Deck 7: Current Asset Management

Question 1

The difference between the amount of cash on the firm's books and the amount credited to it by the bank is:

A) an overdraft.
B) interest revenue.
C) extended disbursement.
D) float.

Answer 1

D

Question 2

Characteristics of a money market mutual fund include:

A) the purchase of shares by investors,the proceeds of which are reinvested into liquid short-term securities.
B) a required minimum balance of $2,500.
C) these funds cannot be easily marketable.
D) secured by a promissory note.

Answer 2

A

Question 3

The system whereby funds are moved between computer terminals without use of cheques is:

A) electronic funds transfer.
B) float.
C) a lock-box system.
D) magnetic character recognition.

Answer 3

A

Question 4

The problem in stretching out the maturity of marketable securities is that:

A) you are legally locked in until the maturity date.
B) longer term securities are often not available.
C) there is greater possibility of loss.
D) interest rates are generally lower.

Question 5

Which of the following securities represents an unsecured promissory note issued by a corporation?

A) Certificates of deposit
B) Savings accounts
C) Commercial paper
D) Money market fund

Question 6

Deposited cheques may be cleared through:

A) Stock exchange.
B) trusted employees.
C) a local dealer network.
D) chartered banks.

Question 7

The economic order quantity:

A) determines the reorder point.
B) is the lowest cost amount to order considering all costs.
C) determines the safety stock.
D) requires the number of days to maturity.

Question 8

How would electronic funds transfer affect the use of "float"?

A) Increase its use somewhat
B) Decrease its use somewhat
C) Virtually eliminate its use
D) Have no effect on its use

Question 9

"Float" takes place because:

A) a firm is early in paying its bills.
B) the level of cash on the firm's books is equal to the level of cash in the bank.
C) a lag exists between writing a cheque and it being debited to the bank account.
D) a customer writes "hot" cheques.

Question 10

For a given firm,holding other factors constant,ordering costs per unit generally:

A) decline as average inventory increases.
B) increase in proportion to increases in inventory.
C) are considered fixed costs.
D) are negotiated.

Question 11

The costs of carrying inventory do not include:

A) the interest on funds tied up in inventory.
B) the cost of warehouse space.
C) ordering costs.
D) insurance and handling costs.

Question 12

Average daily remittances are $5 million,and "extended disbursement float" adds 3 days to the disbursement schedule,how much should the firm be willing to pay for a cash management system if the firm earns 10% on excess funds.

A) $500,000
B) $1,500,000
C) $1,000,000
D) $0

Question 13

A multinational company may prefer to hold sizeable cash balances in one currency rather than another because:

A) of low interest rates existing in one country.
B) one country's currency may be weaker relative to the dollar.
C) of interest rate differentials on short term investments.
D) both currencies are at parity.

Question 14

A firm that wishes to minimize risk when investing idle cash would be least likely to buy:

A) commercial paper.
B) long-term corporate bonds.
C) negotiable certificates of deposit.
D) Treasury bills of the Canadian government.

Question 15

One of the first considerations in cash management is:

A) to have as much cash as possible on hand.
B) synchronization of cash inflows and cash outflows.
C) profitability.
D) to put any excess cash into accounts receivable.

Question 16

Which of the following securities regularly trades on a discount basis?

A) Government bonds
B) Treasury bills
C) Swap deposits
D) Certificates of deposit

Question 17

Which of the following is not a method of speeding up collections?

A) Lock-box system
B) Use of local bank branches to deposit funds
C) Extended disbursement float
D) Electronic fund transfer

Question 18

Probably the safest and most marketable instrument for short-term investment is:

A) Commercial paper.
B) Large denomination certificates.
C) Bankers' acceptances.
D) Treasury bills.

Question 19

In managing cash and marketable securities,what should be the manager's primary concern?

A) Maximization of profit
B) Maximization of liquid assets
C) Acceptable return on investment
D) Liquidity and safety

Question 20

A bankers' acceptance:

A) is a draft drawn on a corporation.
B) may be accepted by the corporation for future payment.
C) is a long term investment accepted by the bank.
D) is traded in a relatively liquid market until maturity.

Question 21

Cash flow does not rely on which of the following?

A) The payment patterns of customers.
B) The monetary policy of the Bank of Canada.
C) The speed at which suppliers and creditors process cheques.
D) The efficiency of the banking system.

Question 22

In comparison to securities issued by the federal government,securities issued by provincial governments:

A) are significantly riskier.
B) are much less liquid.
C) yield slightly more than federal securities.
D) usually require the payment of higher commissions when purchased than federal securities.

Question 23

Assuming that we can earn a 13.5% return on accounts receivable,which of the following actions to finance an increase in our accounts receivable balance would be optimal?

