instead of long-term debt financing tends to increase both earnings and risk.​

Question 7

The safety stock is the maximum amount of inventory that the firm should seek to carry.​

Question 8

If a firm uses short-term sources of finance instead of long-term, its financial risk is increased.​

Question 9

The use of long-term sources of finance instead of short-term sources tends to decrease operating income.​

Question 10

The matching principle suggests that long-term assets should not be financed with short-term sources.​

Question 11

Credit policy requires establishing both the terms and the collection procedures.​

Question 12

Net working capital is the difference between current assets and current liabilities.​

Question 13

The economic order quantity is inversely related to carrying costs.​

Question 14

In the decision to extend credit, the analysis of bad debt expense applies only to existing customers.​

Question 15

Short-term financing is an inappropriate source of finance to acquire long-term assets.​

Question 16

An increase in accounts receivable increases profitability because the receivables are a source of funds.​

Question 17

An increase in equipment financed by issuing bonds increases both the firm's earning capacity and its working capital.​

Question 18

An increase in accounts payable and in inventory suggests that net working capital also increased.​

Question 19

The more lenient the terms of credit, the riskier is the firm's credit policy.​

Question 20

An increase in accounts receivable is a source of finance.​

Question 21

A repurchase agreement occurs when a firm sells a Treasury bill and agrees to buy it back at a lower price.​

Question 22

Which of the following money market securities are sold at a discount?​
1) commercial paper
2) corporate stock
3) certificates of deposit
4) Treasury bills

A)​1 and 2
B)​2 and 3
C)​3 and 4
D)​1 and 4

Question 23

Commercial paper is a short‑term security that is sold at a discount.​

Question 24

​If a firm has excess cash that will be needed for a required payment after six months, these funds should not be invested in

A) ​commercial paper
B) ​bankers' acceptances
C) ​corporate bonds
D) ​tax anticipation notes

Question 25

Treasury bills are long‑term securities that are sold at a discount.​

Question 26

The purpose of aging accounts receivable is to identify the speed with which inventory turns over.​

Question 27

Treasury bills and commercial paper are examples of liquid assets.​

Question 28

​Excess cash may be invested in short‑term money market securities such as
1) commercial paper
2) corporate stock
3) Treasury bills

A)1 and 2​
B)​1 and 3
C)​2 and 3
D)​1, 2, and 3

Question 29

Negotiable CDs are an example of a money market instrument for which there is no secondary market.​

Question 30

The lower the rate of interest, the smaller is

A) ​the economic order quantity
B) the number of units sold
C) ​the cost of carrying inventory
D) ​the safety stock

Question 31

​One method to identify slow paying accounts is to

A) ​age the accounts receivable
B) ​determine the desired safety stock
C) ​calculate the inventory turnover
D) ​age the accounts payable

Question 32

Which of the following increases the firm's net working capital?​

A) ​an increase in plant financed by retained earnings
B) ​paying a cash dividend
C) ​retaining earnings and increasing the firm's cash
D) ​paying off an account payable

Question 33

​Which of the following increases net working capital?

A) ​an increase in plant financed by issuing bonds
B) ​an increase in bonds and a decrease in equity
C) ​an increase in cash and a decrease in accounts receivable
D) an increase in preferred stock and a decrease in accounts payable​

Question 34

The optimal economic order quantity depend on
1)the cost of carrying inventory
2)the cost of placing an order
3)the volume of sales​

A)​1 and 2
B)​1 and 3
C)​2 and 3
D)​1, 2, and 3

Question 35

Which of the following should tend to decrease the firm's profitability?
1) a decrease the speed with which receipts are processed
2) an increase in the allowance for doubtful accounts
3) riding the credit of the firm's suppliers​

A)​1 and 2
B)​1 and 3
C)​2 and 3
D)​1, 2, and 3

Question 36

​Which of the following decreases the firm's net working capital?

A) ​distributing a stock dividend
B) ​paying accrued wages
C) ​selling inventory on credit
D) ​increasing the allowance for doubtful accounts

Question 37

Treasury bills do not pay a set rate of interest but are sold at a discount.​

Question 38

​The matching principle suggests that
1) equipment should be financed with long-term sources
2) current assets may be financed with short-term sources
3) plant should not be financed with short-term sources

A)​1 and 2
B)​1 and 3
C)​2 and 3
D)​1, 2, and 3

Question 39

Repurchase agreements establish a specified price at which the asset will be bought in the future.​

Question 40

​Which of the following increases financial risk?

