Question 1

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
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Question 2

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

Accepted Answer

The answer of Which of the following is NOT directly...

Question 3

Which of the following statements is CORRECT?

Accepted Answer

The statement that reflects the typical cash budget accurately is E. The cash budget typically includes interest paid on loans and income from investments of surplus cash, and these are expected values that may vary from actual results. A is incorrect because longer-term budgets may also be used for planning purposes, while shorter-term budgets can be used for actual cash control. B is incorrect because both budgets are interrelated, and decisions regarding capital expenditures could affect the cash budget. C is incorrect because while depreciation is a non-cash charge, it is accounted for in the cash budget since it affects taxes and cash flows. D is incorrect because the target cash balance should be adjusted for seasonal patterns and unexpected fluctuations in receipts.

Question 4

If 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, while within the 30-day credit period, does not necessarily indicate the absence of past-due accounts or that the credit department is functioning efficiently. It simply means that, on average, receivables are collected in 28 days. Some accounts could still be past due, and others paid earlier, affecting the average.

Question 5

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

Accepted Answer

Matching the maturities of assets and liabilities can reduce risk, and short-term debt is often cheaper than long-term debt.

Question 6

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

Accepted Answer

Depreciation is a non-cash expense and is not included in the cash budget, but it affects tax payments, which are included.

Question 7

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

Accepted Answer

By reducing the time it takes to convert raw materials to finished goods, the company can speed up the cash conversion cycle. This means that the company can sell the finished goods faster, collect receivables faster, and convert inventory into cash faster, which reduces the amount of time that cash is tied up in the operating cycle. The other choices would either have no effect or lengthen the cash conversion cycle.

Question 8

Helena Furnishings wants to reduce its cash conversion cycle. Which of the following actions should it take?

Accepted Answer

Reducing the Days Sales Outstanding (DSO) will decrease the cash conversion cycle by speeding up the collection of receivables, thus improving cash flow.

Question 9

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 should be reported directly in a company's monthly cash budget as it represents a cash inflow. The other options, such as depreciation expense, accrued interest on zero coupon bonds, and new shares issued do not represent actual cash transactions and do not impact a company's cash balance in the short term.

Question 10

Swim Suits Unlimited is in a highly seasonal business, and the following summary balance sheet data show its assets and liabilities at peak and off-peak seasons (in thousands of dollars):

Accepted Answer

The answer of Swim Suits Unlimited is in a highly...

Question 11

If 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 due to an upward sloping yield curve, then a firm's CFO may opt to finance more with short-term debt, leading to a lower current ratio (current assets/current liabilities) as short-term debt is classified as a current liability.

Question 12

If 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

Stretching accounts payable means delaying payment beyond the agreed-upon terms, which can lead to cash flow problems for the supplier firm. It could result in higher borrowing costs, lost opportunities due to lack of funds, and increased administrative expenses. Therefore, stretching accounts payable represents a real financial cost to the firm.

Question 13

A lockbox plan is most beneficial to firms that

Accepted Answer

The answer of A lockbox plan is most beneficial to...

Question 14

If 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, even for a profitable firm, indicates a cash flow issue, suggesting the firm does not have enough working capital to comfortably meet its short-term obligations, thus pointing to undercapitalization.

Question 15

The 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

Short-term credit carries more risk due to higher variability of interest costs and potential reluctance of lenders to renew loans during temporary financial difficulties.

Question 16

A lockbox plan is

Accepted Answer

A lockbox plan is a banking arrangement where a company's customers send payments to a special post office box, which is maintained by a bank. The bank collects the payments and deposits them directly into the company's account, thus speeding up the collection process.

Question 17

If 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

Choosing to pay on the net due date instead of taking trade credit discounts would increase the firm's accounts payable balance, which would be reflected on the balance sheet. Additionally, the firm may experience higher interest expenses due to the delayed payments, which would be reflected on the income statement.

Question 18

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 19

A 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

This is because the construction loan is a long-term debt related to the construction of a fixed asset, while working capital is a short-term liability related to day-to-day business operations. Separating the two will give a clearer picture of the company's current financial position.

Question 20

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...

Quiz 16: Working Capital Management

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?

Which of the following statements is CORRECT?

If 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.

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

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

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

Helena Furnishings wants to reduce its cash conversion cycle. Which of the following actions should it take?

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

Swim Suits Unlimited is in a highly seasonal business, and the following summary balance sheet data show its assets and liabilities at peak and off-peak seasons (in thousands of dollars) :

If 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.

If 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.

A lockbox plan is most beneficial to firms that

If 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.

A lockbox plan is

If 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.

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.

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