Chapt

er14
Worki
ngCapi
tal
andCur
rent
Asset
sManagement

 Lear
ningGoal
s
1. Under
standshort
-t
ermfinanci
almanagement
,networ
kingcapi
tal
,andt
her
elat
edt
radeof
f
bet
weenprofi
tabi
li
tyandrisk.

2. Descr
ibethecashconv
ersi
oncy
cle,
itsf
undi
ngr
equi
rement
s,andt
hekeyst
rat
egi
esf
or
managingit
.

3. Discussinv
ent
orymanagement
:di
ff
eri
ngv
iews,
commont
echni
ques,
andi
nter
nat
ional
concerns.

4. Expl
ainthecr
edi
tsel
ect
ionpr
ocessandt
hequant
it
ati
vepr
ocedur
eforev
aluat
ingchanges
i
ncreditst
andar
ds.

5. Revi
ewtheprocedur
esf orquant
itati
vel
yconsi
der
ingcashdi
scountchanges,
otheraspect
s
ofcr
edi
tter
ms, andcreditmonit
oring.

6. Understandthemanagementofrecei
ptsanddisbursement
s,i
ncl
udingfl
oats,
speeding
col
lecti
ons,slowi
ngpayment
s,cashconcentr
ation,
zero-
bal
anceaccounts,
andinvesti
ngi
n
marketablesecur
it
ies.

 Tr
ue/
Fal
se
1. Af
ir
mthati
sunabl
etopayi
tsbi
l
lsast
heycomeduei
stechni
cal
l
yinsol
vent
.
Answer :TRUE
LevelofDiffi
cul
ty:
1
Learni
ngGoal :1
Topic:BasicsofShor
t-
Ter
m Fi
nanci
alManagement

2. Theshor
t-
ter
mf i
nancialmanagementi
sconcer
nedwi
thmanagementoft
hef
ir
m’scur
rent
asset
sandcurr
entl
iabil
i
ties.
Answer :TRUE
LevelofDiffi
cul
ty:
1
Learni
ngGoal :1
Topic:BasicsofShor
t-
Ter
m Fi
nanci
alManagement
557  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

3. Intheshort
-t
ermfinanci
al management,
thegoal
ist
omanageeachofthefir
m’scur
rent
assetsandcurr
entli
abil
i
tiesinordert
oachiev
eabal
ancebet
weenprof
itabi
l
ityandr
isk
thatcont
ri
butestothefi
rm’sv al
ue.
Answer :TRUE
LevelofDiffi
cul
ty:
1
Learni
ngGoal :1
Topic:BasicsofShor
t-
Ter
m Fi
nanci
alManagement

4. Wor
kingcapi
talr
epresent
sthepor t
ionofthefi
rm’
sinvest
mentt
hatci
rcul
atesf
rom one
f
ormtoanotheri
nthelong-t
erm conductofbusi
ness.
Answer:FALSE
LevelofDi
ff
icul
ty:
1
Learni
ngGoal:1
Topic:Wor
kingCapit
alManagement

5. I
ngeneral
,themoreafi
rm’
scurr
entasset
scov
eri
tsshor
t-
ter
m obl
i
gat
ions,
thebet
terabl
e
i
twi
llbetopayit
sbil
lsast
heycomedue.
Answer:TRUE
LevelofDi
ff
icul
ty:
1
Learni
ngGoal:1
Topic:Wor
kingCapit
alManagement

6. Themor
epr
edi
ctabl
eit
scashi
nfl
ows,
themor
enetwor
kingcapi
tal
afi
rm needs.
Answer:FALSE
LevelofDi
ff
icul
ty:
1
Learni
ngGoal:1
Topic:Wor
kingCapit
alManagement

7. Ast
her
ati
oofcur
rentasset
stot
otal
asset
sincr
eases,
thef
ir
m’sr
iski
ncr
eases.
Answer:FALSE
LevelofDi
ff
icul
ty:
2
Learni
ngGoal:1
Topic:Wor
kingCapit
alManagement

8. Becausefi
rmsareunabletomat
chcashi
nfl
owstoout
fl
owswi t
hcer t
aint
y,mostoft
hem
needcurr
entl
iabi
l
iti
esthatmor
ethancov
erout
fl
owsforcur
rentassets.
Answer:FALSE
LevelofDi
ff
icul
ty:
2
Learni
ngGoal:1
Topic:Wor
kingCapit
alManagement

9. Toomuchinvest
mentincur
rentasset
sreducespr
ofit
abi
li
ty,
wher
east
ool
i
ttl
einv
est
ment
i
ncreasest
heri
skofnotbei
ngabletopaydebtsastheycomedue.
Answer :TRUE
LevelofDiffi
cult
y:2
Learni
ngGoal :1
Topic:TradeoffBet
weenPr
ofi
tabi
l
ityandRi
sk
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  558

10. Toolit
tl
ecurr
entli
abi
li
tyfi
nancingreducespr
ofit
abi
l
ity,
whereast
oomuchoft
hisf
inanci
ng
i
ncreasest
heriskofnotbeingabletopaydebtsastheycomedue.
Answer :TRUE
LevelofDiffi
cult
y:2
Learni
ngGoal :1
Topic:TradeoffBet
weenPr
ofi
tabi
l
ityandRi
sk

11. Busi
nessri
skistheriskofbeingunabl
etomaketheschedul
edf
ixedpay
ment
sassoci
ated
wit
hdebt,
leases,andprefer
redstockf
inanci
ngast
heycomedue.
Answer :FALSE
LevelofDiffi
cul
ty:
2
Learni
ngGoal :1
Topic:BusinessRi
sk

12. Thecashinfl
ows—thati
s,theconv
ersi
onofthecurr
entasset
stomoreliqui
dforms—are
rel
ati
vel
ypredi
ctabl
ebutthecashoutl
aysf
orcurr
entli
abi
li
ti
esaredi
ff
icultt
opredi
ct.
Answer:FALSE
LevelofDi
ff
icul
ty:
2
Learni
ngGoal:1
Topic:Wor
kingCapit
alManagement

13. Networki
ngcapi
tal
canbedef
inedast
hepor
ti
onoft
hef
ir
m’scur
rentasset
sfi
nancedwi
th
l
ong-t
ermfunds.
Answer :TRUE
LevelofDiff
icult
y:2
Learni
ngGoal :1
Topic:NetWor ki
ngCapi
tal

14. Afi
rmissaidtobetechni
cal
l
yinsol
ventwheni
tst
otal
asset
sisl
esst
hani
tst
otal
li
abi
l
iti
es
andst
ockholder
s’equi
ty.
Answer :FALSE
LevelofDiff
icult
y:2
Learni
ngGoal :1
Topic:TechnicalI
nsol
vency

15. Ani ncreaseincurrentasset

sincr
easesnetwor
kingcapi
tal
,ther
ebyr
educi
ngt
her
iskof
technicalinsol
vency.
Answer :TRUE
LevelofDiff
icult
y:3
Learni
ngGoal :1
Topic:TechnicalI
nsol
vency

16. Theeffectofadecreasei
nt herat
ioofcurr
entassetstot
otalassetsandtheeff
ectofan
i
ncreaseintherati
oofcurrentl
i
abili
ti
estotot
alassetsar
eincreasesint
hefir
m’sprofi
ts
and,corr
espondingl
y,i
tsr
isk.
Answer :TRUE
LevelofDiffi
cult
y:4
Learni
ngGoal :1
Topic:TradeoffBet
weenPr
ofi
tabi
l
ityandRi
sk
559  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

17. Thecashconversioncycl
eistheamountoft i
methatel
apsesf
rom thepoi
ntwhent
hefir
m
i
nputsmateri
alsandlaborint
ot heproducti
onprocesst
othepointwhencashi
scol
lect
ed
fr
om thesal
eoft heresul
ti
ngfinishedproduct
.
Answer :FALSE
LevelofDiff
icul
ty:1
Learni
ngGoal :2
Topic:CashConv er
sionCy
cle

18. Thefi
rm’soper
ati
ngcycl
e(OC)i
ssimpl
ythesum oft
heav
erageageofi
nvent
ory(
AAI
)and
theav
eragepaymentper
iod(
APP).
Answer :FALSE
LevelofDiff
icul
ty:
1
Learni
ngGoal :2
Topic:Operati
ngCy cl
e

19. Thecashconv
ersi
oncycl
eisthetot
alnumberofday
sint
heoper
ati
ngcy
clel
esst
he
aver
agepaymentper
iodf
orinput
stoproduct
ion.
Answer :TRUE
LevelofDiff
icul
ty:1
Learni
ngGoal :2
Topic:CashConv er
sionCy
cle

20. Anegat
ivecashconver
sioncy
cle(
CCC)meanst
heav
eragepay
mentper
iod(
APP)exceeds
t
heoperati
ngcycl
e(OC).
Answer :TRUE
LevelofDiff
icul
ty:1
Learni
ngGoal :2
Topic:CashConv er
sionCy
cle

21. Theoper
ati
ngcy
cleistherecur
ringtransi
ti
onofafi
rm’
swor ki
ngcapi
tal
from casht
o
i
nvent
ori
esandi
nventori
estoreceiv
ablesandbacktocash.
Answer :TRUE
LevelofDiff
icul
ty:
1
Learni
ngGoal :2
Topic:Operati
ngCy cl
e

22. Theaggr
essi
vef
inanci
ngstr
ategyi
sastr
ategybywhichthefi
rmf
inancesi
tscur
rent
asset
swit
hshor
t-t
ermfundsandit
sfi
xedasset
swithlong-
ter
mfunds.
Answer :FALSE
LevelofDiff
icul
ty:
1
Learni
ngGoal :2
Topic:Aggressi
veFinanci
ngSt
rat
egy

23. Thepermanentfi
nanci
alneedofaf
ir
mi st
hef
inancingrequi
rement
sfort
hef
ir
m’sf
ixed
asset
splusthepermanentpor
ti
onoft
hefi
rm’
scurrentasset
s.
Answer :TRUE
LevelofDiff
icul
ty:
1
Learni
ngGoal :2
Topic:PermanentFundi
ngRequi
rement
s
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  560

24. Theconservat
ivefi
nanci
ngstr
ategyisastrat
egybywhi
chthefir
mf i
nancesatleasti
ts
seasonal
requir
ements,andpossi
blysomeofi t
sper
manentrequi
rements,
withshort
-ter
m
fundsandthebalanceofit
spermanentrequi
rement
swit
hlong-t
ermfunds.
Answer :FALSE
LevelofDiff
icult
y:2
Learni
ngGoal :2
Topic:Conservati
veFi
nanci
ngSt
rat
egy

25. Theaggr
essi
vestrat
egyoper
ateswit
hminimum networki
ngcapit
alsi
nceonlyt
he
per
manentport
ionofthef
ir
m’scurr
entasset
sisbeingf
inancedwit
hlong-
ter
mf unds.
Answer :TRUE
LevelofDiff
icul
ty:
2
Learni
ngGoal :2
Topic:Aggressi
veFinanci
ngSt
rat
egy

26. Oper
ati
ngcycl
eistheamountofti
met hef
ir
m’scashi
sti
edupbetweenpaymentfor
pr
oduct
ioni
nputsandrecei
ptofpaymentf
rom t
hesal
eofther
esul
ti
ngfi
nishedpr
oduct
.
Answer :FALSE
LevelofDiff
icul
ty:
2
Learni
ngGoal :2
Topic:Operati
ngCy cl
e

27. Byef
ficient
lymanagi
ngt hefir
m’soperati
ngandcashconv
ersi
oncycl
es,thefi
nanci
al
managercanmai nt
ainahi ghl
evelofcashinv
est
mentandther
ebycontr
ibutetowar
d
maxi
mi zati
onofsharevalue.
Answer :FALSE
LevelofDiff
icul
ty:
2
Learni
ngGoal :2
Topic:Operati
ngandCashConv
ersi
onCy
cles

28. Theabi
li
tytopurchasepr
oduct
ioninput
soncredi
tal
lowsthef
ir
mtopart
ial
l
y(ormaybe
event
otal
ly
)offsetthel
engt
hoftimeresour
cesaret
iedupint
heoper
ati
ngcycl
e.
Answer :TRUE
LevelofDiff
icul
ty:
2
Learni
ngGoal :2
Topic:Operati
ngCy cl
e

29. Thecashconver
sioncyclei
sthedi
fferencebet
weenthenumberofdaysr
esour
cesaret
ied
upintheoper
ati
ngcy cl
eandtheaveragenumberofdayst
hefi
rm candel
aymaking
paymentontheproducti
oni
nputspurchasedoncr
edit
.
Answer :TRUE
LevelofDiff
icul
ty:2
Learni
ngGoal :2
Topic:CashConv er
sionCy
cle

30. Aposit
ivecashconver
sioncy
clemeanst
hatt
hef
ir
m mustobt
ainf
inanci
ngt
osuppor
tthe
cashconver
sioncycl
e.
Answer :TRUE
LevelofDiff
icul
ty:2
Learni
ngGoal :2
Topic:CashConv er
sionCy
cle
561  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  562

31. Whenaf i
rm’scashconver
sioncycl
eisnegat
ive,thefi
rm shoul
dbenef
itbybeingabl
eto
usethefi
nanci
ngprovi
dedbyt hesuppl
i
ersofitsproduct
ioninput
stohelpsuppor
taspect
s
ofthebusi
nessothert
hanjusttheoper
ati
ngcycle.
Answer :TRUE
LevelofDiff
icul
ty:3
Learni
ngGoal :2
Topic:CashConv er
sionCy
cle

32. Nonmanufact
uri
ngf
irmsaremorel
ikel
ytohaveposi
ti
vecashconversi
oncycles;
they
gener
all
ycarr
ysmal
ler,
fast
er-
movi
nginvent
ori
esandoft
ensell
theirpr
oductsforcash.
Answer :FALSE
LevelofDiff
icul
ty:3
Learni
ngGoal :2
Topic:CashConv er
sionCy
cle

33. Whenimpl ementingthecashmanagementst r

ategies,afi
rm shouldtakecar
etoavoi
d
havi
ngal argenumberofi nventoryst
ockouts,toav oi
dlosi
ngt heuseofi t
scashby
col
lect
ingitsaccountsrecei
v ableusi
nghigh-pressurecoll
ect
iont echni
ques,
andtoavoi
d
damagingt hefi
rm’scredi
tratingbyoverstr
etchingaccountspay able.
Answer :FALSE
LevelofDiff
icul
ty:3
Learni
ngGoal :2
Topic:CashConv er
sionCy
cleManagementSt
rat
egi
es

34. Oneaspectofri
skassoci
atedwitht
heaggr essi
vest rat
egy’smaximum useofshor
t-
ter
m
fi
nanci
ngisthefactt
hatchangi
ngshort
-t
ermi nterestratescanresul
tinsi
gni
fi
cant
ly
hi
gherborr
owingcostsastheshort
-t
erm debtisrefinanced.
Answer :TRUE
LevelofDiff
icul
ty:
3
Learni
ngGoal :2
Topic:Aggressi
veFinanci
ngSt
rat
egy

35. Theaggressivef
inanci
ngstr
ategyisastrat
egybywhichthefi
rmf i
nancesal
lproj
ect
ed
fundsrequir
ementswithl
ong-t
ermf undsandusesshor
t-
termfinanci
ngonlyfor
emergenciesorunexpect
edoutfl
ows.
Answer :FALSE
LevelofDiff
icul
ty:
3
Learni
ngGoal :2
Topic:Aggressi
veFinanci
ngSt
rat
egy

