Question 1

a firm switched from taking trade credit discounts to paying on the net due date, this might cost the firm some money, but such a policy would probably have only a negligible effect on the income statement and no effect whatever on the balance sheet.

Accepted Answer

Switching from taking trade credit discounts to paying on the net due date can affect both the income statement and the balance sheet. The income statement may show increased interest expenses or reduced discounts, while the balance sheet may reflect changes in accounts payable and cash flow.

Question 2

lockbox plan is

Accepted Answer

A lockbox plan is used to speed up the collection of checks received. The lockbox plan involves setting up a special mailbox at a post office or at a bank, where customers can send their payments. The payments are processed by the bank and the funds are deposited directly into the firm's account, thus speeding up the collection process.

Question 3

Which of the following items should a company report directly in its monthly cash budget?

Accepted Answer

Cash proceeds from selling one of its divisions would represent a significant inflow of cash that should be included in the monthly cash budget. Accrued interest on zero coupon bonds, new shares issued in a stock split or dividend, and monthly depreciation expense would not involve actual cash inflows or outflows and would not be included in a cash budget.

Question 4

Which of the following actions would be likely to shorten the cash conversion cycle?

Accepted Answer

Shortening the time it takes to convert raw materials to finished goods will reduce the cash conversion cycle.

Question 5

Which of the following statements is CORRECT?

Accepted Answer

The statement is correct that the typical cash budget reflects interest paid on loans as well as income from the investment of surplus cash. However, these numbers, as well as other items on the cash budget, are expected values; hence, actual results might vary from the budgeted amounts. A is incorrect since the capital budget and cash budget are interdependent. B is false as depreciation has a significant effect on the cash budget. C is incorrect as seasonal patterns and unanticipated fluctuations must be considered while setting the target cash balance. Lastly, E is incorrect as both shorter-term and longer-term cash budgets are used for planning purposes as well as actual cash control.

Question 6

Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?

Accepted Answer

Depreciation is a non-cash expense and does not directly affect the cash budget.

Question 7

a profitable firm finds that it simply must "stretch" its accounts payable, then this suggests that it is undercapitalized, i.e., that it needs more working capital to support its operations.

Accepted Answer

Stretching accounts payable means delaying payments to suppliers, which may indicate a cash flow problem and insufficient working capital. If the firm were well-capitalized, it would have the funds to pay its bills on time without resorting to stretching its payables.

Question 8

Which of the following actions should Reece Windows take if it wants to reduce its cash conversion cycle?

Accepted Answer

Reece Windows should take steps to reduce the DSO (Days Sales Outstanding) to reduce its cash conversion cycle. This can be achieved by improving its collection process, offering discounts for early payments, and improving the creditworthiness of its customers. Starting to pay bills sooner would reduce the average accounts payable but not affect sales, which would not necessarily lead to a reduction in the cash conversion cycle. Selling common stock or issuing long-term bonds to retire debt or buy back stock would have no direct impact on the cash conversion cycle. Increasing average inventory without increasing sales would lead to a longer cash conversion cycle as more funds would be tied up in inventory.

Question 9

one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but it does not represent a real financial cost to your firm as long as the customer periodically pays off its entire balance.

Accepted Answer

While stretching accounts payable may not necessarily incur a direct financial cost, it can have an impact on the cash flow and financial stability of the firm if the customer consistently delays payments or defaults on payments. In such cases, the firm may need to invest more resources in collection efforts, risk losing future business, and may even experience financial losses.

Question 10

the yield curve is upward sloping, then short-term debt will be cheaper than long-term debt Thus, if a firm's CFO expects the yield curve to continue to have an upward slope, this would tend to cause the current ratio to be relatively low, other things held constant.

Accepted Answer

If short-term debt is cheaper than long-term debt, the firm may prefer to use more short-term debt to finance its current assets, leading to a relatively lower current ratio.

Question 11

Firms generally choose to finance temporary current operating assets with short-term debt because

Accepted Answer

Matching the maturities of assets and liabilities reduces risk under some circumstances, and also because short-term debt is often less expensive than long-term capital. This means that firms prefer short-term debt to finance temporary current operating assets because it reduces risk and is often less expensive than long-term debt or equity financing.

Question 12

Other things held constant, which of the following would tend to reduce the cash conversion cycle?

Accepted Answer

The answer of Other things held constant, which of the...

