Deck 24: Working Capital Management: Current Assets and Current Liabilities

Question 1

Which of the four motives for holding cash do firms cite when planning for major outlays?

A)Speculative motive
B)Precautionary motive
C)Transactions motive
D)Finance motive

Answer 1

Finance motive

Question 2

Why might firms prefer to hold more liquidity in borrowing facilities rather than raising capital from shareholders?

A)Firms can obtain more capital from borrowing
B)Obtaining the money is faster via borrowing
C)Borrowing is often cheaper
D)Firms would like to avoid paying dividends to investors

Answer 2

Borrowing is often cheaper

Question 3

A firm taking an aggressive approach with respect to their cash balance is most likely to be:

A)holding as little cash as possible.
B)holding as much cash as possible.
C)holding as much credit as possible.
D)holding as little borrowing power as possible.

Answer 3

holding as little cash as possible.

Question 4

Which is NOT one of the reasons why firms hold cash?

A)In case good deals arise
B)To finance major outlays
C)To enjoy returns on investment
D)To handle emergencies

Question 5

A firm taking a conservative approach with respect to its cash balance is most likely to be:

A)holding as much credit as possible.
B)holding as much cash as possible.
C)holding as much borrowing ability as possible.
D)holding as much long-term debt as possible.

Question 6

The term "cash on hand" refers to:

A)cash in the current account.
B)cash in short-term marketable securities.
C)none of the above.
D)a and b

Question 7

What is the optimal amount of cash a firm should hold?

A)As much as possible
B)Just enough to pay for purchases
C)Enough to be liquid
D)None

Question 8

The transactions motive refers to:

A)the motive to hold cash that is required for a firm's normal operations.
B)the motive to hold cash that is required for purchases.
C)the motive to hold cash that is required for a firm's long-term purchases.
D)the motive to hold cash that is required for emergencies.

Question 9

Which of the following is not an example of a near-cash item?

A)Treasury bonds
B)Commercial paper
C)Treasury bills
D)Bankers' acceptances

Question 10

To be included in "cash on hand" cash must be:

A)available instantaneously.
B)available almost instantaneously.
C)next day available.
D)available for borrowing immediately.

Question 11

Which of the following is considered as a main source of cash in a business cycle?

A)Inventory
B)Accounts receivable
C)Accounts payable
D)All of the above

Question 12

The precautionary motive refers to:

A)a firm's motive to hold securities in case of emergencies.
B)a firm's motive to hold cash in case of emergencies.
C)a firm's motive to hold cash for insurance purposes.
D)a firm's motive to hold cash to pay for damages.

Question 13

Which of the following scenarios is an example of the precautionary motive to hold cash?

A)A retailer holds a reserve of cash in case customers return products for a cash refund.
B)A bank holds cash on deposit for its customers.
C)A car dealership holds cash to pay its utility bill.
D)A small business pays a cash dividend to its owner because she's not sure she will have enough funds to pay for Christmas gifts for her family.

Question 14

Which of the following scenarios is an example of the transactions motive to hold cash?

A)An oil company saves abnormally high earnings as cash on its balance sheet which it will use to buy another oil company.
B)A manufacturing company holds cash to pay its suppliers for raw materials.
C)An airline keeps a reserve of cash during the winter months in case it has to pay customers a refund because bad weather results in a cancellation of flights.
D)A firm holds cash to pay its annual dividend.

Question 15

Which of the following pairs does not include a motive for holding cash?

A)Transactions motive and speculative motive
B)Precautionary motive and transactions motive
C)Speculative motive and finance motive
D)Transactions motive and operating motive

Question 16

Investments in short-term marketable securities are categorized as:

A)operational investments.
B)speculative investments.
C)strategic investments.
D)near-cash investments.

Question 17

Cash on hand provides:

A)low return, high liquidity, and low default risk.
B)high return, high liquidity, and low default risk.
C)high return, high liquidity, and high default risk.
D)low return, high liquidity, and high default risk.

Question 18

What determines the optimum amount of cash a firm should hold?

A)The motives for the use of the cash
B)The firm's borrowing capacity
C)a and b
D)None of the above determines the optimum amount of cash a firm should hold

Question 19

A firm may hold a large amount of cash balances because:

A)these balances are required by the bank.
B)the company has few bank accounts and it is difficult to manage their cash.
C)the company is aggressive in cash management.
D)a and b

Question 20

Which of the following scenarios is an example of the speculative motive to hold cash?

