Question 1

Financial management is limited to business organizations.

Accepted Answer

Financial management is the field that addresses the issues of obtaining and managing the funds and resources necessary to run a business successfully. It is not limited to business organizations: All organizations, from the corner store to the local nonprofit art museum, from giant corporations to county governments, must manage their resources effectively and efficiently if they are to achieve their objectives.

Question 2

Commercial certificates of deposit (CDs) work exactly the same way as consumer certificates of deposit, except that commercial CDs must be held until maturity.

Accepted Answer

Unlike consumer CDs which must be held until maturity, commercial CDs may be traded prior to maturity. Should a cash shortage occur, the organization can simply sell the CD on the open market and obtain needed funds.

Question 3

New issues of stocks and bonds are sold directly to the public and to institutions in what is known as the secondary market.

Accepted Answer

New issues of stocks and bonds are sold directly to the public and to institutions in what is known as the primary market-the market where firms raise financial capital. The primary market differs from secondary markets, which are stock exchanges and over-the-counter markets where investors can trade their securities with other investors rather than the company that issued the stock or bonds.

Question 4

The terms current and short term are used interchangeably when discussing assets and liabilities because these assets and liabilities
A) will always be more current than previously established assets and liabilities.
B) are constantly evolving, so they are constantly considered to be current.
C) are replaced with new assets and liabilities every five years.
D) are usually replaced by new assets and liabilities within a week.
E) are usually replaced by new assets and liabilities within three or four months, and always within a year.

Accepted Answer

The terms current and short term are used interchangeably because short-term assets and liabilities are usually replaced by new assets and liabilities within three or four months, and always within a year.

Question 5

Valerie is a financial manager for a large office supply store. One of the most important facets of her job is ensuring that sufficient, but not excessive, funds are on hand to meet the store's obligations. What current asset is Valerie managing in this scenario?
A) accrued taxes
B) temporary investments
C) inventory
D) cash
E) accounts receivable

Accepted Answer

In this scenario, Valerie is managing cash. Cash flow is the movement of money through an organization on a daily, weekly, monthly, or yearly basis. Ensuring that sufficient (but not excessive) funds are on hand to meet the company's obligations is one of the single most important facets of financial management.

Question 6

Esther is a financial manager who focuses on current assets and liabilities. Her chief goal is to maximize returns on all of the following EXCEPT
A) cash.
B) inventory.
C) temporary investments of idle cash.
D) accounts receivable.
E) accrued taxes.

Accepted Answer

The chief goal of financial managers who focus on current assets and liabilities is to maximize the return to the business on cash, temporary investments of idle cash, accounts receivable, and inventory.

Question 7

Fabulous Finds, a large home decorating company with stores located nationwide, wants to collect cash from its customers quickly but pay out cash to its suppliers slowly. How might Fabulous Finds succeed in accomplishing this goal?
A) use electronic funds transfers to collect payments and checks to make payments
B) use checks to collect payments and electronic funds transfers to make payments
C) have customers send payments directly to its mailing address and send payments to suppliers via their lockboxes
D) use electronic funds transfers for both, but set the delivery dates to one day for payments from customers and three or four days for payments to suppliers
E) use checks for both, but require customers to send checks via express mail and send checks to suppliers via regular mail

Accepted Answer

Fabulous Finds, like most companies, wants to collect cash quickly but pay out cash slowly. When companies use electronic funds transfers between buyers and suppliers, the speed of collections and disbursements increases to one day. Only with the use of checks can companies delay the payment of cash by three or four days until the check is presented to their bank and the cash leaves their account.

Question 8

When Frank's Fertilizer Company bills its customers, it has them send their payments to an address that is just for receiving payments, instead of directly to the company's mailing address. Although this system costs Frank's Fertilizer Company a lot of money, it is worth it because the company receives thousands of checks from customers each business day. What system is this company using to receive its payments?
A) a treasury account
B) a safety deposit box
C) a P.O. box
D) a lockbox
E) a transaction box

Accepted Answer

In this scenario, Fred's Fertilizer Company is using a lockbox, which is simply an address for receiving payments, instead of having customers send payments directly to the company's mailing address. Using a lockbox allows the bank to get the money into the company's checking account much more quickly than if the payments had been submitted directly to the company. However, there is no free lunch: The costs associated with lockbox systems make them worthwhile only for those companies that receive thousands of checks from customers each business day.