36. Theaggr
essiv
efinanci
ngstr
ategyisri
skyduetoi
tsmi
nimum l
evelofnetwor
kingcapi
tal
,
hi
ghdependencyonshort
-t
erm sourcesoff
unds,
andt
hechangingshort
-t
erminter
est
.
Answer :TRUE
LevelofDiff
icul
ty:
3
Learni
ngGoal :2
Topic:Aggressi
veFinanci
ngSt
rat
egy
563  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

37. Underconservat
ivef
inancingst
rat
egy,
short-
ter
mf i
nanci
ngisusedonl
ytofi
nancean
emergency,anunexpectedoutf
lowoffunds,
andthevari
abl
eporti
onofthef
ir
m’scur
rent
asset
s.
Answer :FALSE
LevelofDiff
icult
y:3
Learni
ngGoal :2
Topic:Conservati
veFi
nanci
ngSt
rat
egy

38. Ther i
skoftheconser
vati
vefi
nancingrequi
rement
sislowbecauseofi
tshi
ghl
evelofnet
workingcapit
al,
andthefactt
hatthestrat
egydoesnotrequi
ret
hefi
rmtouseanyofit
s
l
imitedshort-
ter
m bor
rowingcapacit
y.
Answer :TRUE
LevelofDiff
icult
y:3
Learni
ngGoal :2
Topic:Conservati
veFi
nanci
ngSt
rat
egy

39. Theconserv
ati
vest
rat
egyislesspr
ofi
tabl
ethantheaggr
essi
veappr
oachbecausei
t
requi
rest
hefir
mtopayint
erestonunneededfunds.
Answer :TRUE
LevelofDiff
icult
y:3
Learni
ngGoal :2
Topic:Conservati
veFi
nanci
ngSt
rat
egy

40. TheABCsy st
em i
saninvent
orymanagementt
echni
quef
ordet
ermi
ningt
heopt
imal
order
quant
it
yforanit
em ofi
nvent
ory.
Answer :FALSE
LevelofDiff
icult
y:1
Learni
ngGoal :3
Topic:ABCI nvent
orySy
stem

41. Ther
eor
derpoi
nti
sthepoi
ntatwhi
cht
hef
ir
mrecei
vesor
der
s.
Answer:FALSE
LevelofDif
fi
culty
:1
Learni
ngGoal :
3
Topic:I
nventor
yReorderPoi
nt

42. Safet
ystocksar
eextrai
nvent
ori
est
hatcanbedr
awndownwhenact
ual
leadt
imesand/
or
usagerat
esaregreat
ert
hanexpect
ed.
Answer:TRUE
LevelofDif
fi
culty
:1
Learni
ngGoal :
3
Topic:I
nventor
ySafet
ySt
ock

43. I
ntheABCsystem ofinv
ent
orymanagement
,ther
ed-
li
nemet
hodorsy
stem coul
dbe
ut
il
izedt
ocont
rolCitems.
Answer :TRUE
LevelofDiff
icult
y:1
Learni
ngGoal :3
Topic:ABCInv ent
orySy
stem
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  564

44. I
nEOQmodel
,theav
eragei
nvent
oryi
sdef
inedast
heor
derquant
it
ydi
vi
dedby2.
Answer :TRUE
LevelofDiff
icult
y: 1
Learni
ngGoal :3
Topic:EOQInv entoryModel

45. Theeconomi
corderquant
it
y(EOQ)i
stheor
derquant
it
ywhi
chmi
nimi
zest
hecar
ryi
ng
cost
speruni
tperper
iod.
Answer :FALSE
LevelofDiff
icult
y: 2
Learni
ngGoal :3
Topic:EOQI nventoryModel

46. I
ntheeconomicorderquant
it
ymodel,i
fcar
ryi
ngcost
sincr
easewhi
l
eallot
hercost
s
r
emainunchanged,t
henumberoforderspl
acedwoul
dbeexpect
edtoi
ncrease.
Answer :TRUE
LevelofDiff
icult
y: 2
Learni
ngGoal :3
Topic:EOQInv entoryModel

47. Int
heEOQmodel,t
hetot
alcosti
smi
nimi
zedatt
hepoi
ntwher
etheor
dercost
sand
car
ryi
ngcost
sar
eequal.
Answer :TRUE
LevelofDiff
icult
y: 2
Learni
ngGoal :3
Topic:EOQInv entoryModel

48. Thereor
derpointisaninv
ent
orymanagementsyst
em thatcompar
esproducti
onneedsto
avai
l
ableinvent
orybal
ancesanddeter
mineswhenordersshoul
dbepl
acedf orvar
ious
i
temsont hefir
m’sbil
lofmater
ial
s.
Answer:FALSE
LevelofDif
fi
culty
:2
Learni
ngGoal :
3
Topic:I
nventor
yReorderPoi
nt

49. Si
nceitsobject
ivei
stomi ni
mizei
nvent
oryi
nvest
ment
,aJust
-i
n-Ti
me(
JIT)sy
stem usesno,
orver
ylit
tl
e,safet
ystocks.
Answer :TRUE
LevelofDiff
icul
ty:
3
Learni
ngGoal :3
Topic:JustI
nTimeI nv
ent
oryManagementSy
stem

50. Becausemanaginginv
entoryi
sjustli
kemanagi
nganyotheri
nvest
ment,
deci
sionsabout
thel
evelofi
nventor
yshouldbeguidedbyt
heeffectofi
nvent
oryl
evel
sonsal
es.
Answer :FALSE
LevelofDiffi
cul
ty:3
Learni
ngGoal :3
Topic:BasicsofInv
ent
oryManagement
565  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

51. Afi
rm’
scredi
tpol
i
cygener
all
yincl
udesdet
ermi
ningcr
edi
tsel
ect
ion,
credi
tter
ms,
and
col
l
ect
ion.
Answer :FALSE
LevelofDiff
icul
ty:
1
Learni
ngGoal :4
Topic:Credi
tPoli
cyBasi
cs

52. Afi
rm’scr
editsel
ect
ioni
stheprocessofdet
ermi
ningt
hemi
nimum r
equi
rement
sfor
ext
endi
ngcreditt
oacustomer
.
Answer :FALSE
LevelofDiff
icul
ty:1
Learni
ngGoal :4
Topic:Credi
tSelect
ionSt
andar
ds

53. Cr
edi
tanaly
stsusuall
yanalyzeanappl
i
cant’
scredit
wort
hinessbyusingt
hedi
mensi
onsof
cr
edi
tsuchascharacter
,capaci
ty,
capi
tal
,col
lat
eral
,andcondit
ions.
Answer :TRUE
LevelofDi f
fi
cul
ty:1
Learni
ngGoal :4
Topic:FiveC’sofCredi
t

54. Af
ir
m’scr
edi
tter
msspeci
fyt
hemi
nimum r
equi
rement
sforext
endi
ngcr
edi
ttoacust
omer
.
Answer :FALSE
LevelofDiff
icul
ty:1
Learni
ngGoal :4
Topic:Credi
tSelect
ionSt
andar
ds

55. Thefi
rm’
scredi
tst
andar
dsar
ethemi
nimum r
equi
rement
sforext
endi
ngcr
edi
ttoa
cust
omer.
Answer :TRUE
LevelofDiff
icul
ty:1
Learni
ngGoal :4
Topic:Credi
tSelect
ionSt
andar
ds

56. Theaveragei
nvestmenti
naccount
srecei
vabl
eisequal
tot
hef
ir
m’st
otal
var
iabl
ecostof
annualsal
esdi
videdbyit
saver
agecoll
ect
ionper
iod.
Answer:FALSE
LevelofDif
fi
culty
:1
Learni
ngGoal :
4
Topic:I
nvestmentinAccount
sRecei
vabl
e

57. Inint
ernat
ional
tradewhenaU.S.companysel
l
saproducti
nFrance,t
heU.S.company
experi
encesanexchangerat
egainift
hefr
ancdepr
eci
atesagai
nstthedol
l
arbefor
etheU.
S.
export
ercoll
ectsonit
saccount
srecei
vabl
e.
Answer:FALSE
LevelofDi
ffi
cul
ty:
2
Learni
ngGoal:4
Topic:Managi
ngInter
nat
ional
Credi
t
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  566

58. Inanal
yzi
nganappli
cant
’scredi
tworthi
ness,
thecredi
tmanagert
ypi
cal
lygiv
esprimary
att
enti
ontotwoofthefi
veC’sofcredit
—coll
ater
alandcondi
ti
on—si
ncetheyrepr
esentthe
mostbasicr
equi
rementsforext
endingcredi
ttoanappli
cant
.
Answer :FALSE
LevelofDi f
fi
cul
ty:2
Learni
ngGoal :4
Topic:FiveC’sofCredi
t

59. Oneofthekeyinput
stothefi
nal
creditdeci
sioni
sthecreditanal
yst
’ssubj
ect
ivej
udgment
ofafi
rm’scr
editwor
thi
nesssi
nceitcanprovi
deabetterfeelofafi
rm’soper
ati
onthanany
quant
it
ati
vefi
gures.
Answer :FALSE
LevelofDiff
icul
ty:2
Learni
ngGoal :4
Topic:Credi
tSelect
ionSt
andar
ds

60. Thef i
rm’scredi
tselecti
onproceduresmustbeestabl
i
shedonasoundeconomicbasi
s
thatconsider
sthecost sofi
nv est
igat
ingt
hecredi
twort
hinessofacust
omerandt
he
expectedsizeofit
scr edi
tpurchases.
Answer :TRUE
LevelofDiff
icul
ty:2
Learni
ngGoal :4
Topic:Credi
tSelect
ionSt
andar
ds

61. Afi
rm’scredi
tst
andar
disaprocedur
eforr
ankingofanappl
icant’
sover
all
credi
tstr
engt
h,
der
ivedasaweight
edaver
ageofscoresonkeyfi
nanci
alandcredi
tchar
acter
ist
ics.
Answer :FALSE
LevelofDiff
icul
ty:2
Learni
ngGoal :4
Topic:Credi
tSelect
ionSt
andar
ds

62. Ascredi
tstandardsarerel
axed,sal
esareexpect
edt
oincr
easeandt
hei
nvest
menti
n
account
sreceivabl
eisexpectedtodecr
ease.
Answer:FALSE
LevelofDif
fi
culty
:2
Learni
ngGoal :
4
Topic:I
nvestmentinAccount
sRecei
vabl
e

63. Theturnoverofaccount
srecei
vabl
ecanbecal
cul
atedbydi
vi
dingannual
sal
esbyaccount
s
recei
vabl
e.
Answer:TRUE
LevelofDif
fi
culty
:2
Learni
ngGoal :
4
Topic:I
nvestmentinAccount
sRecei
vabl
e

64. Incr
easi
ngthel
engthoft
hecredi
tperi
odshoul
dincr
easesales,
butbot
hthei
nvest
menti
n
account
srecei
vabl
eandbaddebtexpensesar
eli
kel
ytoincr
easeaswell
.
Answer :TRUE
LevelofDiffi
cul
ty:
2
Learni
ngGoal :4
Topic:Relaxi
ngCredi
tSt
andar
ds
567  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  568

65. I
fthef
irmr
elaxesi
tscredi
tst
andar
ds,
thev
olumeofaccount
srecei
vabl
eincr
easesandso
doest
hefi
rm’scar
ryi
ngcost.
Answer :TRUE
LevelofDiffi
cul
ty:
3
Learni
ngGoal :4
Topic:Relaxi
ngCredi
tSt
andar
ds

66. Ar el
axat
ionofcredi
tstandardsisexpect
edt oaff
ectpr
ofi
tsposi
ti
vel
yduetolower
carry
ingcostswhereasti
ghteningcredi
tstandar
dswouldaff
ectprof
it
snegat
ivel
yasa
resul
tofhighercar
ryi
ngcosts.
Answer :FALSE
LevelofDiffi
cul
ty:
3
Learni
ngGoal :4
Topic:Relaxi
ngCredi
tSt
andar
ds

67. Theincreasei
nbaddebt
sassoci
atedwi
thti
ghteni
ngcr
edi
tst
andar
dsr
aisesbaddebt
expensesandhasanegati
vei
mpactonprof
it
s.
Answer :FALSE
LevelofDiff
icult
y:3
Learni
ngGoal :4
Topic:Tight
eningCredi
tSt
andar
ds

68. Thecostofmargi
nali
nvestmentinaccountsrecei
vabl
ecanbecalcul
atedbyfi
ndingthe
di
ff
erencebet
weentheav er
ageinvest
menti naccount
srecei
vabl
ebeforeandaft
erthe
i
ntr
oducti
onofthechangesincredi
tstandards.
Answer:FALSE
LevelofDif
fi
culty
:3
Learni
ngGoal :
4
Topic:I
nvestmentinAccount
sRecei
vabl
e

69. Thecostofmargi
nalbaddebtsi
sfoundbymult
ipl
yi
ngthef
irm’
sopport
uni
tycostbyt
he
di
ff
erencebet
weenthelevel
ofbaddebtsbef
oreandaf
tert
herel
axat
ionofcr
edit
st
andards.
Answer :FALSE
LevelofDiffi
cul
ty:
3
Learni
ngGoal :4
Topic:Relaxi
ngCredi
tSt
andar
ds

70. Ift
helevel
ofbaddebtatt
ri
but
abletocredi
tpolicyi
srel
ati
velyconst
ant
,incr
easi
ng
col
lect
ionexpendi
tur
escanbeexpect
edt oreducebaddebts.
Answer :TRUE
LevelofDiff
icul
ty:
1
Learni
ngGoal :5
Topic:ChangingCredi
tSt
andar
ds

71. 2/
15net45t
ransl
atesas2per
centoft
hebal
ancei
sduei
n15day
s;t
her
emai
ningbal
ance
i
sduei
n45day s.
Answer :FALSE
LevelofDiff
icult
y:2
Learni
ngGoal :5
Topic:Understandi
ngCr
edi
tTer
ms
569  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  570

72. I
fthecashdiscountper
iodi
sincreased,thefi
rm’si
nvest
mentinaccount
srecei
vabl
edue
t
onon-discountt
akersnowpayingearli
erisexpect
edtodecr
ease.
Answer:TRUE
LevelofDi
ffi
cult
y:3
Learni
ngGoal:5
Topic:I
ncr
easingtheCashDi
scountPer
iod

73. I
fthecashdi
scountperi
odisincr
eased,thefi
rm’
sinv
estmenti
naccountsr
ecei
vabl
edue
t
odiscountt
aker
sstil
lgett
ingcashdiscount
sbutpayi
nglat
eri
sexpectedt
oincr
ease.
Answer:TRUE
LevelofDi
ffi
cult
y:3
Learni
ngGoal:5
Topic:I
ncr
easingtheCashDi
scountPer
iod

74. Ift
hefi
rm’scr
edi
tperiodindecreased,
thesal
esvol
umecanbeexpect
edtoi
ncrease,t
he
i
nvest
mentinaccountsrecei
vablecanbeexpect
edtoi
ncr
ease,
andthebaddebtexpenses
canbeexpect
edtoincrease.
Answer :FALSE
LevelofDiffi
cul
ty:
3
Learni
ngGoal :5
Topic:Decreasi
ngtheCashDi
scountPer
iod

