A lockbox plan is A) used for safe-keeping cash and marketable securities. B) used to identify inventory safety stocks. C) used to slow down the collection of checks our firm writes. D) used to speed up the collection of checks received. E) not described by any of the statements above.
Helena Furnishings wants to reduce its cash conversion cycle. Which of the following actions should it take?
a. Start paying its bills sooner, which would reduce the average accounts payable but not affect sales.
b. Sell an issue of long-term bonds and use the proceeds to buy back some of its common stock.
c. Sell common stock to retire long-term bonds.
d. Take steps to reduce the DSO.
e. Increases average inventory without increasing sales.
Which of the following statements is CORRECT?
a. Shorter-term cash budgets, in general, are used primarily for planning purposes, while longer-term budgets are used for actual cash control.
b. The cash budget and the capital budget are developed separately, and although they are both important to the firm, one does not affect the other.
c. Since depreciation is a non-cash charge, it neither appears on nor has any effect on the cash budget.
d. The target cash balance should be set such that it need not be adjusted for seasonal patterns and unanticipated fluctuations in receipts, although it should be changed to reflect long-term changes in the firm’s operations.
e. The typical cash budget reflects interest paid on loans as well as income from the investment of surplus cash. These numbers, as well as other items on the cash budget, are expected values; hence, actual results might vary from the budgeted amounts.
. Which of the following statements is most correct?
a. Accrued liabilities are an expensive way to finance working capital.
b. A conservative financing policy is one in which the firm finances all of its fixed assets with long-term capital and part of its permanent current assets with short-term, non-spontaneous credit.
c. If a company receives trade credit under the terms 2/10 net 30, this implies the company has 10 days of free trade credit.
d. Statements a and b are correct.
e. None of the answers above is correct.
Which of the following is NOT commonly regarded as being a credit policy variable?
a. Credit period.
b. Collection policy.
c. Credit standards.
d. Cash discounts.
e. Payments deferral period.
Others things held constant, which of the following will cause an increase in working capital?
a. Cash is used to buy marketable securities.
b. A cash dividend is declared and paid.
c. Merchandise is sold at a profit, but the sale is on credit.
d. Long-term bonds are retired with the proceeds of a preferred stock issue.
e. Missing inventory is written off against retained earnings.
Which of the following statements is CORRECT?
Other things held constant, the higher a firm’s days sales outstanding (DSO), the better its credit department.
If a firm that sells on terms of net 30 changes its policy to 2/10 net 30, and if no change in sales volume occurs, then the firm’s DSO will probably increase.
If a firm sells on terms of 2/10 net 30, and its DSO is 30 days, then the firm probably has some past-due accounts.
If a firm sells on terms of net 60, and if its sales are highly seasonal, with a sharp peak in December, then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be lower in January than in July.
If a firm changed the credit terms offered to its customers from 2/10 net 30 to 2/10 net 60, then its sales should increase, and this should lead to an increase in sales per day, and that should lead to a decrease in the DSO.
Which of the following statements is CORRECT?
a. Under normal conditions, a firm’s expected ROE would probably be higher if it financed with short-term rather than with long-term debt, but using short-term debt would probably increase the firm’s risk.
b. Conservative firms generally use no short-term debt and thus have zero current liabilities.
c. A short-term loan can usually be obtained more quickly than a long-term loan, but the cost of short-term debt is normally higher than that of long-term debt.
d. If a firm that can borrow from its bank at a 6% interest rate buys materials on terms of 2/10 net 30, and if it must pay by Day 30 or else be cut off, then we would expect to see zero accounts payable on its balance sheet.
e. If one of your firm’s customers is “stretching” its accounts payable, this may be a nuisance but it will not have an adverse financial impact on your firm if the customer periodically pays off its entire balance.
Which of the following statements is CORRECT?
a. Net working capital is defined as current assets minus the sum of payables and accruals, and any increase in the current ratio automatically indicates that net working capital has increased.
b. Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks associated with using short-term financing.
c. If a company follows a policy of “matching maturities,” this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt.
d. Net working capital is defined as current assets minus the sum of payables and accruals, and any decrease in the current ratio automatically indicates that net working capital has decreased.
e. If a company follows a policy of “matching maturities,” this means that it matches its use of short-term debt with its use of long-term debt.
Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable securities?
a. The firm must make a known future payment, such as paying for a new plant that is under construction.
b. The firm is going from its peak sales season to its slack season, so its receivables and inventories will experience a seasonal decline.
c. The firm is going from its slack season to its peak sales season, so its receivables and inventories will experience seasonal increases.
d. The firm has just sold long-term securities and has not yet invested the proceeds in operating assets.
e. The firm just won a product liability suit one of its customers had brought against it.
Which of the following statement completions is CORRECT? If the yield curve is upward sloping, then the marketable securities held in a firm’s portfolio, assumed to be held for emergencies, should
a. consist mainly of long-term securities because they pay higher rates.
b. consist mainly of short-term securities because they pay higher rates.
c. consist mainly of U.S. Treasury securities to minimize interest rate risk.
d. consist mainly of short-term securities to minimize interest rate risk.
e. be balanced between long- and short-term securities to minimize the adverse effects of either an upward or a downward trend in interest rates.
Which of the following statements is most consistent with efficient inventory management? The firm has a
a. low incidence of production schedule disruptions.
b. relatively high current ratio.
c. below average total assets turnover ratio.
d. relatively low DSO.
e. below average inventory turnover ratio.
Which of the following statements is CORRECT?
a. Trade credit is provided only to relatively large, strong firms.
b. Commercial paper is a form of short-term financing that is primarily used by large, strong, financially stable companies.
c. Short-term debt is favored by firms because, while it is generally more expensive than long-term debt, it exposes the borrowing firm to less risk than long-term debt.
d. Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate.
e. Commercial paper is typically offered at a long-term maturity of at least five years.
Which of the following actions would be likely to shorten the cash conversion cycle?
a. Adopt a new manufacturing process that speeds up the conversion of raw materials to finished goods from 20 days to 10 days.
b. Adopt a new manufacturing process that saves some labor costs but slows down the conversion of raw materials to finished goods from 10 days to 20 days.
c. Change the credit terms offered to customers from 2/10, net 30 to 1/10, net 60.
d. Begin to take discounts on inventory purchases; we buy on terms of 2/10, net 30.
e. Change the credit terms offered to customers from 3/10, net 30 to 1/10, net 50.
Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?
a. Payments lags.
b. Depreciation.
c. Cumulative cash.
d. Repurchases of common stock.
e. Payment for plant construction.