A) A reduction in marketable securities which are earning a return of 14.2%
B) A decrease in inventories which are earning a 17.6% return
C) An increase in bank loans that would cost us 11.5%
D) An increase in accounts payable that would cost our firm 15%

Question 24

Characteristics of money market securities include:

A) a greater risk than money market funds.
B) the rates offered for currency deposits in the London international banking market.
C) the society for worldwide interbank financial telecommunication.
D) bought and sold on the basis of their promissory yield (price).

Question 25

Money market funds are:

A) accounts that allow small investors to participate in buying large-denomination securities.
B) extremely risky but high-yielding accounts used by large corporations to finance operations.
C) accounts that allow small investors to buy shares in companies that then buy shares of common stock.
D) pools of bonds held by large utility companies.

Question 26

Which of the following are characteristics of money market investments?

A) Money market funds are quite risky.
B) Money market funds are insured up to $60,000 by CDIC.
C) The minimum balance for money market accounts is $5,000.
D) Short term and most commonly issued for periods of up to one year.

Question 27

Which of the following is not a factor influencing the selection of a marketable security?

A) Yield
B) Maturity
C) Float
D) Safety

Question 28

Hedging:

A) is a way to reduce your accounts receivable collection period.
B) increases risk.
C) is a non-binding agreement to buy or sell a financial futures contract.
D) can be carried out with a futures contract.

Question 29

When using the economic order quantity model:

A) ordering costs increase as the level of inventory increases.
B) carrying costs decrease as the level of inventory increases.
C) costs are minimized when total carrying costs and total ordering costs are equal.
D) discounted prices are calculated.

Question 30

Massa Machine Tool expects total sales of $10,000.The price per unit is $5.The firm estimates an ordering cost of $7.50 per order,with an inventory carrying cost of $0.70 per unit.What is the optimum order size?

A) 146 units
B) 207 units
C) 373 units
D) 2,000 units

Question 31

Which of the following is not a valid quantitative measure of accounts receivable collection policies?

A) Average collection period
B) Aging of accounts receivables
C) Ratio of debt to equity
D) Ratio of bad debts to credit sales

Question 32

Modos Company has deposited $2,000 in cheques received from customers.It has written $1,400 in cheques to its suppliers.The initial balance was $400.If $1,600 of its customers cheques have been cleared but only $600 of its own has been deposited,calculate its float.

A) $200
B) $400
C) $300
D) $700

Question 33

The economic order quantity:

A) assumes that inventory usage is seasonal.
B) assumes that delivery times of each order are consistent.
C) considers stock-outs.
D) assumes that inventory needs are constant.

Question 34

Price Corp.is considering selling to a group of new customers and creating new annual sales of $70,000.5% will be uncollectible.The collection cost on these accounts is 3.5%,the cost of producing and selling is 80% of sales and the firm is in the 31% tax bracket.What is the profit on new sales?

A) $5,554.50
B) $9,660.00
C) $7,245.00
D) $5,959.50

Question 35

Eurodollar (Canadian)certificates of deposit:

A) may be borrowed by anyone who wishes to hold dollars.
B) are Canadian dollars which have been converted into several European currencies.
C) can only be redeemed at Canadian banks or their branches in European countries.
D) can only be redeemed at Canadian banks or their branches in any foreign country.

Question 36

A service provided around the clock by SWIFT is:

A) International interest rate evaluation.
B) foreign currency analysis.
C) swift shipping of goods.
D) international payments between banks.

Question 37

Money market funds:

A) are modelled after money market accounts.
B) are insured up to $60,000.
C) have a minimum balance of $2,500.
D) earn competitive market rates of return.

Question 38

Which of the following is not a valid reason for holding cash?

A) To meet transaction requirements.
B) To earn the highest return possible.
C) To satisfy emergency needs for funds.
D) To provide a compensating balance for a bank.

Question 39

Eurodollar (Canadian)certificates of deposits:

A) are not marketable investments.
B) are Canadian dollars held on deposit by foreign banks.
C) pay interest rates usually lower than the rates on treasury bills.
D) are European currencies deposited into international Canadian branch banks.

Question 40

Waldron Inc.is considering selling to a group of new customers that will bring in sales of $15,000 with a return on sales of 5%.The only new investment will be in accounts receivable.Waldron has a turnover ratio of 5 to 1 between sales and accounts receivable.What is the return on investment?

A) 3%
B) 25%
C) 5%
D) 40%

Question 41

International cash management is more complex than domestic based cash management because of:

A) difficult capital asset management.
B) similarity in banking systems.
C) exchange rate parity.
D) currency risk fluctuations.