75. Whenaf i
rmi ni
ti
atesorincreasesacashdiscount,
theneteff
ectontheaccount
s
receiv
ableinvestmentisdiff
icul
ttodeter
minebecausethenondiscountt
aker
spayi
ng
earl
ierwillr
educet heaccountsrecei
vabl
einvest
ment,whil
ethenewcustomeraccount
s
willi
ncreasethisinvest
ment .
Answer:TRUE
LevelofDi
ffi
cult
y:3
Learni
ngGoal:5
Topic:I
ncr
easingtheCashDi
scountPer
iod

76. Theneteffectofchangesi
nthecashdiscountper
iodi
squi
tedi
ff
iculttoanal
yzebecause
theyaredi
rectl
yattr
ibut
abl
etothethr
eeforcesaff
ecti
ngt
hefi
rm’sinvest
mentinaccounts
recei
vabl
e.
Answer :TRUE
LevelofDiff
icul
ty:3
Learni
ngGoal :5
Topic:ChangingtheCashDi
scountPer
iod

77. Anincr
easeinaccount
srecei
vabl
etur
nov
erduetoanincr
easei
ncol
l
ect
ionef
for
tswi
l
l
decr
easethefi
rm’smargi
nali
nvest
menti
naccount
srecei
vabl
e.
Answer:TRUE
LevelofDi
ffi
cult
y:3
Learni
ngGoal:5
Topic:I
ncr
easingColl
ect
ionEf
for
ts

78. Adecreaseincoll
ecti
oneffor
tswil
lresulti
nanincr
easei
nsalesv ol
ume, ani
ncr
easei
nthe
i
nvestmentinaccountsrecei
vabl
e,anincreasei
nbaddebtexpenses,andadecr
easei
n
col
lect
ionexpendi
tures.
Answer:TRUE
Level
ofDiff
icul
ty:
3
571  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

Lear
ningGoal
:5
Topi
c:Decr
easi
ngCol
l
ect
ionEf
for
ts
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  572

79. I
ncreasedcol
lect
ionexpendit
uresshouldr
educet
hei
nvest
menti
naccount
srecei
vabl
eand
baddebtexpenses,i
ncreasi
ngprofi
ts.
Answer:TRUE
LevelofDi
ffi
cult
y:3
Learni
ngGoal:5
Topic:I
ncr
easingColl
ect
ionEf
for
ts

80. Byincr
easi
ngcol
l
ecti
onexpendi
tures,
thef
ir
m candecreasebaddebtlossesuptoapoint
,
beyondwhi
chbaddebtscannotbeeconomical
l
yreduced.Thesei
nescapablebaddebt
s
areatt
ri
but
edtot
hefi
rm’scredi
tpoli
cy.
Answer:TRUE
LevelofDi
ffi
cult
y:3
Learni
ngGoal:5
Topic:I
ncr
easingColl
ect
ionEf
for
ts

81. Processi
ngfloati
sthedel
aybet
weent
her
ecei
ptofacheckbyt
hepay
eeandi
tsdeposi
tin
thefi
rm’saccount.
Answer :TRUE
LevelofDiffi
cul
ty:
1
Learni
ngGoal :6
Topic:Processi
ngFloat

82. Mai
lfl
oatist
hedel
aybet
weent
hedeposi
tofacheckbyapay
eeandt
heact
ual
avai
l
abi
l
ity
oft
hefunds.
Answer:FALSE
LevelofDi
ff
icult
y:1
Learni
ngGoal:6
Topic:Mai
lFloat

83. Assumingthatthefi
rm hasdonealli
tcantosti
mulatecustomerstopaypr
ompt l
yandto
sel
ectvendorsoff
eri
ngt hemostattr
act
iveandfl
exibl
ecreditt
erms,i
tcanfur
therspeed
col
lect
ionsandslowdisbursementsbytaki
ngadvantageofthe“fl
oat
”exi
sti
nginthe
col
lect
ionandpay mentsystems.
Answer:TRUE
LevelofDi
ffi
cul
ty:
1
Learni
ngGoal:6
Topic:Managi
ngFloat

84. Fl
oatexi
stswhenapayeehasrecei
vedfundsi
naspendabl
efor
m butt
hesef
undshav
enot
beenwit
hdrawnfr
om t
heaccountofthepayer
.
Answer:TRUE
LevelofDi
ffi
cul
ty:
1
Learni
ngGoal:6
Topic:Managi
ngFloat

85. Col
l
ect
ionf
loati
sexper
iencedbyt
hepay
erandi
sadel
ayi
nther
ecei
ptoff
unds.
Answer :FALSE
LevelofDiff
icul
ty:
1
Learni
ngGoal :6
Topic:Coll
ecti
onFloat
573  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

86. Disbur
sementf
loati
sexper
iencedbyt
hepay
eeandi
sadel
ayi
ntheact
ual
wit
hdr
awal
of
funds.
Answer :FALSE
LevelofDiffi
culty
:1
Learni
ngGoal :
6
Topic:DisbursementFl
oat

87. Coll
ecti
onfloatr
esul
tsfrom thelapsebet
weenthet
imethatafi
rm deductsapay
ment
fr
om it
scheckingaccountledgerandtheti
methatf
undsareact
uallywit
hdrawnfr
om i
ts
accounts.
Answer :FALSE
LevelofDiff
icul
ty:
1
Learni
ngGoal :6
Topic:Coll
ecti
onFloat

88. Disbur
sementfloatresul
tsfrom t
hedelaybetweentheti
met hatapayerorcust
omer
deductsapaymentf rom i
tschecki
ngaccountledger(
disbur
sesit)andtheti
methatt
he
payeeorvendoractuall
yreceiv
esthesefundsinaspendableform.
Answer :FALSE
LevelofDiffi
culty
:1
Learni
ngGoal :
6
Topic:DisbursementFl
oat

89. Cont
rol
l
eddi
sbursi
ngi
nvol
vesthest
rategi
cuseofmai
l
ingpoi
ntsandbankaccount
sto
l
engt
henmai
lfl
oatandcl
eari
ngfl
oat
,respect
ivel
y.
Answer :TRUE
LevelofDiff
icult
y:1
Learni
ngGoal :6
Topic:Contr
olledDisbur
sing

90. Lockboxsy
stem isusedt
oreducecol
l
ect
ionfl
oatbyshor
teni
ngal
lthr
eebasi
cfl
oat
components(i
.e.
,mail
,pr
ocessi
ng,
andcl
eari
ng).
Answer :TRUE
LevelofDiff
icul
ty:
1
Learni
ngGoal :6
Topic:LockboxSystem

91. TheACH(automatedcl
ear
inghouse)debi
tsar
epr
eaut
hor
izedel
ect
roni
cwi
thdr
awal
sfr
om
thepay
er’
saccount.
Answer :TRUE
LevelofDiff
icul
ty:
1
Learni
ngGoal :6
Topic:AutomatedClear
ingHouse

92. Cont
rol
leddi
sbursi
ngi
samethodofconsci
ouslyant
ici
pat
ingt
hemai
l
,pr
ocessi
ng,
and
cl
ear
ingti
meinvolv
edwit
hthepay
mentprocess.
Answer :FALSE
LevelofDiff
icult
y:1
Learni
ngGoal :6
Topic:Control
ledDisbur
sing
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  574

93. Federal
agencyissuesarelow-
ri
sksecur
it
iesi
ssuedbygov
ernmentagenci
esbutnot
guarant
eedbytheU. S.Tr
easur
y.
Answer :TRUE
LevelofDiff
icult
y:1
Learni
ngGoal :6
Topic:FederalAgencyI
ssues

94. Eurodol
l
ardeposit
sar
edeposi
tsofcur
rencyt
hatar
enotnat
ivet
othecount
ryi
nwhi
cht
he
bankislocat
ed.
Answer :TRUE
LevelofDiffi
cult
y:1
Learni
ngGoal :6
Topic:Eurodoll
arDeposi
ts

95. Tobetrul
ymarketabl
e,asecuri
tymusthav
ethr
eebasi
cchar
act
eri
sti
cs:
areadymar
ket
,
ri
sk-
fr
ee,andsaf
etyofpri
ncipal
.
Answer:FALSE
LevelofDi
ff
icul
ty:
1
Learni
ngGoal:6
Topic:Mar
ketabl
eSecur
it
ies

96. Themarketf
orasecuri
tyshoul
dhavebothbreadt
handdept
hinor
dert
omi
nimi
zet
he
amountofti
merequi
redtoconver
titi
ntocash.
Answer:TRUE
LevelofDi
ff
icul
ty:
1
Learni
ngGoal:6
Topic:Mar
ketabl
eSecur
it
ies

97. Si
nceTr
easur
ybi
l
lsar
eissuedi
nbear
erf
orm,
theyar
econsi
der
edt
obev
irt
ual
l
yri
sk-
fr
ee.
Answer :FALSE
LevelofDiffi
cult
y:1
Learni
ngGoal :6
Topic:TreasuryBil
l
s

98. Theyiel
dsonTreasurybi
llsaregeneral
l
yhi
gherthant
hoseonanyot
hermar
ket
abl
e
secur
iti
esduet
ot hei
rvir
tuall
yri
sk-f
reenat
ure.
Answer :FALSE
LevelofDiffi
cult
y:1
Learni
ngGoal :6
Topic:TreasuryBil
l
s

99. Feder
alagencyissuesar
eobl
i
gat
ionsoft
heU.
S.Tr
easur
yandar
ereadi
l
yaccept
edasl
ow-
ri
sksecur
it
ies.
Answer :FALSE
LevelofDiff
icult
y:1
Learni
ngGoal :6
Topic:FederalAgencyI
ssues
575  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

100.Commer ci
alpaperi
sashort
-t
ermfundondeposi
tatcommerci
albankshav
ingv
ari
abl
e
yi
eldsbasedonsize,
matur
it
y,andpr
evai
l
ingmoneymarketcondi
ti
ons.
Answer :FALSE
LevelofDiff
icul
ty:
1
Learni
ngGoal :6
Topic:Commer ci
alPaper

101.Cashmanagementtechni
quesareai
medatmi ni
mizi
ngthefir
m’sfi
nanci
ngrequi
rement
s
bytaki
ngadv
antageofcert
aini
mperfect
ionsi
nthecol
lect
ionandpaymentsyst
em.
Answer :TRUE
LevelofDiff
icul
ty:
2
Learni
ngGoal :6
Topic:CashManagementTechni
ques

102.Theenti
reprocessresul
ti
ngf r
om acheckissueandmailbythepayercompanyt
othe
payeecompany( i
.
e.,mailf
loat,
processi
ngfl
oat,andcl
eari
ngfl
oat)i
sdisbur
sementf
loat
tot
hepay ercompanyandi scoll
ecti
onfl
oattothepayeecompany.
Answer:TRUE
LevelofDi
ffi
cul
ty:
2
Learni
ngGoal:6
Topic:Managi
ngFloat

103.Pl
ayi
ngt hefl
oati
nvolv
est hestr
ategi
cuseofmai
l
ingpoi
ntsandbankaccount
stol
engt
hen
mail
floatandcl
eari
ngfloat,r
especti
vel
y.
Answer:FALSE
LevelofDi
ffi
cul
ty:
2
Learni
ngGoal:6
Topic:Managi
ngFloat

104.Wit
htheACH( aut
omat
edclear
inghouse)credi
ts,
disbur
sementfl
oati
ssacri
fi
cedbecause
ACHtransact
ionsimmedi
atel
ydrawdownt hecompany ’
spayr
oll
accountonpayday.
Answer :TRUE
LevelofDiff
icul
ty:
2
Learni
ngGoal :6
Topic:AutomatedClear
ingHouse

105.Zero-
bal
anceaccountsar
echecki
ngaccountsi
nwhichazer
obal
anceismai
ntai
nedand
thebankaut
omatical
l
ycover
sallcheckspr
esent
edagai
nstt
heaccount
s.
Answer :FALSE
LevelofDiff
icul
ty:2
Learni
ngGoal :6
Topic:ZeroBalanceAccount
s

106.Amaj ordecisi
onconfronti
ngthebusi
nessfir
m whenpurchasi
ngmar ket
abl
esecuri
ti
es
i
nvolvesatrade-of
fbetweentheopportuni
tytoearnaret
urnonidl
efundsduri
ngthe
hol
dingperiodandt hebroker
agecost
sassociatedwit
hthepurchaseandsal
eof
marketabl
esecur i
ti
es.
Answer:TRUE
LevelofDi
ff
icul
ty:
2
Learni
ngGoal:6
Topic:Mar
ketabl
eSecur
it
ies
Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  576
577  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

107.Treasur
ynotesareobligat
ionsoftheU.S.Treasuryt
hatareissuedweeklyonanaucti
on
basisandhavecommonmat ur
it
iesof91and182day s.Duetotheexist
enceofastr
ong
secondarymarket
,thesenotesarequit
eat t
racti
vemar ket
ablesecur
it
yinvest
ments.
Answer :FALSE
LevelofDiffi
cult
y:2
Learni
ngGoal :6
Topic:TreasuryNotes

108.Mostfederalagencyissueshav
eshor
tmatur
it
iesandof
fersl
i
ght
lyhi
ghery
iel
dst
hanU.
S.
Tr
easuryissueshavingsimil
armat
uri
ti
es.
Answer :TRUE
LevelofDiff
icult
y:2
Learni
ngGoal :6
Topic:FederalAgencyI
ssues

109.Theyi
eldsonnegot
iablecert
if
icatesofdeposi
taretypi
cal
lyabov
ethoseonU.S.Tr
easur
y
i
ssuesandcomparabletothey i
eldsoncommer ci
alpaperwit
hsimi
larmat
uri
ti
es.
Answer :TRUE
LevelofDiff
icult
y:2
Learni
ngGoal :6
Topic:Negotiabl
eCDs

110.Abanker
’saccept
anceisalow-
ri
sksecur
it
ybecauseatl
eastt
wo,
andsomet
imest
hree,
par
ti
esmaybel i
ablef
orit
spaymentatmatur
it
y.
Answer :TRUE
LevelofDiff
icul
ty:
2
Learni
ngGoal :6
Topic:Banker’
sAccept
ances

111.I
nexchangef orthet
ail
or-
mademat uri
tydateprov
idedbytherepurchaseagreement,
the
bankorsecurit
ydeal
erprovi
desareturnsl
ight
lybelowthatobt
ainablethr
oughoutri
ght
purchaseofsimil
armarket
abl
esecurit
ies.
Answer :TRUE
LevelofDiff
icul
ty:3
Learni
ngGoal :6
Topic:RepurchaseAgr
eement
s

112.Thehighery ieldsonEurodoll
ardeposit
scomparedwi t
hnear l
yallothermar ket
able
securi
ti
es, gov er
nmentalornongovernmental
,wit
hsimilarmaturi
ti
esar eattri
butabl
eto(1)
thefactthatt hedeposi
torybanksaregeneral
lyl
esscloselyregul
atedthanU. S.banksand
arethereforemor eri
sky,and(2)somef or
eignexchangeriskmaybepr esent.
Answer :TRUE
LevelofDiffi
cult
y:4
Learni
ngGoal :6
Topic:Eurodoll
arDeposi
ts
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  578

113.Apopularextensionofmat eri
alsr
equir
ementpl
anningi
smanuf acturi
ngresour
ceplanni
ng
II
,whi
chintegratesdatafrom numerousar
eassuchasfinance,accounti
ng,market
ing,
engi
neeri
ng,andmanuf actur
ingusi
ngasophist
icat
edcomput ersyst
em.
Answer:TRUE
LevelofDi
ffi
culty:
3
Learni
ngGoal :
3
Topic:Manufactur
ingResour
cePl
anni
ng