Question 9

Callie's Curtain Shop invests the cash it earns in marketable securities, for periods as short as one day or for as long as one year, until it is needed. What temporary investment would Callie's Curtain Shop most likely use to invest these funds?
A) certificates of deposit
B) tradable equities
C) transaction balances
D) stock dividends
E) cash deposits

Accepted Answer

Organizations, like Callie's Curtain Shop, often invest the daily cash they earn, for periods as short as one day (overnight) or for as long as one year, until it is needed. Such temporary investments of cash are known as marketable securities. Examples include U.S. Treasury bills, certificates of deposit, commercial paper, and eurodollar deposits.

Question 10

Which type of marketable securities are the safest?
A) U.S. Treasury bills
B) commercial paper
C) certificates of deposit
D) eurodollar deposits
E) cash deposits

Accepted Answer

While all marketable securities are very low risk, U.S. government securities, such as Treasury bills are the safest. U.S. Treasury bills are even called risk free because the U.S. government will not default on its debt.

Question 11

A company invests its excess cash in a commercial certificate of deposit (CD). If a cash shortage occurs, what will the company most likely do?
A) return the CD to the commercial bank or brokerage company and get its money back
B) trade the CD for a lower cost CD to obtain needed funds
C) sell the CD on the open market and obtain needed funds
D) find an unrelated way to obtain needed funds, since CDs must be held until maturity
E) wait for the CD to reach maturity and then trade it in for the needed funds

Accepted Answer

Unlike consumer CDs, which must be held until maturity, commercial CDs may be traded prior to maturity. Should a cash shortage occur, the organization can simply sell the CD on the open market and obtain needed funds.

Question 12

During 2007 and 2008, the market for which short-term investment stopped functioning and had to be rescued by the Federal Reserve?
A) consumer certificates of deposit
B) eurodollars
C) Treasury bills
D) commercial certificates of deposit
E) commercial paper

Accepted Answer

During 2007 and 2008, the commercial paper market simply stopped functioning. Investors no longer trusted the IOUs of even the best companies. Companies that had relied on commercial paper to fund short-term cash needs had to turn to the banks for borrowing. Eventually, the Federal Reserve entered the market to buy and sell commercial paper for its own portfolio. It rescued the market, and the commercial paper market is now standing on its own two feet without the Fed's help.

Question 13

Rhea is traveling internationally, selling her company's computer software. While she is in Ireland, she makes a deposit of $10,000 in a bank there. What short-term investment does this scenario describe?
A) an international deposit
B) a eurodollar deposit
C) commercial paper
D) a commercial certificate of deposit
E) an international certificate of deposit

Accepted Answer

This scenario describes eurodollar deposits. Some companies invest idle cash in international markets such as the eurodollar market, a market for trading U.S. dollars in foreign countries. Because the eurodollar market was originally developed by London banks, any dollar-denominated deposit in a non-U.S. bank is called a eurodollar deposit, regardless of whether the issuing bank is actually located in Europe, South America, or anyplace else.

Question 14

Money owed to a business by credit customers is referred to as
A) accounts receivable.
B) accounts payable.
C) trade credit.
D) working capital.
E) idle cash.

Accepted Answer

Accounts receivable is money owed to a business by credit customers. Many businesses make the vast majority of their sales on credit, so managing accounts receivable is an important task.

Question 15

Classic Cars Corporation makes the vast majority of its car sales on credit. What is something Classic Cars Corporation may do to encourage quick payment of these accounts receivable?
A) Offer customers discounts if they pay off their balances within a specified time period.
B) Threaten to charge customers extra money if they pay their balances after the specified time period is over.
C) Offer customers a free upgrade to a nicer car model if they pay their balances off on time.
D) Send customer accounts to collections if they do not pay off their balances on time.
E) Extend credit to customers who don't have good credit ratings to encourage them to feel obligated to pay their balances quickly.

Accepted Answer

To encourage quick payment, Classic Cars Corporation can offer some of its customers discounts of between 1 and 2 percent if they pay off their balances within a specified period of time (usually between 10 and 30 days). The larger the early payment discount offered, the faster customers will tend to pay their accounts.

Question 16

King Construction Company receives weekly shipments of lumber, vinyl siding, and stone slabs from one of its materials suppliers. Since King Construction Company is a regular customer, the supplier has made an agreement to give the company discounts if it pays its bill early. This is an example of
A) accounts receivable.
B) a certificates of deposit.
C) a line of credit.
D) trade credit.
E) a discount window.

Accepted Answer

This scenario describes trade credit, which is credit extended by suppliers for the purchase of their goods and services. Most trade credit agreements offer discounts to organizations that pay their bills early. For example, a supplier may offer terms of "1/10 net 30,"
meaning that the purchasing organization may take a 1 percent discount from the invoice amount if it makes payment by the 10th day after receiving the bill. Otherwise, the entire amount is due within 30 days.