A)An oil refining company holds cash to make special purchases of petroleum if the price temporarily drops below a predetermined level.
B)A government holds cash to make interest payments on its bonds.
C)A small business holds cash that it will use to purchase equipment at the end of the year.
D)A firm holds cash to pay its employee wages.

Question 21

Which firms can maintain a higher portion of their liquidity in marketable securities and less in cash?

A)Firms that have well-developed cash management systems and more predictable cash flows.
B)Firms that have more cash than they need.
C)Firms that have expertise in securities trading.
D)Firms that have volatile cash flows.

Question 22

A company's trade credit decision is largely set by all of the following criteria except

A)the nature of the product sold.
B)the industry the firm operates in.
C)the company's profitability.
D)competitors' credit policies.

Question 23

The credit terms offered to a customer include all the following except:

A)due date.
B)discount date.
C)discount amount.
D)product on discount.

Question 24

If the current credit policy is 3/30 net 60, which of the following loosens the credit policy?

A)3/20 net 60
B)3/35 net 75
C)2/30 net 60
D)3/30 net 45

Question 25

The level of a firm's investment in marketable securities is dictated by its:

A)liquidity requirements.
B)accuracy of cash requirement needs.
C)accuracy of cash requirement needs and level of returns.
D)liquidity requirements and accuracy of cash requirement needs.

Question 26

When a cheque is written by the firm, it is said to generate:

A)a float.
B)an account receivable.
C)an account payable.
D)none of the above.

Question 27

The float is defined as:

A)the time between when payables are accrued and when they are paid.
B)the time between when the sale is made and when the money is available for use by the receiving firm.
C)the time between when payment is initiated and the time the money is available for use by the receiving firm.
D)the time between when sale is made and the time the payment cheque is issued to the receiving firm.

Question 28

If the current credit policy is 3/30 net 60, which of the following tightens the credit policy?

A)3/30 net 90
B)3/35 net 75
C)2/30 net 60
D)3/20 net 45

Question 29

One way to alleviate the problem of the low returns associated with cash, but still maintain high liquidity is to

A)keep no cash on hand.
B)invest in more bonds.
C)borrow funds at a lower interest rate.
D)invest in marketable securities.

Question 30

Which of the following firms will have the highest cash balance?

A)A firm with low cash requirements but unpredictable cash needs
B)A firm with high cash requirements but unpredictable cash needs
C)A firm with high cash requirements but predictable cash needs
D)A firm with low cash requirements but predictable cash needs

Question 31

The main premise to good cash management is:

A)to sell at the highest profit possible.
B)to collect sales as quickly as possible and sell at the highest price.
C)to sell at the highest profit and pay expenses as late as possible.
D)to delay payables as much as possible and collect receivables as soon as possible.

Question 32

Which of the following scenarios is an example of the finance motive to hold cash?

A)A government holds cash to pay for its operating expenses.
B)A taxi company holds cash in reserve in case some of its vehicles require repairs.
C)A company that makes motion pictures holds cash to pay for special effects for a new film.
D)A bank holds cash to pay its shareholders their annual dividend.

Question 33

When credit is granted to a firm, it is called:

A)consumer credit.
B)trade credit.
C)accounts receivable.
D)all of the above.
E)b and c

Question 34

Which of the following is/ are part of the credit granting decision?

A)The credit terms
B)Whether to grant credit
C)Details of the collection process
D)All of the above

Question 35

Firms implement centralized systems with respect to receivables and payables in order to:

A)monitor collections.
B)ensure payments are made on time.
C)monitor payments.
D)all the above.

Question 36

The net credit period for a company with terms of 3/15 net 40 is:

A)15 days
B)25 days
C)40 days
D)55 days

Question 37

All of the following are components of float except:

A)the time it takes the receiving firm to make a sale on credit and receive payment from the purchasing firm.
B)the time it takes the cheque to clear through the banking system so that the funds are available to the firm.
C)the time it takes the receiving firm to process the cheque and deposit it in an account.
D)the time it takes the cheque to reach the firm after it is mailed by the customer.

Question 38

An open account credit occurs when a firm grants:

A)trade credit to customers who have an account with the firm.
B)trade credit to customers who have depository accounts.
C)trade credit to customers by collateralizing the assets sold to the customer.
D)credit to customers who have an open bank account.

Question 39

Which of the following is/are alternatives to paying with a cheque?