114.Apopularextensionofmat eri
alsr
equir
ementpl
anningi
sinventoryintegrat
ionautomat
ion
II
,whi
chintegratesdatafrom numerousar
eassuchasfinance,account i
ng,marketi
ng,
engi
neeri
ng,andmanuf actur
ingusi
ngasophist
icat
edcomput ersystem.
Answer:FALSE
LevelofDi
ffi
culty:
3
Learni
ngGoal :
3
Topic:Manufactur
ingResour
cePl
anni
ng

115.Anagi
ngschedul
ebr
eaksdownaccount
srecei
vablei
ntogroupsont
hebasi
soft
hef
ir
st
l
ett
eroft
henameofthecompanyt
hatowesont heaccount
.
Answer :FALSE
LevelofDiff
icul
ty:
2
Learni
ngGoal :6
Topic:AccountsRecei
vabl
eAgi
ngSchedul
e

 Mul
ti
pleChoi
ceQuest
ions
1. Networ
kingcapi
tali
sdef i
nedas
(
a)arati
omeasur eofli
quidi
tybestusedi ncr
oss-sect
ionalanal
ysi
s.
(
b)theport
ionofthefi
rm’sassetsfinancedwithshort
-ter
mf unds.
(
c)curr
entli
abi
li
ti
esmi nuscurrentassets.
(
d)curr
entasset
smi nuscurrentli
abil
it
ies.
Answer :D
LevelofDiff
icult
y:1
Learni
ngGoal :1
Topic:NetWor ki
ngCapi
tal

2. Theporti
onofaf ir
m’scurrentasset
sfi
nancedwi
thl
ong-
ter
mfundsmaybecal
l
ed
(a)worki
ngcapi t
al.
(b)accountsrecei
vable.
(c)networkingcapit
al.
(d)i
nventory.
Answer :C
LevelofDiff
icult
y:1
Learni
ngGoal :1
Topic:NetWor ki
ngCapi
tal
579  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

3. I
nworkingcapi
talmanagement
,ri
skismeasur
edbyt
hepr
obabi
l
ityt
hataf
ir
m wi
l
lbecome
(
a)l
iquid.
(
b)techni
call
yinsol
vent
.
(
c)unabletomeetlong-
ter
m obl
igat
ions.
(
d)l
esspr of
it
able.
Answer:B
LevelofDi
ff
icul
ty:
1
Learni
ngGoal:1
Topic:Wor
kingCapit
alManagement

4. Theconv er
sionofcur
rentassetsfr
om inv
entor
ytorecei
vabl
estocashprov
idesthe
____
_ _
___ofcashusedtopayt hecurr
entli
abi
li
ti
es,
whichrepr
esent
sa(n)__
_____
_ _ofcash.
(a)outfl
ow; i
nfl
ow
(b)use;source
(c)source;use
(d)infl
ow;outfl
ow
Answer:C
LevelofDi
ff
icul
ty:
1
Learni
ngGoal:1
Topic:Wor
kingCapit
alManagement

5. Thegoal ofworkingcapi t
al managementi sto
(a)balancecurrentassetsagainstcurrentli
abil
it
ies.
(b)payof fshor
t-term debts.
(c)achieveabal ancebetweenr i
skandr eturninordert
omaxi mizet
hefi
rm’
sv al
ue.
(d)achieveabal ancebetweenshor t
-term andlong-t
erm asset
ssothatt
heyaddtothe
achievementoft hef i
rm’soveral
lgoals.
Answer:C
LevelofDi
ff
icul
ty:
1
Learni
ngGoal:1
Topic:Wor
kingCapit
alManagement

6. Curr
entl
iabi
l
iti
escanbev i
ewedas
(a)debt
sdueinoney ear
.
(b)debt
sdueinlessthanayear
.
(c)sour
cesofcashinfl
ows.
(d)sour
cesofcashoutfl
ows.
Answer:D
LevelofDi
ff
icul
ty:
1
Learni
ngGoal:1
Topic:Wor
kingCapit
alManagement
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  580

7. Themostdi f
fi
cultsetofaccount
stopr
edi
ctar
e
(a)curr
entassets.
(b)curr
entli
abil
i
ties.
(c)fi
xedassets.
(d)l
ong-ter
m debt.
Answer:A
LevelofDi
ff
icul
ty:
1
Learni
ngGoal:1
Topic:Wor
kingCapit
alManagement

8. Curr
entli
abil
it
iesare
(a)easytoobtain.
(b)l
owerincostt hanlong-t
ermliabi
l
iti
es.
(c)ti
edtotheleveloffixedasset
s.
(d)afuncti
onofcol l
ectionpol
icy
.
Answer:B
LevelofDi
ff
icul
ty:
1
Learni
ngGoal:1
Topic:Wor
kingCapit
alManagement

9. I
ngener
al,themor ewor kingcapit
al afi
rm has,
(
a)thegreaterit
sr isk.
(
b)thel
oweri tsrisk.
(
c)thel
essl i
kelyar ecredi t
orstol
endt othefir
m.
(
d)thel
oweri tslevel oflong-t
ermf unds.
Answer:B
LevelofDi
ff
icul
ty:
2
Learni
ngGoal:1
Topic:Wor
kingCapit
alManagement

10. A(n)_____
_ _
__i ncur rentassets_ __
___
___networ
kingcapi
tal
,ther
eby_
___
___
__t
her
iskof
techni
calinsolvency .
(a)decrease; i
ncr eases;increasing
(b)incr
ease; decr eases;increasing
(c)incr
ease; i
ncr eases; r
educing
(d)decrease; decr eases;reducing
Answer:C
LevelofDi
ff
icul
ty:
3
Learni
ngGoal:1
Topic:Wor
kingCapit
alManagement
581  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

11. A(n)_____
____incur rentli
abili
ti
es____
___
__networ
kingcapi
tal
,ther
eby_
___
___
__t
her
isk
oftechni
calinsolvency .
(a)decrease;increases;increasing
(b)incr
ease;decr eases;increasing
(c)incr
ease;increases; r
educing
(d)decrease;decr eases;reducing
Answer:B
LevelofDi
ff
icul
ty:
3
Learni
ngGoal:1
Topic:Wor
kingCapit
alManagement

12. Whenaport
ionoft hef
ir
m’ sfi
xedassetsarefi
nancedwi
thcur
rentl
i
abi
l
iti
es,
thef
ir
m
(
a)hasposit
ivenetworkingcapit
al.
(
b)hasnegati
venetwor kingcapi
tal
.
(
c)hasexcessiveamountsofcurrentasset
s.
(
d)isi
nalow-riskposi
ti
on.
Answer:B
LevelofDi
ff
icul
ty:
3
Learni
ngGoal:1
Topic:Wor
kingCapit
alManagement

13. Thepurposeofmanagi ngcurrentasset sandcur rentl

iabil
i
tiesisto
(a)achi
eveaslowal evelofcurrentasset saspossi bl
e.
(b)achi
eveaslowal evelofcurrentliabil
it
iesaspossible.
(c)achi
eveabalancebet weenpr ofi
tabili
tyandriskthatcont r
ibut
estot
hef
ir
m’sv
alue.
(d)achi
eveashighal evelofcurrentliabi
li
tiesaspossible.
Answer :C
LevelofDiffi
cult
y:3
Learni
ngGoal :1
Topic:Tradeoffbet
weenPr
ofi
tabi
l
ityandRi
sk

14. Relativetocashf l
owsaf fecti
ngnetwor ki
ngcapi t
al,allofthef oll
owingaretr
ueEXCEPT
(a)cashi nf
lowsar egenerall
ymorepr edi
ctablethancashout l
ays.
(b)cashout lay
sf orcurrentli
abil
it
iesarerelati
vel
ypr edictable.
(c)t hemor epr edictabl
ethecashi nfl
ows,thelessnetwor ki
ngcapitalafi
rm needs.
(d)becausemostf ir
msar eunabletomat chcashi nflowst oout f
lowswithcertai
nty
,
currentassetst hatmor ethancoveroutflowsforcur rentliabi
li
ti
esarenecessary.
Answer:A
LevelofDi
ff
icul
ty:
3
Learni
ngGoal:1
Topic:Wor
kingCapit
alManagement
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  582

15. Thefir
m’spermanentf i
nanci
ngr
equi
rementi
sfi
nancedwi
th_
___
___
__i
ntheaggr
essi
ve
fi
nanci
ngst r
ategy .
(a)l
ong-term sources
(b)short-
ter
m sour ces
(c)ret
ainedearnings
(d)accountspay able
Answer :A
LevelofDiff
icul
ty:
1
Learni
ngGoal :2
Topic:PermanentFundi
ngRequi
rement
s

16. Mostf
irmsemploy__
___
___
_fi
nanci
ngst
rat
egy
.
(
a)anaggressi
ve
(
b)aconservat
ive
(
c)atrade-
off
(
d)aseasonal
Answer :C
LevelofDiffi
cul
ty:
1
Learni
ngGoal :2
Topic:Trade-
offFi
nanci
ngSt
rat
egy

17. Thefir
m’sfinancingrequirementscanbesepar
atedi
nto
(a)curr
entliabil
i
tiesandlong-ter
mf unds.
(b)curr
entasset sandfixedassets.
(c)curr
entliabil
i
tiesandlong-ter
m debt.
(d)seasonal andpermanent .
Answer :D
LevelofDiff
icul
ty:
1
Learni
ngGoal :2
Topic:PermanentandSeasonal
Fundi
ngRequi
rement
s

18. Thebasicstrat
egiesf
ordeter
mi ni
ngt
heappr
opr
iat
efi
nanci
ngmi
xar
e
(a)seasonalandpermanent.
(b)short-
ter
m andlong-
ter
m.
(c)aggressi
veandconservat
ive.
(d)curr
entandf i
xed.
Answer :C
LevelofDiff
icul
ty:
1
Learni
ngGoal :2
Topic:Aggressi
vever
susConser
vat
iveFi
nanci
ngSt
rat
egy
583  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

19. I
faf
ir
m usesanaggr essi
vef i
nanci ngstrat
egy
,
(
a)i
tincr
easesreturnandincreasesr i
sk.
(
b)i
tincr
easesreturnanddecr easesrisk.
(
c)i
tdecreasesretur
nandi ncreasesrisk.
(
d)i
tdecreasesretur
nanddecr easesrisk.
Answer :A
LevelofDiff
icul
ty:
1
Learni
ngGoal :2
Topic:Aggressi
veFinanci
ngSt
rat
egy

20. Onemajorr
iskaf i
rm assumesi nanaggr essi
vef
inancingst rat
egyi
s
(
a)thepossibi
l
itythatcoll
ectionswillbesl
owert
hanexpect ed.
(
b)thepossibi
l
itythatl
ong-termf undsmaynotbeav ailablewhenneeded.
(
c)thepossibi
l
itythatshort
-termf undsmaynotbeav ailablewhenneeded.
(
d)thepossibi
l
itythati
twillrunoutofcash.
Answer :C
LevelofDiff
icul
ty:
1
Learni
ngGoal :2
Topic:Aggressi
veFinanci
ngSt
rat
egy

21. The_______
__i sthetimeper i
odthatel
apsesfr
om t
hepointwhent
hef
ir
m makest
heoutl
ay
topurchaserawmat eri
alsonaccounttothepoi
ntwhenpaymenti
smadet
othesuppl
i
erof
thegoods.
(a)cashconv ersi
oncy cl
e
(b)averagepay mentper i
od
(c)averageageofi nventory
(d)averagecollect
ionper i
od
Answer :B
LevelofDiffi
cul
ty:
1
Learni
ngGoal :2
Topic:AveragePaymentPer
iod

22. Whenmanagi ngi nv

entori
es,agoodst rat
egyi
stoi
ncr
easei
nvent
oryt
urnov
erbydoi
ngt
he
f
oll
owingEXCEPT
(
a)increaserawmat er
ial
sturnover.
(
b)shor t
enthepr oducti
oncycle.
(
c)producelow- costshortcycl
egoods.
(
d)increasefi
nishedgoodst urnover.
Answer:C
LevelofDif
fi
culty
:1
Learni
ngGoal :
2
Topic:I
nventor
yTurnov
er
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  584

23. Thebasi cstrategiesthatshouldbeempl oyedbythebusinessfir

mi nmanagi
ngcash
i
ncludeal lofthef oll
owingEXCEPT
(a)pay i
ngaccount spay abl
easl ateaspossi
blewit
houtdamagi ngthef
ir
m’scredi
trat
ing.
(b)turningov erinventoryasqui ckl
yaspossi
ble,
avoidi
ngstockouts.
(c)oper at
ingi naf ashi
ont hatrequir
esmaximum cash.
(d)collect
ingaccount sreceiv
abl easqui
ckl
yaspossibl
ewi thoutdamagi
ngcustomer
rapport.
Answer:C
LevelofDi
ffi
cul
ty:
2
Learni
ngGoal:2
Topic:Managi
ngtheCashConv
ersi
onCy
cle

24. The_ _
_____
__ofaf i
rmi stheamountofti
methatel
apsesf
rom t
hepoi
ntwhent
hefi
rm
makesanout laytopurchaserawmateri
alst
othepoi
ntwhencashi
scoll
ect
edf
rom t
he
saleofthefi
nishedgood.
(a)cashturnover
(b)cashconv er
sioncycle
(c)averageageofinventory
(d)averagecoll
ecti
onper i
od
Answer :B
LevelofDiff
icul
ty:2
Learni
ngGoal :2
Topic:CashConv er
sionCy
cle

25. The_ _
______
_ofaf i
rmi st heamountoftimethatelapsesf
rom t
hepoi
ntwhenthefi
rm
i
nputsmat eri
alandl abori nt
otheproducti
onprocesstothepoi
ntwhencashiscol
l
ected
from t
hesaleoft hef i
nishedproductthatcont
ainsthesepr
oducti
oni
nputs.
(a)cashconv er
sioncy cle
(b)averageageofi nvent ory
(c)operati
ngcy cle
(d)averagecoll
ect i
onper iod
Answer :C
LevelofDiff
icul
ty:
2
Learni
ngGoal :2
Topic:Operati
ngCy cl
e

26. Afir
m hasanaverageageofinv
entor
yof90days,anav
eragecoll
ect
ionperi
odof40day
s,
andanaveragepaymentper
iodof30days.Thef
ir
m’soperat
ingcycl
eis___
____
__day
s.
(a)110
(b)130
(c)120
(d)70
Answer :B
LevelofDiff
icul
ty:
2
Learni
ngGoal :2
Topic:Operati
ngCy cl
e(Equat
ion14.
1)
585  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

27. Afir
m hasanoper
ati
ngcycl
eof120days,
anaver
agecol
lect
ionperi
odof40day
s,andan
aver
agepaymentper
iodof30day
s.Thefi
rm’
saver
ageageofinvent
oryi
s___
___
___days.
(a)80
(b)50
(c)90
(d)70
Answer :A
LevelofDiffi
cul
ty:
2
Learni
ngGoal :2
Topic:AverageAgeofI
nvent
ory(
Equat
ion14.
1)