Question 17

Pipe Supply Company offers its customers trade credit terms of 2/10 net 30. What does this mean?
A) Customers have 2 days to pay 10 percent of their bill, and then, they have 30 days to pay the rest.
B) Customers can save 2 percent off the invoice amount if they pay within 10 days, or they can pay the entire amount within 30 days.
C) Customers can save 30 percent off their invoice amount if they pay 10 percent of the bill within 2 days.
D) Customers can save $2 for every $10 they spend if they pay within 30 days.
E) Customers can save 10 percent off the invoice amount if they pay within 2 days, or they can pay the entire amount within 30 days.

Accepted Answer

Trade terms of 2/10 net 30 means that the purchasing organization may take a 2 percent discount from the invoice amount if it makes payment by the 10th day after receiving the bill. Otherwise, the entire amount is due within 30 days.

Question 18

A surfboard manufacturer orders 100 units of fiberglass material and promises to pay the supplier at a later date. The surfboard manufacturer will record the amount to be paid as
A) a secured loan.
B) accounts receivable.
C) a serial bond.
D) accounts payable.
E) trade credit.

Accepted Answer

The surfboard manufacturer will record the amount to be paid as accounts payable, which is money an organization owes to suppliers for goods and services. Just as accounts receivable must be actively managed to ensure proper cash collections, so too must accounts payable be managed to make the best use of this important liability.

Question 19

Mauricio owns a catering business, and he has put all his savings into running this business. During the busy holiday season, he realizes that he needs short-term help financing the business' operations, so he goes to the bank to request $25,000. The bank agrees to lend Mauricio this amount of money. What type of bank loans does this scenario best describe?
A) an unsecured loan
B) a certificate of deposit
C) a trade credit
D) a secured loan
E) a line of credit

Accepted Answer

In this scenario, the bank is giving Mauricio a line of credit, which is an arrangement by which a bank agrees to lend a specified amount of money to an organization upon request.

Question 20

If Talia borrows $30,000 to buy a car and ends up paying the lender a total of $35,000, the $5,000 represents the
A) principal.
B) collateral.
C) trade credit.
D) discount.
E) interest.

Accepted Answer

The $5,000 in the given scenario represents the interest. The principal is the amount of money borrowed; interest is the amount of money the bank charges a company to use its funds.

Quiz 16: Financial Management and Securities Markets

Financial management is limited to business organizations.

Commercial certificates of deposit (CDs) work exactly the same way as consumer certificates of deposit, except that commercial CDs must be held until maturity.

New issues of stocks and bonds are sold directly to the public and to institutions in what is known as the secondary market.

The terms current and short term are used interchangeably when discussing assets and liabilities because these assets and liabilities

Valerie is a financial manager for a large office supply store. One of the most important facets of her job is ensuring that sufficient, but not excessive, funds are on hand to meet the store's obligations. What current asset is Valerie managing in this scenario?

Esther is a financial manager who focuses on current assets and liabilities. Her chief goal is to maximize returns on all of the following EXCEPT

Fabulous Finds, a large home decorating company with stores located nationwide, wants to collect cash from its customers quickly but pay out cash to its suppliers slowly. How might Fabulous Finds succeed in accomplishing this goal?

Callie's Curtain Shop invests the cash it earns in marketable securities, for periods as short as one day or for as long as one year, until it is needed. What temporary investment would Callie's Curtain Shop most likely use to invest these funds?

Which type of marketable securities are the safest?

A company invests its excess cash in a commercial certificate of deposit (CD) . If a cash shortage occurs, what will the company most likely do?

During 2007 and 2008, the market for which short-term investment stopped functioning and had to be rescued by the Federal Reserve?

Rhea is traveling internationally, selling her company's computer software. While she is in Ireland, she makes a deposit of $10,000 in a bank there. What short-term investment does this scenario describe?

Money owed to a business by credit customers is referred to as

Classic Cars Corporation makes the vast majority of its car sales on credit. What is something Classic Cars Corporation may do to encourage quick payment of these accounts receivable?

King Construction Company receives weekly shipments of lumber, vinyl siding, and stone slabs from one of its materials suppliers. Since King Construction Company is a regular customer, the supplier has made an agreement to give the company discounts if it pays its bill early. This is an example of

Pipe Supply Company offers its customers trade credit terms of 2/10 net 30. What does this mean?

A surfboard manufacturer orders 100 units of fiberglass material and promises to pay the supplier at a later date. The surfboard manufacturer will record the amount to be paid as

If Talia borrows $30,000 to buy a car and ends up paying the lender a total of $35,000, the $5,000 represents the