A) ​the substitution of equity for short-term debt
B) ​the substitution of short-term debt for long-term debt
C) ​the substitution of long-term debt for short-term debt
D) ​the reduction of cash and marketable securities

Question 41

​More lenient terms of credit will probably decrease

A) ​sales
B) ​risk
C) ​receivables turnover
D) ​inventory turnover

Question 42

If a firm has excess cash that it will need after a period of four months, the financial manager may acquire
1)negotiable certificates of deposit
2)Treasury bills
3)commercial paper​

A)​1 and 2
B)​1 and 3
C)​2 and 3
D)​1, 2, and 3

Question 43

A firm has the following items on its balance sheet: inventory
$\$ 3,000,000$
accounts receivable $2,300,000$
The inventory tumover for the industry is 4x and the average collection period is 33 days. If this firm's sales are $9,000,000 and the interest rate is 10 percent, how much could it save in carrying costs if its inventory tumover and average collection period were comparable to the industry average? (To answer, assume that last year's inventory equaled this year's inventory.)

Question 44

A firm annually sells 7,890 units. The cost of placing an order is $100 and the carrying costs are $2 a unit. What are the EOQ, the duration of the EOQ, and how many orders are placed annually? If the safety stock is 100 units, what are the maximum and average levels of inventory?

Question 45

The yield on a Treasury bill will increase if​

A) the length of time to maturity decreases​
B) ​the premium over its face amount increases
C) ​bond prices rise
D) ​the discount increases

Question 46

What are the discount yield and the true annual yield on a six-month, $10,000 Treasury bill purchased for $9,589?​

Question 47

Which of the following argues for extending credit?​

A) ​an increase in sales and an increase in collection costs
B) ​an increase in bad debt expense and a decrease in collection costs
C) ​an increase in both carrying costs and in sales
D) ​an increase in both sales and inventory turnover

Question 48

What is the discount yield, the simple yield, and the compound yield on a $10,000 nine month (270 day) treasury bill that cost $9,676? What are the same yields on a $10,000 six-month (180-day) piece of commercial paper that cost $9,721?​

Question 49

​A firm has the following accounts receivable:
​ $$\begin{array} { c c c c } \text { customer } & \text { amount owed } & \text { days outstanding } \\\text { A } & \$ 1,000 & 15 & \\\text { B } & 530 & 32 & \\\text { C } & 680 & 45 & \\\text { D } & 1,050 & 18 & \\\text { E } & 115 & 63 & \\\text { F } & 320 & & 22\end{array}$$ ​
If the firm's terms are n30, construct an aging schedule showing the percent of accounts that are one and two months overdue.

Question 50

Credit policy requires establishing​

A) the optimal level of inventory​
B) ​the terms of enforcement
C) ​the minimum level of inventory
D) ​the average collection period

Question 51

Aging accounts receivable​

A) ​shows which accounts are slow payers
B) ​requires a more lenient credit policy
C) ​increases the firm's cash
D) ​decreases the firm's inventory

Question 52

Which of the following argues against extending credit?
1) increased collection expense
2) reduced collection expense
3) increased bad debt expense
4) reduced bad debt expense​

A)​1 and 3
B)​1 and 4
C)​2 and 3
D)​2 and 4

Question 53

A firm with excess cash needs the funds for a payment after two months, the funds should not be invested in​

A) ​commercial paper and repurchase agreements
B) ​Treasury bills and Treasury bonds
C) ​negotiable certificates and Treasury bills
D) ​bankers' acceptances and commercial paper

Question 54

A firm currently has sales of $2,000,000 and does not offer credit. Management expects sales to rise to $2,500,000 if it offers customers thirty days to pay. Which of the following will probably happen? 1. receivables will turn over more rapidly 2. receivables will turn over more slowly 3. credit sales will increase by more than the increase in sales 4. credit sales will increase by less than the increase in sales​

A) ​1 and 3
B) ​1 and 4
C) ​2 and 3
D) ​2 and 4

Question 55

​Firm XX has the following accounts receivable:
$\begin{array} { c c c } \text { Receivable } & \text { Amount due } & \text { Days outstanding } \\\text { A } & \$ 11,000 & 10 \\\text { B } & 13,456 & 35 \\\text { C } & 23,110 & 42 \\\text { D } & 13,222 & 62 \\\text { E } & 9776 &\end{array}$
The firm sells on credit and requires payment on the thirtieth day. What proportion of its sales are overdue and what proportion are more than ten days overdue?

Question 56

Credit policy requires
1) establishing the terms of credit
2) determining to the amount of any discount
3) determining the collection policy​

A)​1 and 2
B)​1 and 3
C)​2 and 3
D)​1, 2, and 3