28. Afir
m hasacashconver
sioncycl
eof80days,anaver
agecol
l
ecti
onper
iodof25day
s,and
anaver
ageageofinvent
oryof70days.I
tsoper
ati
ngcycl
eis__
___
___
_days.
(a)95
(b)105
(c)60
(d)130
Answer :A
LevelofDiff
icul
ty:
2
Learni
ngGoal :2
Topic:Operati
ngCy cl
e(Equat
ion14.
1)

29. Afir
m hasanaverageageofinv
entor
yof60days,anav
eragecoll
ecti
onper
iodof45days,
andanaveragepaymentper
iodof30days.Thef
ir
m’scashconversi
oncycl
eis___
___
___
days.
(a)15
(b)45
(c)75
(d)135
Answer :C
LevelofDiff
icul
ty:2
Learni
ngGoal :2
Topic:CashConv er
sionCy
cle(
Equat
ion14.
2andEquat
ion14.
3)

30. Afir
m hasacashconv
ersi
oncycl
eof120days,
anav er
agecol
l
ecti
onperi
odof25days,
andanaver
agepaymentperi
odof50day
s.Thefir
m’saver
ageageofi
nventor
yis_
___
_ _
___
days.
(a)45
(b)95
(c)125
(d)145
Answer :D
LevelofDiffi
cul
ty:
2
Learni
ngGoal :2
Topic:AverageAgeofI
nvent
ory(
Equat
ion14.
2andEquat
ion14.
3)
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  586

31. Afi
rm purchasedrawmat er
ial
sonaccountandpai dforthem wit
hin30day
s.Ther
aw
mater
ial
swer eusedinmanuf act
uri
ngaf i
nishedgoodsoldonaccount100daysaf
terthe
r
awmat erial
swerepurchased.Thecustomerpaidforthefini
shedgood60daysl
ater
.The
f
ir
m’scashconv ersi
oncycleis___
____
__day s.
(
a)10
(
b)70
(
c)130
(
d)190
Answer :C
LevelofDiff
icul
ty:2
Learni
ngGoal :2
Topic:CashConv er
sionCy
cle(
Equat
ion14.
2andEquat
ion14.
3)

32. The______
___i stheti
meper iodthatel
apsesfr
om thepoi
ntwhent
hef i
rm usest
heraw
materi
alsi
nmanuf acturi
ngaf i
nishedgoodtothepoi
ntwhenthef
ini
shedgoodissold.
(a)cashturnov er
(b)cashconv ersi
oncy cl
e
(c)aver
ageageofi nventory
(d)aver
agecol lect
ionperiod
Answer :C
LevelofDiffi
cul
ty:
2
Learni
ngGoal :2
Topic:AverageAgeofI
nvent
ory

33. The_____
____isthetimeperiodt
hatelapsesfr
om thepoi
ntwhent
hef
ir
m sel
l
saf
ini
shed
goodonaccountt othepointwhentherecei
vablei
scoll
ect
ed.
(a)cashconversi
oncy cl
e
(b)aver
agepay mentperiod
(c)aver
ageageofi nvent
or y
(d)aver
agecollect
ionperiod
Answer :D
LevelofDiffi
cul
ty:
2
Learni
ngGoal :2
Topic:AverageColl
ect
ionPer
iod

34. Afir
m hasanaverageageofinv
entor
yof101days,anaveragecol
lect
ionper
iodof49day
s,
andanaveragepaymentper
iodof60days.Thef
ir
m’ scashconver
sioncycl
eis
(a)150days.
(b)90days.
(c)112days.
(d)8days.
Answer :B
LevelofDiff
icul
ty:2
Learni
ngGoal :2
Topic:CashConv er
sionCy
cle(
Equat
ion14.
2andEquat
ion14.
3)
587  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

35. Afi
rm canr educeit
scashconv er
sioncycleby
(
a)increasingtheaverageageofinvent
or y.
(
b)increasingtheaveragecoll
ect
ionperiod.
(
c)decr easingtheaveragepaymentper
iod.
(
d)increasingtheaveragepaymentperi
od.
Answer:D
LevelofDi
ffi
cul
ty:
2
Learni
ngGoal:2
Topic:Managi
ngtheCashConv
ersi
onCy
cle

36. Af i
rm wi t
hacashconv er
sioncycleof175day scanst ret
chi
tsav
eragepay
mentper
iod
from
30day st o45days.Thiswil
l r
esul
tina/an
(a)decr easeof15daysint hecashconv ersioncycle.
(b)increaseof15day sinthecashconv ersioncycle.
(c)decr easeof30daysint hecashconv ersioncycle.
(d)increaseof30day sinthecashconv ersioncycle.
Answer:A
LevelofDi
ffi
cul
ty:
2
Learni
ngGoal:2
Topic:Managi
ngtheCashConv
ersi
onCy
cle(
Equat
ion14.
2andEquat
ion14.
3)

37. Afir
m hasanaverageageofinv
entor
yof20days,anav
eragecoll
ecti
onper
iodof30days,
andanaveragepaymentper
iodof60days.Thef
ir
m’scashconversi
oncycl
eis___
___
___
days.
(a)70
(b)50
(c)–10
(d)110
Answer :C
LevelofDiff
icul
ty:2
Learni
ngGoal :2
Topic:CashConv er
sionCy
cle(
Equat
ion14.
2andEquat
ion14.
3)

38. Anincr
easeintheaver
agecoll
ect
ionper
iodwi
l
lresul
tin_
___
___
__i
ntheoper
ati
ngcy
cle.
(a)anincr
ease
(b)adecrease
(c)anundeter
minedchange
(d)nochange
Answer:A
LevelofDi
ffi
cul
ty:
2
Learni
ngGoal:2
Topic:Managi
ngtheOper
ati
ngCy
cle
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  588

39. Anincr
easeintheaver
agepaymentper
iodwi
l
lresul
tin_
___
___
__i
ntheoper
ati
ngcy
cle.
(a)anincr
ease
(b)adecrease
(c)anundeter
minedchange
(d)nochange
Answer:D
LevelofDi
ffi
cul
ty:
2
Learni
ngGoal:2
Topic:Managi
ngtheOper
ati
ngCy
cle

40. Adecreaseintheaverageageofi
nvent
orywi
l
lresul
tin_
___
___
__i
nthecashconv
ersi
on
cycl
e.
(a)anincr
ease
(b)adecrease
(c)anundeter
mi nedchange
(d)nochange
Answer:B
LevelofDi
ffi
cul
ty:
2
Learni
ngGoal:2
Topic:Managi
ngtheCashConv
ersi
onCy
cle

41. Anincr
easeintheaver
agepaymentper
iodwi
l
lresul
tin_
___
___
__i
nthecashconv
ersi
on
cycl
e.
(a)anincr
ease
(b)adecrease
(c)anundeter
minedchange
(d)nochange
Answer:B
LevelofDi
ffi
cul
ty:
2
Learni
ngGoal:2
Topic:Managi
ngtheCashConv
ersi
onCy
cle

42. Afir
m hasanaverageageofinv
entor
yof60days,anav
eragecoll
ect
ionperi
odof45day
s,
andanaveragepaymentper
iodof30days.Thef
ir
m’soperat
ingcycl
eis___
____
__day
s.
(a)75
(b)105
(c)90
(d)135
Answer :B
LevelofDiff
icul
ty:
2
Learni
ngGoal :2
Topic:Operati
ngCy cl
e(Equat
ion14.
1)
589  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

43. Afir
m hasanoperat
ingcycl
eof170days,
anav er
agepay
mentper
iodof50day
s,andan
aver
ageageofinv
entoryof145day
s.Thefir
m’saver
agecol
l
ect
ionper
iodi
s_____
___
_days.
(a)25
(b)75
(c)95
(d)120
Answer :A
LevelofDiffi
cul
ty:
2
Learni
ngGoal :2
Topic:AverageColl
ect
ionPer
iod(
Equat
ion14.
2andEquat
ion14.
3)

44. Afir
m hasacashconv
ersioncy
cleof60daysandav
eragecol
l
ect
ionper
iodof40day
s.
Thefir
m’soper
ati
ngcycl
eis___
____
__days.
(a)20
(b)100
(c)50
(d)Cannotbedet
ermi
ned
Answer :D
LevelofDiff
icul
ty:
2
Learni
ngGoal :2
Topic:Operati
ngCy cl
e(Equat
ion14.
1,Equat
ion14.
2,andEquat
ion14.
3)

45. Afir
m hasanaverageageofinv
entor
yof101days,anaveragecol
l
ect
ionper
iodof49day
s,
andanaveragepaymentper
iodof60days.Thef
ir
m’ si
nventor
ytur
nov
eris__
_ _
___
__.
(a)3.2
(b)4.0
(c)2.5
(d)3.6
Answer:D
LevelofDif
fi
culty
:2
Learni
ngGoal :
2
Topic:I
nventor
yTurnov
er(
Equat
ion14.
2andEquat
ion14.
3)

46. Thegoalofaf i
rm’
scashmanagementi sto
(a)i
ncreaset hecashconversioncy
cle.
(b)i
ncreaset hepaymentperiod.
(c)mini
mi zecashr equi
rement.
(d)max i
mi zecashoutfl
ows.
Answer:C
LevelofDi
ffi
cul
ty:
2
Learni
ngGoal:2
Topic:Managi
ngtheCashConv
ersi
onCy
cle
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  590

47. Onewaytoi
mpr ovethecashconver
sioncy
clei
sto
(
a)speedupcollecti
ons.
(
b)slowdowncr edi
tapproval
s.
(
c)reducei
nventorytur
nover.
(
d)borrowf
unds.
Answer:A
LevelofDi
ffi
cul
ty:
2
Learni
ngGoal:2
Topic:Managi
ngtheCashConv
ersi
onCy
cle

48. I
faf
ir
mi ncreasesit
scurr
entasset srelat
ivet
otot
alasset
s,
(
a)i
tincr
easesr et
urnandreducesr i
sk.
(
b)i
tincr
easesr et
urnandincreasesrisk.
(
c)i
treducesretur
nandr educesrisk.
(
d)i
treducesretur
nandincreasesr i
sk.
Answer :C
LevelofDiffi
cult
y:2
Learni
ngGoal :2
Topic:Tradeoffbet
weenPr
ofi
tabi
l
ityandRi
sk

49. Afir
m withhighlyunpr
edi
ctabl
esal
esr
evenuewoul
dbestchoose_
___
___
__f
inanci
ng
str
ategytominimizeri
sk.
(a)theaggressive
(b)theconservati
ve
(c)thetr
ade-off
(d)aseasonal
Answer :B
LevelofDiff
icult
y:2
Learni
ngGoal :2
Topic:Conservati
veFi
nanci
ngSt
rat
egy

50. Cert
ainfi
nancingplansareter
medconser vati
vewhen
(a)short
-t
ermf i
nancingisusedfrequent
ly.
(b)worki
ngcapitalisrel
ati
vel
yhigh.
(c)worki
ngcapitalisrel
ati
vel
ylow.
(d)ri
skisincr
eased.
Answer :B
LevelofDiff
icult
y:2
Learni
ngGoal :2
Topic:Conservati
veFi
nanci
ngSt
rat
egy
591  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

51. Anincr
easei nthecurr
entassett
otot
alassetr
ati
ohast
heef
fect
sof_
___
___
__onpr
ofi
ts
and___
_ __
_ __onri
sk.
(a)anincrease;ani
ncrease
(b)anincrease;adecr
ease
(c)adecrease;adecrease
(d)adecrease;anincr
ease
Answer :C
LevelofDiffi
cult
y:3
Learni
ngGoal :2
Topic:Tradeoffbet
weenPr
ofi
tabi
l
ityandRi
sk

52. Adecreaseint hecurrentassett

otot
alassetr
ati
ohast
heef
fect
sof_
___
___
__onpr
ofi
ts
and______
_ __onrisk.
(a)anincrease;anincrease
(b)anincrease;adecr ease
(c)adecrease; adecrease
(d)adecrease; anincrease
Answer :A
LevelofDiffi
cult
y:3
Learni
ngGoal :2
Topic:Tradeoffbet
weenPr
ofi
tabi
l
ityandRi
sk

53. Anincreaseinthecur r
entli
abil
i
tiest
otot
alasset
srat
iohast
heef
fect
sof_
___
___
__on
prof
it
sand_ ___
_ _
___onr i
sk.
(a)anincrease;anincrease
(b)anincrease;adecrease
(c)adecr ease;adecrease
(d)adecr ease;anincr
ease
Answer :A
LevelofDiffi
cult
y:3
Learni
ngGoal :2
Topic:Tradeoffbet
weenPr
ofi
tabi
l
ityandRi
sk

54. Adecreaseinthecurrentli
abi
li
ti
est
otot
alasset
srat
iohast
heef
fect
sof_
___
___
__on
prof
it
sand_ ___
_ _
___onr i
sk.
(a)anincr
ease;anincrease
(b)anincr
ease;adecr ease
(c)adecrease;adecrease
(d)adecrease;anincrease
Answer :C
LevelofDiffi
cult
y:3
Learni
ngGoal :2
Topic:Tradeoffbet
weenPr
ofi
tabi
l
ityandRi
sk
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  592

55. Theaggressivefinancingstr
ategyresul
tsi
nthefi
rmfinanci
ngit
sshor
t-
ter
m needswi
th
____
_ _
___fundsandi tslong-
term needswi
th___
____
__funds.
(a)long-
term;shor t
-t
erm
(b)short-
term;long-t
erm
(c)permanent ;
seasonal
(d)seasonal;permanent
Answer :B
LevelofDiff
icul
ty:
3
Learni
ngGoal :2
Topic:Aggressi
veFinanci
ngSt
rat
egy

I
ri
shAirServ
iceshasdet erminedseveral
factorsrelativetoit
sassetandfinanci
ngmix.
(
a)Thef i
rm earns10per centannual
lyonit
scur rentasset s.
(
b)Thef i
rm earns20per centannual
lyonit
sf i
xedasset s.
(
c)Thef i
rm pays13per centannuall
yoncur r
entliabili
ti
es.
(
d)Thef i
rm pays17per centannuall
yonlong-ter
mf unds.
(
e)Thef i
rm’smont hl
ycur r
ent,f
ixedandtotalassetr equir
ementsfortheprevi
ousyearar
e
summarizedinthetablebelow:
Tabl
e14.
1
Current Fi
xed Tot
al
Month Assets Assets Assets
January $45,000 $100,
000 $145,
000
Februar
y 40,000 100,
000 140,000
March 50,000 100,
000 150,000
Apri
l 55,000 100,
000 155,000
May 60,000 100,
000 160,000
June 75,000 100,
000 175,000
July 75,000 100,
000 175,000
August 75,000 100,
000 175,000
September 60, 000 100,
000 160,000
October 55,000 100,
000 155,000
November 50, 000 100,
000 150,000
December 50, 000 100,
000 150,000

56. Thefi
rm’smonthl
yav
erageper
manentf
undsr
equi
rementi
s(SeeTabl
e14.
1)
(a)$100,
000.
(b)$57,
500.
(c)$140,
000.
(d)$157,
500.
Answer :C
LevelofDiff
icul
ty:
3
Learni
ngGoal :2
Topic:PermanentFundi
ngRequi
rement
s
593  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

57. Thefi
rm’smonthl
yav
erageseasonal
fundsr
equi
rementi
s(SeeTabl
e14.
1)
(a)$17,
500.
(b)$57,
500.
(c)$40,
000.
(d)$157,
500.
Answer :A
LevelofDiff
icul
ty:3
Learni
ngGoal :2
Topic:SeasonalFundi
ngRequi
rement
s

58. Thefi
rm’sannual
financi
ngcost
soft
heaggr
essi
vef
inanci
ngst
rat
egyar
e(SeeTabl
e14.
1)
(a)$21,
175.
(b)$26,
075.
(c)$24,
475.
(d)$22,
775.
Answer :B
LevelofDiff
icul
ty:
3
Learni
ngGoal :2
Topic:Aggressi
veFinanci
ngSt
rat
egy

59. Thefi
rm’sannual
financi
ngcost
sofconser
vat
ivef
inanci
ngst
rat
egyar
e(SeeTabl
e14.
1)
(a)$22,
775.
(b)$26,
075.
(c)$29,
750.
(d)$21,
175.
Answer :C
LevelofDiff
icult
y:3
Learni
ngGoal :2
Topic:Conservati
veFi
nanci
ngSt
rat
egy

60. Thefi
rm’sannual
prof
it
sont
otal
asset
sfort
hepr
evi
ousy
earwer
e(SeeTabl
e14.
1)
(a)$20,
000.
(b)$21,
500.
(c)$23,
625.
(d)$25,
750.
Answer :D
LevelofDiff
icul
ty:
3
Learni
ngGoal :2
Topic:Prof
it
sonTot al
Asset
s
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  594

61. I
fthefir
m’ scur
rentl
i
abi
l
iti
esi
nDecemberwer
e$40,
000,
thenetwor
kingcapi
tal
was(
See
Tabl
e14.1)
(a)$140,000.
(b)$60,
000.
(c)$10,
000.
(d)–$10,000.
Answer :C
LevelofDiff
icult
y:3
Learni
ngGoal :2
Topic:NetWor ki
ngCapi
tal
Tabl
e14.
2
Fl
um Packages,Inc.
Asset
s Liabi
li
ti
es&Equi
ty
Cur
rentassets $10,
000 Current $5,
000
Liabi
li
ties
Fi
xedassets 20,
000 Long-term debt 12,
000
Equity 13,
000
Tot
al $30,
000 Total $30,
000

Thecompanyearns5percentoncur
rentasset
sand15percentonf
ixedassets.Thefi
rm’
s
cur
rentl
i
abil
i
tiescost7per
centtomaint
ainandtheav
erageannual
costoflong-ter
mfunds
i
s20percent.