A)Electronic funds transfer
B)Debit cards
C)Electronic data interchange
D)All of the above

Question 40

The drawbacks to delaying making payments may include all of the following, except

A)alienating suppliers.
B)losing out on valuable trade credit.
C)loss of business.
D)reduced liquidity.

Question 41

The economic order quantity (EOQ)model of inventory management determines the optimal inventory level that:

A)minimizes shortage costs.
B)minimizes carrying costs.
C)a and b
D)none of the above describes the EOQ model.

Question 42

The ABC approach to inventory management divides inventory into

A)several categories based on first-in, first-out basis.
B)several categories based on last-in, first-out basis.
C)several categories based on overall level of importance and profitability.
D)several categories based on overall type of product.

Question 43

An example of a spontaneous source of funds is:

A)short-term borrowing.
B)bank credit line.
C)trade credit.
D)commercial paper loans.

Question 44

Creditors are interested in assessing a borrower's capacity and character, as well as overall economic conditions when reviewing a loan application.Which of the following would make a bank more willing to lend funds?

A)A small business faces deteriorating business conditions because of a recession in the overall economy.
B)The owner of a small business has been personally bankrupt twice.
C)A retail store has been diligent in making all of its payments on time and in full over the past five years.
D)A large corporation missed an interest payment on one of its bond issues last month.

Question 45

Which of the following scenarios are examples of credit enhancements?

A)A manufacturing company makes monthly payments into a sinking fund which it will use to repay principal to bondholders when the bonds mature.
B)A trucking company obtains a lower interest rate on a bank loan for trucks by pledging the vehicles as collateral.
C)Mortgages on residential properties must be insured by the Canada Mortgage and Housing Corporation if the down payment is less than 20%.
D)All of the above.

Question 46

Which of the following scenarios is an example of securitization?

A)A bank issues more common shares to the public.
B)A multinational manufacturing company sells fixed income securities to a European pension fund in a private deal.
C)A bank creates fixed income securities using the receivables from mortgages on residential property, and sells them to a fixed income mutual fund.
D)The Government of Canada sells 25-year Treasury bonds to raise funds for infrastructure.

Question 47

The following pairs are all benefits of holding inventory except:

A)receive discounts on large-volume purchases
B)keep sufficient levels of raw materials to minimize disruptions in the production process
C)minimize lost sales because of shortage
D)reduce interest payments

Question 48

The prime lending rate is defined as:

A)the rate banks borrow from other commercial banks.
B)the rate banks give to their best customers.
C)the rate banks give to their smallest customers.
D)the rate banks borrow from the central bank.

Question 49

Short-term financing decisions are:

A)less important than long-term financing decisions.
B)more difficult to make than long-term financing decisions.
C)easier to make than long-term financing decisions.
D)none of the above

Question 50

The most common benchmark used for pricing a bank loan is:

A)LIBOR.
B)bankers' acceptance rate.
C)the prime rate.
D)all of the above

Question 51

The following pairs are all costs of holding inventory except:

A)storage and insurance.
B)obsolescence and inventory financing.
C)handling and spoilage.
D)purchase price and overhead.

Question 52

By adopting a just-In-time inventory management system, a company will be vulnerable:

A)to suppliers' bargaining power.
B)to acute changes in economic environment.
C)to suppliers' risk of bankruptcy.
D)all of the above

Question 53

When a firm lowers its inventory period:

A)it requires additional cash investment.
B)it requires lower cash investment.
C)it does not have any impact on the cash flows of the firm.
D)none of the above

Question 54

A factoring company is:

A)a financial firm that buys receivables at a discount
B)a financial firm to which a company out-sources its collection process.
C)a and b
D)None of the above

Question 55

Under which scenario does the economic order quantity inventory management model work poorly?

A)A clothing retailer wants to reduce its inventory shortage costs without unnecessary increases in carrying costs.
B)A grocery store wants to optimize its fruit and vegetable produce inventory, which has an 8% spoilage rate per week.
C)A store that sells only Christmas decorations and Halloween costumes wants to optimize its inventory management.
D)An online retailer wants to determine optimal inventory levels.

Question 56

Inventory consists of:

A)raw materials.
B)work in process.
C)finished goods.
D)all of the above.

Question 57

All of the following are tasks performed by a factor except:

A)purchasing payables and extending loans.
B)purchasing receivables.
C)checking customers' credit and authorizing credit.
D)receivables bookkeeping and collection.