Question 13

a firm sells on terms of 2/10 net 30 days, and its DSO is 28 days, then the fact that the 28-day DSO is less than the 30-day credit period tells us that the credit department is functioning efficiently and there are no past-due accounts.

Accepted Answer

A DSO of 28 days being less than the 30-day credit period does not necessarily indicate that there are no past-due accounts; it simply means that, on average, payments are being collected within 28 days. Some accounts could still be past due.

Question 14

Which of the following is NOT commonly regarded as being a credit policy variable?

Accepted Answer

Payments deferral period is not commonly regarded as a credit policy variable. Credit policy typically includes credit standards, credit terms (which encompass the credit period and cash discounts), and collection policy. Payments deferral period is more related to the terms of payment after the credit period has expired, rather than a direct component of initial credit policy decisions.

Question 15

Long-term loan agreements always contain provisions, or covenants, that constrain the firm's future actions Short-term credit agreements are just as restrictive in order to protect the interest of the lender.

Accepted Answer

The answer of Long-term loan agreements always contain provisions, or...

Question 16

risk to the firm of borrowing using short-term credit is usually greater than if it used long-term debt Added risk stems from (1) the greater variability of interest costs on short-term than long-term debt and (2) the fact that even if its long-term prospects are good, the firm's lenders may not be willing to renew short-term loans if the firm is temporarily unable to repay those loans.

Accepted Answer

The statement accurately describes the added risk of borrowing using short-term credit.

Question 17

firm constructing a new manufacturing plant and financing it with short-term loans, which are scheduled to be converted to first mortgage bonds when the plant is completed, would want to separate the construction loan from its current liabilities associated with working capital when calculating net working capital.

Accepted Answer

Separating the construction loan from the current liabilities associated with working capital when calculating net working capital would provide a more accurate representation of the company's liquidity position. By doing so, the company can have a clearer understanding of its short-term liquidity position and make better financial decisions.

Question 18

lockbox plan is most beneficial to firms that

Accepted Answer

A lockbox plan is most beneficial to firms that have customers who operate in many different parts of the country because it speeds up the collection and processing of checks, reducing the time it takes for funds to be available.

Question 19

Which of the following statements is CORRECT?

Accepted Answer

Short-term debt is riskier than long-term debt, so heavy use of short-term financing is considered aggressive. Additionally, the statement in choice B is incorrect and the statements in choices C and E are contradictory.

Question 20

Which of the following statements concerning the cash budget is CORRECT?

Accepted Answer

Depreciation expense is not explicitly included in the cash budget, but the effects of depreciation are reflected in the estimated tax payments. When a firm depreciates an asset, the depreciation expense reduces taxable income, which in turn reduces the amount of taxes the firm owes. This reduction in taxes affects the cash flows of the firm and is accounted for in the cash budget through the estimated tax payments. Choices A, B, C, and D are incorrect statements regarding the cash budget.

Quiz 21: Working Capital

a firm switched from taking trade credit discounts to paying on the net due date, this might cost the firm some money, but such a policy would probably have only a negligible effect on the income statement and no effect whatever on the balance sheet.

lockbox plan is

Which of the following items should a company report directly in its monthly cash budget?

Which of the following actions would be likely to shorten the cash conversion cycle?

Which of the following statements is CORRECT?

Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?

a profitable firm finds that it simply must "stretch" its accounts payable, then this suggests that it is undercapitalized, i.e., that it needs more working capital to support its operations.

Which of the following actions should Reece Windows take if it wants to reduce its cash conversion cycle?

one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but it does not represent a real financial cost to your firm as long as the customer periodically pays off its entire balance.

the yield curve is upward sloping, then short-term debt will be cheaper than long-term debt Thus, if a firm's CFO expects the yield curve to continue to have an upward slope, this would tend to cause the current ratio to be relatively low, other things held constant.

Firms generally choose to finance temporary current operating assets with short-term debt because

Other things held constant, which of the following would tend to reduce the cash conversion cycle?

a firm sells on terms of 2/10 net 30 days, and its DSO is 28 days, then the fact that the 28-day DSO is less than the 30-day credit period tells us that the credit department is functioning efficiently and there are no past-due accounts.

Which of the following is NOT commonly regarded as being a credit policy variable?

Long-term loan agreements always contain provisions, or covenants, that constrain the firm's future actions Short-term credit agreements are just as restrictive in order to protect the interest of the lender.

lockbox plan is most beneficial to firms that

Which of the following statements is CORRECT?

Which of the following statements concerning the cash budget is CORRECT?