62. Thefi
rm’
sini
ti
alr
ati
oofcur
rentt
otot
alasseti
s__
___
___
_.(
SeeTabl
e14.
2)
(a)1:
3
(b)3:
1
(c)2:
3
(d)3:
2
Answer :A
LevelofDiff
icul
ty:
3
Learni
ngGoal :2
Topic:Rati
oofCur r
entt
oTot
alAsset
s

63. Thefi
rm’ sini
ti
alnetwor
kingcapi
tal
is(
SeeTabl
e14.
2)
(a)–$5, 000.
(b)$13,000.
(c)$5,000.
(d)$10,000.
Answer :C
LevelofDiff
icult
y:3
Learni
ngGoal :2
Topic:NetWor ki
ngCapi
tal
595  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

64. Thefi
rm’si
nit
ial
annual
prof
it
sont
otal
asset
sar
e(SeeTabl
e14.
2)
(a)$2,
500.
(b)$3,
500.
(c)$3,
000.
(d)$4,
500.
Answer :B
LevelofDiff
icul
ty:
3
Learni
ngGoal :2
Topic:Prof
it
sonTot al
Asset
s

65. Ifthefir
m wast oshift$3,000ofcurr
entassetstof i
xedassets,t
hefir
m’snetwor
king
capitalwoul d_________
,theannualprofi
tsontotalasset
swoul d___
_____
_,andt
heriskof
technicalinsolvencywoul d_____
___
_,respect
ivel
y.(SeeTable14.2)
(a)increase; decrease;i
ncrease
(b)decr ease; i
ncrease;decrease
(c)increase; decrease;decrease
(d)decr ease; i
ncrease;i
ncrease
Answer :D
LevelofDiffi
cult
y:3
Learni
ngGoal :2
Topic:Tradeoffbet
weenPr
ofi
tabi
l
ityandRi
sk

66. Ift
hef i
rm wast oshi
ft$7,000offixedasset
stocurrentassets,thefi
rm’snetworking
capi
talwoul d____
_____
,theannual pr
ofi
tsontotal
assetswoul d_ _
_____
__,andtheriskof
notbeingabl etomeetcurrentobl
igati
onswould_______
__,respecti
vel
y.(SeeTable14.2)
(a)increase;decr
ease;i
ncrease
(b)decr ease;i
ncr
ease;decrease
(c)increase;decr
ease;decrease
(d)decr ease;i
ncr
ease;i
ncrease
Answer :C
LevelofDiffi
cult
y:3
Learni
ngGoal :2
Topic:Tradeoffbet
weenPr
ofi
tabi
l
ityandRi
sk

67. Ifthefir
m wast oshi f
t$2, 000ofcurr
entliabi
li
ti
estolong-
ter
mf unds,t
hef
irm’
snetwor
king
capitalwoul d_ _
__ _____,theannualcostoff i
nanci
ngwould____
_ _
___,
andther
iskof
technicalinsolvencywoul d_____
___
_,respecti
vely
.(SeeTabl
e14.2)
(a)decr ease; decr ease; i
ncrease
(b)increase; i
ncr ease; decrease
(c)decr ease; i
ncr ease; decrease
(d)increase; decr ease; decrease
Answer :B
LevelofDiffi
cult
y:3
Learni
ngGoal :2
Topic:Tradeoffbet
weenPr
ofi
tabi
l
ityandRi
sk
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  596

68. Thefir
m woul dli
ket oincreasei t
scur
rentr
ati
o.Thi
sgoal
woul
dbeaccompl
i
shedmost
prof
it
ablyby( SeeTable14. 2)
(a)i
ncreasingcurrentliabil
i
ties.
(b)decreasingcurrentliabi
li
ties.
(c)i
ncreasingcurrentasset s.
(d)decreasingcurrentasset s.
Answer:C
LevelofDi
ffi
cul
ty:
3
Learni
ngGoal:2
Topic:Managi
ngNetWor
kingCapi
tal

69. I
ntheaggressivefinanci
ngst r
ategy
,afi
rm ant
ici
pat
ingal
argei
ncr
easei
nsal
esshoul
d
f
inancetheincreaseinworkingcapit
alwi
th
(
a)t hesal
eofcommonst ock.
(
b)t hesal
eofabondi ssue.
(
c)al i
neofcr edit
.
(
d)al ong-
term notefrom thebank.
Answer :C
LevelofDiff
icul
ty:
3
Learni
ngGoal :2
Topic:Aggressi
veFinanci
ngSt
rat
egy

70. Theaggressi
vefinancingst rategyisriskyintworespect
s:t
hef i
rm operat
eswithal
ow
l
evelof____
_____
, andt hefirm hasonl yalimi
tedamountof_ _
_______capaci
ty.
(a)curr
entli
abi
li
ties;shor t
-t
erm bor r
owi ng
(b)networki
ngcapi tal
; short-
term borrowing
(c)curr
entassets;long-term borrowing
(d)networki
ngcapi tal
; l
ong-term borrowing
Answer :B
LevelofDiff
icul
ty:
3
Learni
ngGoal :2
Topic:Aggressi
veFinanci
ngSt
rat
egy

71. Theconser v
ativefi
nanci
ngst
rat
egyresult
sinfinanci
ngall
proj
ect
edfundsrequi
rement
s
with____
_____fundsanduseof___
______fundsintheev
entofanunexpect
edcashoutf
low.
(a)long-
term;short-
ter
m
(b)short-
term;long-
ter
m
(c)permanent ;
seasonal
(d)seasonal;permanent
Answer :A
LevelofDiff
icult
y:3
Learni
ngGoal :2
Topic:Conservati
veFi
nanci
ngSt
rat
egy
597  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

72. I
ntheory,t
heconservativ
ef i
nanci
ngstr
ategyignores
(
a)allcurr
entli
abil
i
ties.
(
b)thespontaneousf ormsofshort-
ter
mf inanci
ng.
(
c)currentasset
s.
(
d)thehighriskassociatedwitht
hisst
rategy.
Answer :B
LevelofDiff
icult
y:3
Learni
ngGoal :2
Topic:Conservati
veFi
nanci
ngSt
rat
egy

73. Ineconomicconditi
onschar
act
eri
zedbyascar
cit
yofshor
t-
ter
mfunds,
afi
rm woul
dbest
choosethe_ ___
___
__fi
nanci
ngstr
ategy
.
(a)aggressiv
e
(b)conservati
ve
(c)permanent
(d)seasonal
Answer :B
LevelofDiff
icult
y:3
Learni
ngGoal :2
Topic:Conservati
veFi
nanci
ngSt
rat
egy

74. Ari
skofthe_ _
____
___f
inanci
ngst
rat
egyi
sunpr
edi
ctabl
eint
erestexpense.
(
a)aggressiv
e
(
b)conservati
ve
(
c)permanent
(
d)seasonal
Answer :A
LevelofDiff
icul
ty:
3
Learni
ngGoal :2
Topic:Aggressi
veFinanci
ngSt
rat
egy

75. The_________fi
nanci
ngstrat
egyrequi
resthef
ir
mtopayi
nter
estonexcessf
undsbor
rowed
butnotneededt hr
oughouttheenti
reyear
.
(a)aggressive
(b)conservati
ve
(c)permanent
(d)seasonal
Answer :B
LevelofDiff
icult
y:3
Learni
ngGoal :2
Topic:Conservati
veFi
nanci
ngSt
rat
egy
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  598

76. Theaggressivefinancingst r
ategyis______
___met
hodwhi
l
etheconser
vat
ivef
inanci
ng
str
ategyi
s_ ____
_ ___met hod.
(a)ahigh-prof
it
, high-
risk;alow-prof
it
, l
ow-r
isk
(b)ahigh-prof
it
, l
ow- r
isk;alow-profi
t,hi
gh-r
isk
(c)alow-profi
t,high-r
isk;ahigh-prof
it
, l
ow-r
isk
(d)alow-profi
t,l
ow- ri
sk; ahi
gh-profi
t,hi
gh-r
isk
Answer :A
LevelofDiff
icul
ty:
3
Learni
ngGoal :2
Topic:Aggressi
veFinanci
ngSt
rat
egy

77. I
neconomicconditi
onschar
acteri
zedbyshor
t-
ter
mint
erestr
ateswhichexceedl
ong-
ter
m
i
nter
estr
ates,t
hef i
nanci
ngst
rategywhi
chwouldmaxi
mizeprofi
tsi
s_ _
_____
__st
rat
egy.
(
a)theaggressiv
e
(
b)theconservati
ve
(
c)thetr
ade-off
(
d)aseasonal
Answer :B
LevelofDiff
icult
y:3
Learni
ngGoal :2
Topic:Conservati
veFi
nanci
ngSt
rat
egy

78. Anincr
easeintheaveragepay mentper
iodwi
l
lresul
tin_
___
___
__i
ntheoper
ati
ngcy
cleand
____
___
_ _i
nthecashconv er
sioncycl
e.
(a)anincr
ease;adecrease
(b)adecrease;
adecrease
(c)adecrease;
nochange
(d)nochange;adecrease
Answer :D
LevelofDiffi
cul
ty:
3
Learni
ngGoal :2
Topic:AveragePaymentPer
iod

79. Thediff
erencebetweenthenumberofday sresourcesareti
edupintheoperat
ingcycl
e
andthenumberofday sthef i
rm canusespontaneousfi
nanci
ngbeforepaymentismadei
s
the
(a)cashconversi
oncy cl
e.
(b)averagepaymentperiod.
(c)averagecol
lect
ionperiod.
(d)averageageofinvent
or y.
Answer :A
LevelofDiff
icul
ty:3
Learni
ngGoal :2
Topic:CashConv er
sionCy
cle
599  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

80. Adecr
easeintheproducti
onti
met
omanuf
act
ureaf
ini
shedgoodwi
l
lresul
tin_
___
___
__i
n
t
hecashconversi
oncycle.
(
a)anincr
ease
(
b)adecrease
(
c)anundeterminedchange
(
d)nochange
Answer:B
LevelofDi
ffi
cul
ty:
3
Learni
ngGoal:2
Topic:Managi
ngtheCashConv
ersi
onCy
cle

81. Afir
m hasannual oper
ati
ngout
laysof$1,800,
000andacashconver
sioncycl
eof60day
s.
Ift
hefir
m current
lypays12per
centfornegoti
atedf
inanci
ngandr
educesit
scash
conver
sioncycleto
50days, t
heannualsavi
ngsi
s
(a)$50,000
(b)$200,000
(c)$6,000.
(d)$216,000.
Answer:C
LevelofDi
ffi
cul
ty:
3
Learni
ngGoal:2
Topic:Managi
ngtheCashConv
ersi
onCy
cle(
Equat
ion14.
2andEquat
ion14.
3)

82. Afir
m hasacashconv er
sioncycl
eof60days.Annual
out
laysar
e$12mill
ionandthecost
ofnegotiat
edfi
nanci
ngis12percent.I
fthef
ir
mreducesi
tsaver
ageageofinv
entoryby10
days,t
heannualsavi
ngsis____
_____
.
(a)$104,000
(b)$144,000
(c)$28,800
(d)$40,000
Answer:D
LevelofDi
ffi
cul
ty:
3
Learni
ngGoal:2
Topic:Managi
ngtheCashConv
ersi
onCy
cle(
Equat
ion14.
2andEquat
ion14.
3)

83. I
deal
l
yafir
m woul dl i
ketohav ea
(
a)negat
iveoperatingcy cle.
(
b)posi
ti
veoperatingcy cle.
(
c)negat
ivecashconv ersioncycle.
(
d)posi
ti
vecashconv ersioncycle.
Answer:C
LevelofDi
ffi
cul
ty:
3
Learni
ngGoal:2
Topic:Managi
ngtheCashConv
ersi
onCy
cle
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  600

84. Anegat
ivecashconv ersioncycle
(
a)meanst hattheoper ati
ngcy cl
eexceedstheaveragepaymentperi
od.
(
b)meanst hattheav eragepaymentperiodexceedstheoperat
ingcycl
e.
(
c)indi
catesthatthef i
rmi sshorteni
ngi
tsav er
agepaymentperiodandl
engt
heni
ngi
ts
averagecoll
ectionper i
od.
(
d)iseasyforamanuf acturi
ngf i
rmtoattai
n.
Answer:B
LevelofDi
ffi
cul
ty:
3
Learni
ngGoal:2
Topic:Managi
ngtheCashConv
ersi
onCy
cle

85. Afi
rm mayhaveanegat i
vecashconver
sioncycleifi
t
(
a)carri
esveryl
i
ttl
einventor
yandsell
sitsproductsoncredit
.
(
b)carri
eshighi
nventor
yandsell
sitsproductsoncredit.
(
c)carri
esveryl
i
ttl
einventor
yandsell
sitsproductsforcash.
(
d)carri
eshighi
nventor
yandsell
sitsproductsforcash.
Answer:C
LevelofDi
ffi
cul
ty:
3
Learni
ngGoal:2
Topic:Managi
ngtheCashConv
ersi
onCy
cle