Question 58

Toronto Skaters Company is being offered a one-year variable rate loan at a rate of prime + 0.75%.The loan is to be paid in quarterly installments and there are no other fees associated with it.The prime lending rate is currently 6% compounded quarterly.What is the effective annual cost of this loan?

A)6%
B)6.14%
C)6.75%
D)6.92%

Question 59

Use the following statements to answer this question:
I.A high receivables turnover is a good credit strategy that allows firms to lower working capital requirements
II.Trade credit terms are financing tools to the supplier

A)I and II are correct.
B)I and II are incorrect.
C)I is correct and II is incorrect.
D)I is incorrect and II is correct.

Question 60

You are offered the following terms: 5/25 net 50.What is the effective annual interest rate for not paying on time, approximately?

A)111.5%
B)103.9%
C)76.8%
D)45.4%

Question 61

Discuss the limitation of the inventory turnover ratio as an effective inventory management tool.

Question 62

Securitization refers to the process of:

A)bonds are sold to the public at a discount.
B)stocks are issued to raise funds instead of bonds.
C)loans and / or receivables are packaged to create new securities.
D)a portfolio of securities is sold to raise funds to pay debts.

Question 63

Identify the pros and cons for being conservative/aggressive with respect to how much cash a firm should have.Also explain why creating liquidity quickly is expensive.

Question 64

Queue de Castor Company is being offered a one-year $1.45 million operating line of credit at a rate of 5.75%.There is a monthly 0.5% commitment fee on the unused amount.The firm borrows only $0.5 million during the first 8 months of the loan and reduces its loan by a further $0.2 million for the remaining 4 months.What is the effective annual cost (in percent)of this loan arrangement?

Question 65

List and explain the four C's of credit: capacity, character, collateral, and conditions.

Question 66

Can trade credit be labelled as a financing strategy? Provide an example of a firm that uses this strategy in their business model.

Question 67

Laurentide Resort Company would like to issue $25 million face value of 60-day commercial paper at a cost of 0.65%.In addition, the firm must maintain the $25 million credit line at a cost of 0.1% as a standby fee.What is the effective annual cost of this transaction?

A)4.02%
B)4.56%
C)4.65%
D)56.57%

Question 68

The two major types of money market instruments available are

A)credit lines and T-Bills.
B)T-bonds and junk bonds.
C)bankers' acceptances and commercial paper.
D)stocks and options.

Question 69

An important tool used in assessing the quality of receivables is the aged accounts receivable report.What is it, how does it work, and what are its positive and negative characteristics?

Question 70

What is credit analysis? When is it done? And, generally, what are the steps involved in the process?

Question 71

Clearly define what a zero-balance account is, how it functions, and the benefits associated with it in terms of a firm's cash management efforts.

Question 72

In the case of delayed or non-payment, describe in detail the general steps that firms must take in an attempt to force payment or recover as much value as possible from the defaulting customer or customers.

Question 73

McGill Inc.is considering adopting a new credit policy of 3/10 net 30 instead of net 30 days.The firm estimates that 30 percent of the customers will take advantage of the discount, while the remaining 70 percent will pay on day 30.The selling price is $85 per unit and the unit sales are estimated to be 9,000 per year.The after-tax discount rate is 5% and the tax rate is 40%.Should the firm switch to the new policy?

Question 74

Poutine Cheez Company has yearly sales of $550,000 and an average collection period of 35 days.A factoring company is offering a 35-day receivables loan equal to 85% of the accounts receivable at 9% along with a commission fee of .45% of the receivables.The firm estimates that by taking the offer, it could save $300 in collection costs and a full half of one percent in bad debt costs, as a percentage of sales.What is the annual cost (in percent)of the arrangement to Poutine Cheez?

Question 75

A firm would like to issue $15 million face value of 30-day bankers' acceptances quoted at 5.5% at a stamping fee of 0.25%.What is the effective annual cost to the firm?

A)4.65%
B)5.64%
C)8.90%
D)23.39%

Question 76

Explain how revolving loans work and how they are beneficial to firms who are trying to minimize their cost of borrowing and manage their short-term financing so that they do not become illiquid.

Question 77

In light of the 2008 financial crisis, describe the importance of credit to companies and the importance of having access to available cash.

Question 78

Current trends show firms holding less cash physically and preferring to hold liquidity in near-cash or cash equivalent securities or relying on standby lending.Explain fully why you think this is so.