Question 42

All of the following are benefits of just-in-time inventory ordering systems except:

A) reduces warehouse space.
B) saves utility and manpower costs.
C) reduces inventory financing costs.
D) prevents stock-outs.

Question 43

Variables important to credit scoring models include:

A) age of credit scoring company.
B) negative private records.
C) facility owned by competitors.
D) age of company in years.

Question 44

Laura's Furniture is considering selling to a group of new customers and creating new annual sales of $80,000.7% will be uncollectible.The collection cost on these accounts is 2% of all sales,the cost of producing and selling is 75% of sales and the firm is in the 31% tax bracket.What is the profit on new sales?

A) $9,936
B) $8,832
C) $12,696
D) $20,000

Question 45

D&B is known for providing:

A) interest rate information to cash managers.
B) credit scoring reports that rank a company's payment habits relative to its peer group.
C) cash management systems to corporate treasurers.
D) consumer credit reports to credit card companies.

Question 46

Cost savings from JIT inventory management include:

A) lower transaction fees.
B) lower raw material cost.
C) lower productivity.
D) lower inventory financing costs.

Question 47

Companies that are mostly influenced by seasonal sales have to make a choice between:

A) level production and inventory reduction.
B) seasonal production and a stable workforce.
C) a stable workforce and inventory build up.
D) a stable workforce and a fluctuating workforce.

Question 48

Inventory is usually divided into three basic categories except:

A) projected sales.
B) work in progress.
C) finished goods.
D) raw materials.

Question 49

The most subjective and also significant segment of the 4 C's of credit for giving final approval is:

A) capacity
B) collateral
C) character
D) conditions

Question 50

The three primary policy variables to consider when extending credit include all of the following except:

A) credit standards.
B) the level of interest rates.
C) the terms of trade.
D) collection policy.

Question 51

Average daily remittances are $5 million,and "extended disbursement float" adds 5 days to the disbursement schedule,how much should the firm be willing to pay for a cash management system if the firm earns 12% on excess funds.

A) $3,000,000
B) $600,000
C) $1,000,000
D) $0

Question 52

SWIFT's 'smart card technology':

A) increases the likelihood of electronic fraud.
B) adds additional security by sending secret information through mail.
C) disguises the identity of the receiver.
D) automates the process by which banks exchange authentication keys.

Question 53

An example of differences in International cash management systems includes:

A) developed countries using cash payments and developing countries using electronic payments.
B) Canadian companies uses cash payments more than United States Companies.
C) the preference of Russian companies to use cash and United States Companies to use electronic payments.
D) transaction costs are ignored when determining what cash management system to use.

Question 54

LIBOR is:

A) a resource used in production.
B) an interest rate paid on Eurodollar deposits between banks in the London market.
C) an interest rate paid by European firms when they borrow Eurodollar deposits from Canadian banks.
D) the interest rate paid by the British government on its long-term bonds.

Question 55

The amount of safety stock that a firm carries depends upon:

A) the unpredictability of inventory used.
B) the supply chain costs.
C) the riskiness of the storage facility.
D) the time period necessary to fill inventory orders.

Question 56

Effective cash management requires awareness of:

A) production design.
B) forecasting theory.
C) security personnel.
D) financial forecasting.

Question 57

International cash management systems often consider:

A) the use of the gold standard.
B) the similarity of interest rates across countries.
C) the similarity of transaction costs.
D) the risk involved in currency fluctuations.

Question 58

A Just-In-Time (JIT)inventory management program has all but which of the following requirements?

A) Quality production
B) Large safety stocks
C) Close ties between suppliers,manufacturers,and customers
D) Minimizing inventory levels

Question 59

When developing a credit scoring report,many variables would be considered.Which of the following best represent the major factors D&B would examine?

A) the age of the management team,the dollar amount of sales,net profits,and long-term debt
B) the age of the company,the number of employees,the level of current assets
C) the financial statements,satisfactory or slow payment experiences,negative public records (suits,liens,judgments,bankruptcies)
D) the company's cash balances,return on equity,and its average tax rates

Question 60

The Bank Rate is set based on:

A) the target rate for overnight money.
B) the yield on 98-day Treasury bills.
C) the prime rate.
D) U.S.fed funds rate.

Question 61

Van Bosch Inc.is considering selling to a group of new customers that will bring in sales of $20,000 with a return on sales of 7%.The only new investment will be in accounts receivable.Waldron has a turnover ratio of 4 to 1 between sales and accounts receivable.What is the return on investment?

A) 28%
B) 7%
C) 1.75%
D) cannot calculate with the information provided

Question 62

You anticipate selling 10,000 units of Wonder Soap in the next month.It cost $3.50 per order and total carrying costs are $1.50 per unit.What is the minimum order quantity for this new product?

