Question 1

Firms should hold the minimum amounts of inventories that will not jeopardize productions schedules or the satisfaction of customer expectations.

Accepted Answer

Holding excessive inventories ties up valuable capital and can lead to increased storage costs and the risk of obsolescence. However, insufficient inventories can lead to production and delivery delays, causing customer dissatisfaction. Therefore, firms should aim to strike a balance between these two extremes and hold the minimum amount of inventories necessary to meet production schedules and customer demand.

Question 2

Although CDs are slightly more risky than Treasury bills, the yield is usually slightly less.

Accepted Answer

CDs (Certificates of Deposit) typically offer higher yields than Treasury bills because they carry a slightly higher risk, given that they are not direct obligations of the U.S. government. Treasury bills are considered among the safest investments since they are backed by the full faith and credit of the U.S. government, which reflects in their lower yield compared to most other investments, including CDs.

Question 3

Marketable securities are near-cash assets because they can be converted into cash quickly.

Accepted Answer

Marketable securities are financial instruments that can be easily liquidated into cash or sold in the market. This makes them near-cash assets, meaning they can be quickly converted into cash if needed.

Question 4

Briefly describe at least three useful tools for maintaining control over accounts receivable.

Accepted Answer

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Question 5

A history of using different types of credit such as mortgages, auto loans, and credit cards has a negative effect on one's credit score.

Accepted Answer

A mix of different types of credit accounts, such as mortgages, auto loans, and credit cards, can positively affect one's credit score by demonstrating the ability to manage various types of credit responsibly.

Question 6

Electronic funds transfer (EFT) could eventually eliminate the use of most checks and minimize float.

Accepted Answer

EFT allows for direct electronic transfers of funds between bank accounts, reducing the need for checks and the amount of time it takes for funds to clear (minimizing float).

Question 7

A negotiable certificate of deposit (CD) is a marketable receipt for funds deposited in a bank.

Accepted Answer

A negotiable certificate of deposit (CD) can be bought and sold on the secondary market, making it a marketable receipt for funds deposited in a bank.

Question 8

If revenues can be forecast to fall within a tight range of outcomes, then the ratio of cash and near-cash to total assets will be greater for the firm than if the prospective cash inflows might be expected to vary over a wide range.

Accepted Answer

If revenues are forecast to fall within a tight range, the firm may not need to hold as much cash or near-cash assets as a buffer against uncertainty, leading to a lower ratio compared to a scenario with more variable cash inflows.

Question 9

Investing in additional marketable securities and inventories creates higher profitability and lower liquidity.

Accepted Answer

Investing in additional marketable securities may increase liquidity by providing assets that can be quickly converted into cash, but investing in inventories can decrease liquidity since it ties up cash in physical goods. Both actions do not directly lead to higher profitability; profitability depends on the company's ability to generate income from its investments.

Question 10

Treasury bills are a safer choice than bank deposits for very large sums.

Accepted Answer

Treasury bills are backed by the government and are considered to be one of the safest investments. They are also liquid and can be easily bought and sold, making them a better option than bank deposits for large sums of money.

Quiz 18: Working Capital Management