86. I
mpr
ovementst
ocashmanagementi
ncl
udeal
loft
hef
oll
owi
ngEXCEPTar
educt
ioni
n
(
a)t
hecashtur
nover.
(
b)t
hecashconver
sioncycl
e.
(
c)t
heaver
ageageofinvent
ory.
(
d)t
heaver
agecoll
ecti
onperi
od.
Answer:A
LevelofDi
ffi
cul
ty:
3
Learni
ngGoal:2
Topic:Managi
ngtheCashConv
ersi
onCy
cle

87. Af i
rm wi t
hacashconv ersi
oncycl
eof175dayscanstr
etchi
tsaver
agepaymentperi
od
from
30day st o45day s.Thi
swil
lresul
tina(
n)_
___
_____i
nthecashconver
sioncy
cleof
______
___day s.
(a)increase;15
(b)decr ease;15
(c)increase;45
(d)decr ease;45
Answer:B
LevelofDi
ffi
cul
ty:
3
Learni
ngGoal:2
Topic:Managi
ngtheCashConv
ersi
onCy
cle(
Equat
ion14.
2andEquat
ion14.
3)
601  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

88. Afir
m withav erylowcurrentr
ati
oincompari
sontothei
ndust
rystandardcouldlowert
he
r
iskofunavailabl
eshort-
termfundsbymovingtowar
d_ _
___
____f
inancingstr
ategy.
(
a)t heaggressive
(
b)t heconservati
ve
(
c)aper manent
(
d)aseasonal
Answer :B
LevelofDiff
icult
y:4
Learni
ngGoal :2
Topic:Conservati
veFi
nanci
ngSt
rat
egy

89. Afir
m whichusest heaggressiv
ef i
nancingstrat
egypl
anstopurchaseamaj
orf
ixedasset
f
inancedwithaloan.Themostl ikelyconsequenceoft
hisact
ionis
(
a)adecr easei
nt hecurrentrat
io.
(
b)ani ncr
easeinnetwor kingcapital
.
(
c)adecr easei
nt heri
skoft echnicali
nsolvency
.
(
d)ani ncr
easeinlong-t
erm debt.
Answer :D
LevelofDiff
icul
ty:
4
Learni
ngGoal :2
Topic:Aggressi
veFinanci
ngSt
rat
egy

90. Afir
m whichusest heaggr essivefi
nancingstrat
egyplanstopurchaserawmater
ial
sin
l
argequantit
iest
ot akepricedi scounts.Thefi
rm wi
llf
inancethepurchasewi
thaloan.The
mostli
kel
yconsequenceoft hi
sact i
oni s
(
a)adecr easeinthecurrentr ati
o.
(
b)anincreaseinnetwor ki ngcapital
.
(
c)anundet erminedchangei nthecur r
entrat
io.
(
d)anincreaseinlong-t
erm debt .
Answer :C
LevelofDiff
icul
ty:
4
Learni
ngGoal :2
Topic:Aggressi
veFinanci
ngSt
rat
egy

91. The_ _
__ __
__ _invent
orycont
ainst
hebasi
ccomponent
soft
hepr
oduct
ionpr
ocess.
(a)rawmat erial
s
(b)wor k-
in-process
(c)fi
nishedgoods
(d)capitalgoods
Answer :A
LevelofDiff
icul
ty:
1
Learni
ngGoal :3
Topic:Compositi
onofI
nvent
ory
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  602

92. The_ _
__ __
__ _invent
oryconsi
stsofal
li
temscur
rent
lyi
nthepr
oduct
ionpr
ocess.
(a)rawmat erial
s
(b)wor k-
in-process
(c)fi
nishedgoods
(d)capitalgoods
Answer :B
LevelofDiff
icul
ty:
1
Learni
ngGoal :3
Topic:Compositi
onofI
nvent
ory

93. The_ _
__ __
__ _invent
oryconsi
stsofi
temst
hathav
ebeenpr
oducedbutnoty
etsol
d.
(a)rawmat erial
s
(b)wor k-
in-process
(c)fi
nishedgoods
(d)capitalgoods
Answer :C
LevelofDiff
icul
ty:
1
Learni
ngGoal :3
Topic:Compositi
onofI
nvent
ory

94. Thethreebasi ct
ypesofi
nvent
oryar
eal
loft
hef
oll
owi
ngEXCEPT
(a)rawmat er
ial
s
(b)wor k-
in-pr
ocess
(c)fi
nishedgoods
(d)capitalgoods
Answer :D
LevelofDiff
icul
ty:
1
Learni
ngGoal :3
Topic:Compositi
onofI
nvent
ory

95. Allofthef oll

owingmanager
swoul
dli
ket
ohav
elar
gei
nvent
ori
esEXCEPTt
he_
___
___
__
manager .
(a)financial
(b)mar ket
ing
(c)manuf actur
ing
(d)pur chasing
Answer:A
LevelofDi
ffi
cul
ty:
1
Learni
ngGoal:3
Topic:Managi
ngInvent
ory
603  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

96. The__ _
___
___isatechni
quethatdi
vi
desi
nvent
oryi
ntot
hreegr
oups,
accor
dingt
odol
l
ar
i
nvestment.
(a)exponent
ialsmoothi
ngtechni
que
(b)ABCsy st
em
(c)EOQmodel
(d)LIFOmodel
Answer :B
LevelofDiff
icult
y:1
Learni
ngGoal :3
Topic:ABCInv ent
orySy
stem

97. I
nt heABCsy stem ofinvent
orymanagement
,the_
___
___
__met
hodorsy
stem coul
dbe
uti
li
zedtocontrolCitems.
(a)basiceconomicor derquanti
ty
(b)materi
alsrequir
ementpl anni
ng
(c)red-
li
ne
(d)just
-i
n-t
ime
Answer :C
LevelofDiff
icult
y:1
Learni
ngGoal :3
Topic:ABCInv ent
orySy
stem

98. IntheABCsy stem ofinvent

orymanagement
,the_
___
___
__met
hodorsy
stem i
s
appropr
iat
ef ormonitori
ngBi tems.
(a)basiceconomicor derquanti
ty.
(b)materi
alsrequir
ementpl anning
(c)red-
li
ne
(d)just
-i
n-t
ime
Answer :A
LevelofDiff
icult
y:1
Learni
ngGoal :3
Topic:ABCInv ent
orySy
stem

99. The__ __
_____isaninventor
ytechniquethatt
akesi
ntoaccountvar
iousoper
ati
ngand
fi
nancialcoststodeterminetheorderquanti
tyf
oraspeci
fi
cinvent
oryit
em.
(a)exponentialsmoothingtechni
que
(b)ABCsy st
em
(c)EOQmodel
(d)LIFOmodel
Answer :C
LevelofDiff
icult
y: 1
Learni
ngGoal :3
Topic:EOQInv entoryModel
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  604

100.Acomput eri
zedinventorysystem t
hatsimulat
esneededmater
ial
srequi
rementsforthe
fi
nishedpr oduct
,andt hencompar esproducti
onneedstoav
ail
abl
einventor
ybalancesto
determinewhenor dersshouldbeplacedisthe
(a)basiceconomi corderquanti
tysystem.
(b)mat eri
alsrequirementplanni
ngsy stem.
(c)just
-in-ti
mesy stem.
(d)red-l
inemet hod.
Answer:B
LevelofDi
ff
icul
ty:
1
Learni
ngGoal:3
Topic:Mat
eri
alsRequi
rementPl
anni
ng

101.Thephil
osophyofthe_ __
______i
sthatthefir
m woul
dhav
eonl
ywor
k-i
n-pr
ocessi
nvent
ory
.
(a)basi
ceconomi corderquanti
tysystem
(b)materi
alsr
equirementplanni
ngsy stem
(c)j
ust-
in-t
imesystem
(d)red-
li
nemethod
Answer :C
LevelofDiff
icul
ty:
1
Learni
ngGoal :3
Topic:Just-
in-
ti
meI nv
ent
orySy
stem

102.Thecost sassociatedwi
thi
nvent
orycanbedi
vi
dedi
ntot
hef
oll
owi
nggr
oupsEXCEPT
(a)ordercost s.
(b)mar ginal
cost s.
(c)carryi
ngcost s.
(d)totalcosts.
Answer :B
LevelofDiff
icul
ty:
1
Learni
ngGoal :3
Topic:TypesofInvent
oryCost
s

103.I
nvent
oryinsur
ancecost
sar
eanexampl
eof_
___
___
__cost
s.
(
a)order
(
b)mar gi
nal
(
c)carryi
ng
(
d)total
Answer:C
LevelofDif
fi
culty
:1
Learni
ngGoal :
3
Topic:I
nventor
yCarry
ingCost
s
605  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

104.The_ _
__ __
___usesno, orv
eryli
tt
le,safetyst
ock.
(a)basiceconomi corderquanti
tysystem
(b)mat eri
alsr
equirementplanni
ngsy stem
(c)j
ust-in-t
imesystem
(d)red-l
inemethod
Answer :C
LevelofDiff
icul
ty:
2
Learni
ngGoal :3
Topic:Just-
in-
ti
meI nv
ent
orySy
stem

105.I
ntheEOQmodel ,__
____
___cost
sarethev
ari
abl
ecost
speruni
tofhol
dingani
tem of
i
nvent
oryforaspeci
fi
edtimeperi
od.
(
a)basic
(
b)order
(
c)carry
ing
(
d)processi
ng
Answer :C
LevelofDiff
icult
y: 2
Learni
ngGoal :3
Topic:EOQInv entoryModel

106.Theeconomi corderquanti
ty(EOQ)istheor
derquant
it
ywhi
chmi
nimi
zes
(a)theordercostperorder.
(b)thetotali
nventor
ycosts.
(c)thecarry
ingcostsperunitperperi
od.
(d)orderquanti
tyinuni
ts.
Answer :B
LevelofDiff
icult
y: 2
Learni
ngGoal :3
Topic:EOQInv entoryModel

107.I
nt heEOQmodel ,i
fcarry
ingcost
sincreasewhil
eal
lot
hercost
sremai
nunchanged,
the
numberofor der
splacedwouldbeexpectedto
(a)incr
ease.
(b)decrease.
(c)remainunchanged.
(d)changewi t
houtregar
dtocarr
yingcosts.
Answer :A
LevelofDiff
icult
y: 2
Learni
ngGoal :3
Topic:EOQInv entoryModel
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  606

108.The_ _
_ _
__ _
_ _isaninv
entor
ymanagementt
echni
quethatcomparespr
oduct
ionneedsto
avai
lableinventorybal
ancesanddet
ermi
neswhenordersshoul
dbeplacedf
orvari
ous
materiali
nput s.
(a)ABCsy stem
(b)EOQmodel
(c)MRPsy st em
(d)JITsy stem
Answer:C
LevelofDi
ff
icul
ty:
2
Learni
ngGoal:3
Topic:Mat
eri
alsRequi
rementPl
anni
ng

109.The____
__ _
_ _i saninventor
ymanagementtechniquethatmini
mizesi
nventor
yinvest
ment
byhavi
ngmat eri
alsinput
sarri
veatexact
lyt
hetimet heyar
eneededforproduct
ion.
(a)ABCsy stem
(b)EOQmodel
(c)MRPsy st em
(d)JI
Tsy stem
Answer :D
LevelofDiff
icul
ty:
2
Learni
ngGoal :3
Topic:Just-
in-
ti
meI nv
ent
orySy
stem

110.Thedispositi
onoft hefinanci
almanager
,market
ingmanager,andmanufactur
ingmanager
towardinventoryl
ev el
sistokeepthem _
___
_____
, _
___
___
__,and___
____
__,respect
ivel
y.
(a)high;l
ow; high
(b)low;hi
gh; low
(c)low;hi
gh; high
(d)high;l
ow; low
Answer:C
LevelofDif
fi
cult
y:3
Learni
ngGoal:3
Topic:I
ssuesinInv
ent
oryManagement

111.Becausemanaginginv
ent oryisjustli
kemanaginganyotheri
nvest
ment
,deci
sionsabout
thel
evelofinv
entor
yshoul dbegui dedby
(a)theval
ueoftheinventory.
(b)theeff
ectofi
nventorylevelsonsales.
(c)acost-
benefi
tanal
y si
s.
(d)theeff
ectofi
nventorylevelsoncustomerrelat
ions.
Answer:C
LevelofDif
fi
cult
y:3
Learni
ngGoal:3
Topic:I
ssuesinInv
ent
oryManagement
607  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

Bowri
ngBallBear
ingshas10diff
erenti
temsini
tsinvent
ory.Theav
eragenumberofunit
sheld
i
ninvent
oryandtheaverageuni
tcostar
elist
edforeachit
em.Thefirm usesanABCsyst
em of
i
nventor
ycontr
ol
Tabl
e14.
3
Av
erageNumber Average
ofUni
ts Uni
tCost
1 5,
000 $0.05
2 2,
000 1.50
3 100 8.50
4 500 45.00
5 650 3.50
6 10,
000 100.00
7 5,
100 0.25
8 3,
100 5.00
9 20 0.75
10 1,
150 2.00
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  608

112.I
nventor
yit
emsthatbel
ongi
ntheAcat
egor
yincl
ude(
SeeTabl
e14.
3)
(
a)Items4and6.
(
b)Items1,6,
and7.
(
c)Items3and9.
(
d)Items1and7.
Answer :A
LevelofDiff
icult
y:3
Learni
ngGoal :3
Topic:ABCInv ent
orySy
stem
113.Inventoryit
emst hatbel
ongint
heCcat
egor
yincl
ude(
SeeTabl
e14.
3)
(a)Items4and6.
(b)Items1, 6,and7.
(c)Items1, 3,and9.
(d)Items1and7.
Answer :C
Level ofDiff
icult
y: 3
LearningGoal :3
Topic: ABCInv entorySy
stem
114.IntheEOQmodel ,_____
____cost
saret hefi
xedcler
ical
costofwr
it
ingapur
chaseor
der
,
processingthepaperwor k,andver
if
yingtheinv
oice.
(a)basic
(b)order
(c)carrying
(d)processing
Answer :B
LevelofDi f
fi
cult
y: 3
Learni
ngGoal :3
Topic:EOQI nventoryModel
609  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

115.TheSt eel Works,

Inc.i
srequi
redt
ocarryaminimum of40days’r
awsteel
,whi
chis250
tons.Ittakes15day sbet
weenorderanddel
i
v er
y.Atwhatl
evelofst
eelwoul
dSteel
Works
reorder?
(a)3,750t ons
(b)600t ons
(c)667t ons
(d)344t ons
Answer:D
LevelofDif
fi
culty
:3
Learni
ngGoal :
3
Topic:I
nventor
yReorderPoi
nt(
Equat
ion14.
8)

116.TheGener al
Chemi calCompanyuses150, 000gallonsofhydrochlor
icacidpermont h.The
costofcarry
ingthechemi cali
ninv
ent oryi
s50cent spergall
onpery ear,
andthecostof
orderi
ngthechemical i
s$150peror der.Thefi
rm usesthechemi calataconstantrate
throughoutt
heyear.Ittakes18daystor ecei
veanor deronceiti
splaced.Ther eor
derpoint
i
s
(a)7,500gall
ons.
(b)25,000gall
ons.
(c)90,000gall
ons.
(d)105,000gall
ons.
Answer:C
LevelofDif
fi
culty
:3
Learni
ngGoal :
3
Topic:I
nventor
yReorderPoi
nt(
Equat
ion14.
8)