A) 216 units
B) 342 units
C) 1,000 units
D) 100 units

Question 63

Western Jet requires a minimum of 1,000,000 litres of jet fuel each month to keep its fleet of Airbus 380A passenger jets running.If Western Jet Operations Manager enters into a future contract to buy 750,000 litres of jet fuel in 90 days he is engaging in ____________.

A) Speculation
B) Swap options
C) Selling Short
D) Hedging

Question 64

If AC increases it collection period to 40 days its average AR will increase to _______.

A) $1,698,640
B) $567,000
C) $2,106,788
D) $3,238,999

Question 65

Driveline Sprockets expects total sales of $20,000.The price per unit is $5.The firm estimates an ordering cost of $9.00 per order,with an inventory carrying cost of $1.20 per unit.What is the optimum order size?

A) 173 units
B) 1,852 units
C) 245 units
D) 2,000 units

Question 66

For modern corporations,the more cash they have,the better off they are.

Question 67

You purchased a T-bill at $99.80.If held the T-bill to maturity and returned a .8038% yield how long did you hold the T-bill?

A) 180 days
B) 91 days
C) 364 days
D) 250 days

Question 68

Cash management becomes more important as the level of short-term interest rates rise.

Question 69

The Grocery Chain (GC)reported an average inventory of $349,589 in its last annual report.If GC's annual Cost of Goods Sold was $5,800,000,approximately how many days did GC hold its inventory?

A) 30 days
B) 15 days
C) 97 days
D) 22 days

Question 70

$\begin{array}{ll}\text { Warehouse space } & \$ 3.00 / \text { unit } \\\text { Material handling expense } & \$ 2.00 / \text { unit } \\\text { Insurance premium } & \$ 1.00 / \text { unit } \\\text { Total ordering cost } & \$ 150.00 / \text { per order }\end{array}$

-What is the economic order quantity?

A) 187 units
B) 213 units
C) 174 units
D) 522 units

Question 71

In the management of cash and marketable securities,the primary concern is profitability.

Question 72

Banker's Acceptances (BA)are issued in the _____________.A BA is guaranteed by a bank for a _________________.

A) Long term capital markets; discount fee
B) Forex Market; stamping fee
C) LIBOR Market; brokerage fee
D) Money Market; stamping fee

Question 73

$\begin{array}{ll}\text { Warehouse space } & \$ 3.00 / \text { unit } \\\text { Material handling expense } & \$ 2.00 / \text { unit } \\\text { Insurance premium } & \$ 1.00 / \text { unit } \\\text { Total ordering cost } & \$ 150.00 / \text { per order }\end{array}$

-What is the amount of average inventory?

A) 107 units
B) 94 units
C) 261 units
D) cannot calculate with information provided.

Question 74

Assuming that we can earn a 13.5% return on accounts receivable,which of the following actions to finance an increase in our accounts receivable balance would be optimal?

A) a reduction in marketable securities that are earning a return of 12.2%
B) a decrease in inventories that are earning a 17.6% return
C) an increase in bank loans that would cost us 14.5%
D) an increase in accounts payable that would cost our firm 15%

Question 75

If you bought a T-bill at $99.44 and held it for 180 days what would your return be?

A) 1.14%
B) .011419%
C) .0056%
D) 11.49%

Question 76

$\begin{array}{ll}\text { Warehouse space } & \$ 3.00 / \text { unit } \\\text { Material handling expense } & \$ 2.00 / \text { unit } \\\text { Insurance premium } & \$ 1.00 / \text { unit } \\\text { Total ordering cost } & \$ 150.00 / \text { per order }\end{array}$

-What is the total cost of this inventory decision?

A) $640.85
B) $739.52
C) $1,279.85
D) $2,556.59

Question 77

AC's average daily sales are ____________.

A) $55,000
B) $67,890
C) $42,466
D) $87,650

Question 78

$\begin{array}{ll}\text { Warehouse space } & \$ 3.00 / \text { unit } \\\text { Material handling expense } & \$ 2.00 / \text { unit } \\\text { Insurance premium } & \$ 1.00 / \text { unit } \\\text { Total ordering cost } & \$ 150.00 / \text { per order }\end{array}$

-How many orders will be made per year?

A) 8.4 orders per year
B) 12 orders per year
C) 91 orders per year
D) 4.27 orders per year

Question 79

AC's average AR is ______________.

A) $3,238,999
B) $1,486,310
C) $1,698,640
D) $15,500,000

Question 80

If a firm has total accounts receivable of $6,000,000 and its average daily credit sales are $45,000 what is its collection period?

A) 120 days
B) 133 days
C) 45 days
D) 156 days