Question 1

The economic order quantity is that order quantity which results in the minimum ordering costs.

Accepted Answer

The economic order quantity (EOQ) is the order quantity that minimizes the total holding costs and ordering costs, not just the ordering costs.

Question 2

If the carrying costs of inventory increase then the economic ordering quantity of inventory will increase to insure the firm minimizes the total inventory costs.

Accepted Answer

If the carrying costs of inventory increase, it will lead to an increase in the total inventory costs. Therefore, the economic ordering quantity (EOQ) will decrease to minimize the total inventory costs.

Question 3

The credit period is length of time for which credit is granted; after that time, the credit account is considered delinquent.

Accepted Answer

This is true. The credit period is the agreed-upon time frame in which a customer is expected to pay off their credit account. After this time frame, if the account has not been paid, it is considered delinquent.

Question 4

Exchange rates influence a multinational firm's inventory policy because changing currency values can affect the value of inventory.

Accepted Answer

Changes in exchange rates impact a multinational firm's inventory, particularly if it is holding inventory in a foreign currency. When exchange rates shift, the value of inventory can increase or decrease, which can affect a company's pricing, profits, and cash flow. As a result, multinational firms must consider exchange rate fluctuations when devising their inventory policies.

Question 5

All else equal, firms that hold greater amounts of short-term assets are considered more risky than firms that hold grater amounts of long-term securities.

Accepted Answer

Firms with greater amounts of short-term assets are generally considered less risky because these assets can be quickly converted to cash, providing liquidity and flexibility.

Question 6

The primary motivation behind out-sourcing is to provide the firm with an alternative source of supply in the event that its primary supplier is unable to meet the firm's raw material or component needs.

Accepted Answer

The primary motivation behind outsourcing is often to reduce costs, focus on core competencies, and improve efficiency by leveraging the specialized skills or economies of scale of external suppliers, rather than just to provide an alternative source of supply.

Question 7

The target cash balance is the minimum cash balance a firm desires to maintain in order to conduct business.

Accepted Answer

The target cash balance is the minimum cash balance a firm aims to maintain to ensure that it can meet its financial obligations and conduct business smoothly. It is determined by considering factors such as operating cash flows, capital expenditures, debt repayments, and other cash outflows. Maintaining a target cash balance provides financial stability and allows firms to take advantage of business opportunities, such as acquisitions or investments, when they arise.

Question 8

The ABC method of inventory classification helps management concentrate resources on those inventory items that are most critical to the firm's operations.

Accepted Answer

The ABC method of inventory classification is a useful tool for prioritizing inventory items based on their importance to the operations of the firm. By concentrating resources on the most critical inventory items, management can improve efficiency and reduce costs.

Question 9

If the unit sales of a firm double, the optimal order quantity as determined by the EOQ model will also double.

Accepted Answer

The EOQ formula is not affected by changes in unit sales. Therefore, doubling the unit sales does not necessarily result in a doubling of the optimal order quantity as determined by the EOQ model.

Question 10

The collection policy refers to the procedures the firm follows to collect its credit accounts.

Accepted Answer

The statement is true. The collection policy outlines the steps and procedures a business takes to recover outstanding debts from customers who have not paid their bills on time.

Question 11

The threat of expropriation creates an incentive for the multinational firm to minimize inventory holdings and to bring in goods only as needed.

Accepted Answer

This is because if a multinational firm holds a lot of inventory, it could potentially lose a significant amount of assets if expropriation were to occur. By minimizing inventory holdings and bringing in goods only as needed, the firm can reduce its exposure to this risk.

Question 12

A just-in-time system of inventory control requires that manufacturers coordinate production with suppliers so that raw materials or components arrive just as they are needed in the production process.The main objective of such a system is to reduce carrying costs.

Accepted Answer

The statement accurately describes the main objective and function of a just-in-time system of inventory control.

Question 13

The net float is the difference between the disbursement float and the collections float.

Accepted Answer

The net float is calculated by subtracting the collections float from the disbursement float, representing the net effect of these two types of floats on a company's cash balance.

Question 14

Credit policy for the multinational firm is generally riskier due in part to the additional consideration of exchange rates and also due to uncertainty regarding the credit worthiness of many foreign customers.

Accepted Answer

Credit policy for multinational firms involves additional risk factors such as exchange rate fluctuations and uncertainty about the creditworthiness of foreign customers, making it inherently riskier than domestic credit policies.

Question 15

Short term assets generally earn a higher rate of return than long-term assets, making short term assets a more desirable investment than long-term assets.

Accepted Answer

This statement is false. Generally, long-term assets offer higher rates of return than short-term assets. However, this can also depend on market conditions and the specific assets being compared.

Question 16

If the forecasted sales or usage rate is not accurate, the EOQ model may not lead to efficient inventory management.

Accepted Answer

The EOQ model relies on accurate forecasts of sales or demand in order to calculate the optimal order quantity and minimize inventory costs. If these forecasts are inaccurate, the model may recommend order quantities that are too high or too low, leading to suboptimal inventory management.

Question 17

Two commonly used methods of monitoring receivables are the DuPont method and the aging schedule.

Accepted Answer

The DuPont method is used for analyzing a company's financial performance, while the aging schedule is used for monitoring receivables.

Question 18

Synchronization of cash flows is an important cash management technique and effective synchronization can actually increase a firm's profitability.

Accepted Answer

Synchronization of cash flows involves aligning the timing of a company's cash inflows and outflows. This can help to reduce the need for borrowing and can increase a firm's ability to invest in profitable opportunities. By optimizing cash flows, a company can improve its financial performance and profitability.

Question 19

The terms of credit include the length of the credit period and any cash discounts offered.

Accepted Answer

The terms of credit typically include the length of the credit period and any cash discounts offered, as well as the interest rate or fees associated with the credit.

Question 20

A Eurodollar is a U.S.dollar deposited in a bank outside the United States.

Accepted Answer

A Eurodollar is indeed a U.S. dollar deposited in a bank outside the United States, typically in Europe or Asia. It is used as an international currency for trade and financial transactions.

Quiz 16: Managing Short-Term Liabilities Financing