117.TheGener al
Chemi cal
Companyuses150, 000gall
onsofhydrochlor
icacidpermonth.The
costofcarry
ingthechemicali
ninventoryi
s50centspergall
onpery ear,
andthecostof
orderi
ngthechemicalis$150perorder.Thef
ir
m usesthechemi calataconstantr
ate
throughoutt
heyear.Thechemical
’seconomicorderquant
it
yis
(a)32,863gall
ons.
(b)11,619gall
ons.
(c)9,487gall
ons.
(d)1,900gall
ons.
Answer :A
LevelofDiff
icult
y: 4
Learni
ngGoal :3
Topic:EOQInv entoryModel
(Equat
ion14.
7)

118.Afirm’scredit_
_____
___pr
ovidesgui
deli
nesf
ordet
ermi
ningwhet
hert
oext
endcr
edi
ttoa
customerandhowmuchcr editt
oextend.
(a)scor i
ng
(b)terms
(c)policy
(d)standards
Answer :C
LevelofDiff
icul
ty:
1
Learni
ngGoal :4
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  610

Topi
c:Cr
edi
tPol
i
cy
611  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

119._________isapr ocedur eresul

ti
nginanumberrefl
ect
ingt
heappli
cant
’scr
editst
rengt
h,
deriv
edasawei ght edaverageofthescor
esobtai
nedonavari
etyofkeyf
inanci
aland
creditcharacteristi
cs.
(a)Cr editscori
ng
(b)Agi ngofr eceivables
(c)Cr editanalysis
(d)Theeconomi corderquanti
tymodel
Answer :A
LevelofDiff
icul
ty:
1
Learni
ngGoal :4
Topic:Credi
tScori
ng

120.Thefirm’scredi
t__
___
___
_def
inest
hemi
nimum cr
it
eri
afort
heext
ensi
onofcr
edi
ttoa
cust
omer .
(a)scor i
ng
(b)terms
(c)policy
(d)standards
Answer :D
LevelofDiff
icul
ty:1
Learni
ngGoal :4
Topic:Credi
tStandards

121.____
_____areest abl
ishedtoeli
minat
ethenecessi
tyofchecki
ngamaj
orcust
omer
’scr
edi
t
eachtimeamaj orpurchaseismade.
(a)Creditstandards
(b)Creditpoli
cies
(c)Creditdepartment s
(d)Linesofcr edit
Answer :D
LevelofDi f
fi
cul
ty:1
Learni
ngGoal :4
Topic:LinesofCredi
t

122._
___
_____istheprocedur
eforev
aluat
ingmer
cant
il
ecr
edi
tappl
i
cant
s.
(
a)Creditscori
ng
(
b)Creditstandards
(
c)Creditpoli
cy
(
d)Creditanalysi
s
Answer :D
LevelofDiff
icul
ty:
1
Learni
ngGoal :4
Topic:Credi
tAnalysi
s
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  612

123.Afi
rm’s_
________speci
fi
est
her
epay
mentt
ermsr
equi
redofal
lcr
edi
tcust
omer
s.
(
a)credi
tscori
ng
(
b)credi
tterms
(
c)credi
tpoli
cy
(
d)credi
tstandards
Answer :B
LevelofDiff
icul
ty:
1
Learni
ngGoal :4
Topic:Credi
tTerms

124.Whi
choft hefol
l
owi
ngi
sNOToneoft
hef
iveC’
sofcr
edi
t?
(
a)character
(
b)capit
al
(
c)capabili
ty
(
d)col
lateral
Answer :C
LevelofDiff
icul
ty:1
Learni
ngGoal :4
Topic:Fiv
eC’ sofCredi
t

125.Whent
hecredit
wor t
hinessofacust
omeri
sest
abl
i
shed,
thef
ir
m wi
l
lgr
antt
hatcust
omer
(
a)acredi
tpoli
cy.
(
b)ali
neofcredit
.
(
c)acredi
trat
ing.
(
d)acredi
tposit
ion.
Answer :B
LevelofDiff
icul
ty:1
Learni
ngGoal :4
Topic:LineofCredi
t

126.Thecreditappli
cant
’s_
___
___
__i
sit
sabi
l
ityt
orepayt
her
equest
edcr
edi
t.
(a)character
(b)capacit
y
(c)capit
al
(d)col
lateral
Answer :B
LevelofDiff
icul
ty:1
Learni
ngGoal :4
Topic:Fiv
eC’ sofCredi
t
613  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

127.Thecreditappli
cant
’s_
___
___
__i
sthef
inanci
alst
rengt
hoft
heappl
i
cantasr
efl
ect
edbyi
ts
ownershipposit
ion.
(a)character
(b)capacit
y
(c)capit
al
(d)coll
ateral
Answer :C
LevelofDiff
icul
ty:1
Learni
ngGoal :4
Topic:Fiv
eC’ sofCredi
t

128.Thecreditappli
cant’
s___
___
___i
stheamountofasset
stheappl
i
canthasav
ail
abl
eforuse
i
nsecuringt hecredi
t.
(a)character
(b)capacit
y
(c)capit
al
(d)col
lateral
Answer :D
LevelofDiff
icul
ty:1
Learni
ngGoal :4
Topic:Fiv
eC’ sofCredi
t

129.Themajorexternalsour
cesofcr
edi
tinf
ormat
ionar
eal
loft
hef
oll
owi
ngEXCEPT
(a)fi
nanci
alstatement.
(b)cust
omer s.
(c)Dun&Br adstreet
.
(d)bankchecking.
Answer :B
LevelofDiffi
cul
ty:
1
Learni
ngGoal :4
Topic:SourcesofCredi
tInf
ormat
ion

130.Acreditmanagert
ypicall
ygiv
espr
imar
yat
tent
iont
o__
___
___
_inext
endi
ngcr
edi
ttoan
appl
icant.
(a)coll
ater
alandcapacit
y
(b)coll
ater
alandconditi
ons
(c)charact
erandcapacity
(d)charact
erandcapital
Answer :C
LevelofDiff
icul
ty:2
Learni
ngGoal :4
Topic:Fiv
eC’ sofCredi
t
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  614

131.Whil
ecreditscor
ingprovidessoundcredi
tinformati
on,i
tisf
requent
lyNOTusedin
busi
nessbecause
(a)thescori
nginformati
onisdiffi
cul
ttoobtain.
(b)scori
ngstandardsaretoorigi
d.
(c)mostbusinesstransacti
onsinvol
vemer cant
il
ecredi
twhichcannotbescor
ed.
(d)mercanti
lecredi
tdecisi
onsareeasil
yquant i
fi
abl
e.
Answer :C
LevelofDiff
icul
ty:
2
Learni
ngGoal :4
Topic:Credi
tScori
ng

132.Themosti mport
antofthefiv
eC’
sofcr
edi
tar
e
(a)col
later
alandcapacit
y.
(b)capit
alandcoll
ater
al.
(c)charact
erandcapacit
y.
(d)charact
erandconditi
ons.
Answer :C
LevelofDiff
icul
ty:2
Learni
ngGoal :4
Topic:Fiv
eC’ sofCredi
t

133.Thecredi
tappli
cant’
scharacteri
ncl
udesal
loft
hef
oll
owi
ngEXCEPT
(a)moralcommi t
menttopay .
(b)l
evelofli
qui
dassets.
(c)pastpaymenthist
ory
.
(d)pendi
nglegalj
udgment s.
Answer :B
LevelofDiff
icul
ty:2
Learni
ngGoal :4
Topic:Fiv
eC’ sofCredi
t

134.Ascr edi
tst andar dsar erel
axed,sal
esareexpect
edt
o__
___
___
_andt
hei
nvest
menti
n
accountsr ecei v
abl eisexpectedto___
____
__.
(a)increase; i
ncr ease
(b)increase; decr ease
(c)decr ease; decr ease
(d)decr ease; i
ncr ease
Answer :A
LevelofDiff
icul
ty:
2
Learni
ngGoal :4
Topic:Rel
axingCredi
tSt
andar
ds
615  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

135.Ascr edi
tst andar dsar eti
ghtened,sal
esareexpect
edt
o__
___
___
_andt
hei
nvest
menti
n
accountsr ecei v
abl eisexpectedto_ _
___
____
.
(a)increase; i
ncr ease
(b)increase; decr ease
(c)decr ease; decr ease
(d)decr ease; i
ncr ease
Answer :C
LevelofDiff
icult
y:2
Learni
ngGoal :4
Topic:Tight
eningCredi
tSt
andar
ds

136.Themaj orvari
ablesthatshoul
dbeconsider
edwhenev
aluat
ingpr
oposedchangesi
ncr
edi
t
standardsareall
ofthef ol
lowi
ngEXCEPT
(a)salesvolume.
(b)theinvestmentinaccountsrecei
vabl
e.
(c)baddebtexpenses.
(d)levelofl
iqui
dasset s.
Answer:D
LevelofDi
ffi
cul
ty:
2
Learni
ngGoal:4
Topic:Managi
ngCredi
tSt
andar
ds

137.Anappli
cant’
scapacitytorepayt herequest
edcr
edi
tisshownby
(a)fi
nanci
alstat
ementanal ysis.
(b)bankaccountbalances.
(c)theappl
icant
’spaymenthi story
.
(d)thel
evelofassetstheappl i
cantcanpledget
owar
dt hel
oan.
Answer :A
LevelofDiff
icul
ty:3
Learni
ngGoal :4
Topic:Fiv
eC’ sofCredi
t

138.Afirmisanalyzingarel
axationofcreditstandardsthati
sexpect edtoi ncr
easesal
es10
percent.Thefi
rmi scur
rentl
ysell
ing400uni tsatanav eragesalepr i
ceperunitof$575,and
thevari
ablecostperunitis$400att hecurrentsalesvol
ume.Theav eragecostperunitis
$425.Whati stheaddit
ionalprof
itcontri
butionfrom sal
esifcreditstandardsar
erelaxed?
(a)$23,000
(b)$16,000
(c)$6,000
(d)$7,000
Answer :D
LevelofDiff
icul
ty:
3
Learni
ngGoal :4
Topic:Rel
axingCredi
tSt
andar
ds
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  616

139.Whenshouldcredi
tstandardsberel
axed?
(
a)Whensal esareexpectedtoi
ncrease.
(
b)Whencost sareexpectedtodecrease.
(
c)Whencost sareexpectedtoincr
easefastert
hansal
esi
fthest
andar
dsarenotr
elaxed.
(
d)Whent heprofi
tcontri
buti
onfrom sal
esisgreat
ert
hant
hecostcont
ri
but
ion.
Answer :D
LevelofDiff
icul
ty:
3
Learni
ngGoal :4
Topic:Rel
axingCredi
tSt
andar
ds
Tabl
e14.
4
Caren’
sCanoesi sconsider
ingrelaxi
ngit
scredi tstandardstoencour
agemor esales.Asa
resul
t,sal
esareexpectedtoincrease15percentf rom 300canoesperyearto345canoes
peryear.Theaveragecoll
ecti
onper i
odisexpect edtoincreaseto40daysfrom 30day s
andbaddebt sareexpectedtodoublethecurrent1per centl
evel
.Thepri
cepercanoei s
$850,thevari
ablecostpercanoei s$650andt heav eragecostperuni
tatthe300uni t
617  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

l
evel
is$700.Thef
ir
m’sr
equi
redr
etur
noni
nvest
menti
s20per
cent
.

140.Whatist hefi
rm’saddit
ionalpr
ofitcont
ri
but
ionf
rom sal
esundert
hepr
oposedr
elaxat
ionof
credi
tstandards?(SeeTable14.4.)
(a)$2,250
(b)$6,750
(c)$9,000
(d)$69,000
Answer :C
LevelofDiff
icul
ty:
4
Learni
ngGoal :4
Topic:Prof
itContr
ibut
ionf
rom Sal
es

141.Whatisthecostofmar
ginal
inv
est
ment
sinaccount
srecei
vabl
eundert
hepr
oposedpl
an?
(See
Tabl
e14.4)
(a)$1,
817
(b)$1,
867
(c)$1,
733
(d)$1,
617
Answer :C
LevelofDiff
icul
ty:
4
Learni
ngGoal :4
Topic:CostofMar gi
nal
Inv
est
menti
nAccount
sRecei
vabl
e(Equat
ion14.
9)

142.Whati
sthecostofmar
ginal
baddebt
sundert
hepr
oposedpl
an?(
SeeTabl
e14.
4)
(
a)$383
(
b)$765
(
c)$3,
315
(
d)$5,
100
Answer :C
LevelofDiff
icul
ty:
4
Learni
ngGoal :4
Topic:CostofMar gi
nal
BadDebt
s
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  618

143.Whatist henetresul
tofimplementi
ngt
heproposedpl
an?(
SeeTabl
e14.
4)
(a)$3,952
(b)–$3, 868
(c)$2,083
(d)–$2, 083
Answer :A
LevelofDi f
fi
cul
ty:4
Learni
ngGoal :4
Topic:NetBenefit(
Cost)ofRelaxi
ngCr
edi
tStandar
ds
144.Af i
rmi sconsi deri
ngr elaxingcredi
tstandards, whichwi ll
resultinannualsalesincreasi
ng
from $1. 5mi ll
ionto$1. 75mi l
l
ion,t
hecostofannual salesincreasi
ngf r
om $1, 000,
000t o
$1,125,000, andt heav er agecoll
ecti
onper i
odi ncreasingf r
om 40t o55day s.Thebaddebt
l
ossi sexpect edt oincreasef r
om 1per centofsal esto1. 5percentofsales.Thef ir
m’ s
requir
edr eturnoni nvest mentsis20per cent.Thef ir
m’ scostofmar gi
nalinvestmentin
account sr eceivableis
(a)$5, 556.
(b)$9, 943.
(c)$12, 153.
(d)$152, 778.
Answer :C
LevelofDi ff
iculty
: 4
LearningGoal :4
Topic:CostofMar gi
nal Invest
mentinAccount sRecei vable(Equation14.9)
145.Afirmi sconsi deringr el
axi
ngcr editstandardswhi chwi l
lresul
tinanincreasei
nannual
salesf r
om $3mi lli
ont o$3.75mi ll
ion,adecr easei nt hecostofannualsalesfr
om
$2,225,000t o$2,000, 000,anincreasei naddi ti
onal profi
tcontr
ibuti
onfrom sal
esof
$10,000, andani ncr easeintheav eragecol l
ect i
onper i
odof15day s,f
rom 20to35days.
Thebaddebtl ossi sexpectedtoi ncreasefrom
1per centt o1.5per centofsales.Thef i
rm’sr equir
edr et
urnoninvestmentsis15per
cent.
Thenetr esultofthef irmrel
axingi t
scr edi
tst andar dsis
(a)$10, 000.
(b)–$16, 250.
(c)–$26, 875.
(d)–$16, 875.
Answer :D
Level ofDi f
fi
culty:4
LearningGoal :4
Topic: NetBenef it(Cost)ofRelaxingCr editSt andar ds
619  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

146.Afirm’scredittermscoveral
loft
hef
oll
owi
ngEXCEPT
(a)cashdi scount.
(b)cashdi scountperi
od.
(c)creditstandards.
(d)creditperiod.
Answer :C
LevelofDiffi
culty:1
Learni
ngGoal : 5
Topic:CreditTerms

147.Company_ ___
__ _
__aret
hepr
ocedur
esf
oll
owedt
ocol
l
ectaccount
srecei
vabl
ewhent
hey
comedue.
(a)coll
ecti
onpolici
es
(b)credi
tscori
ngs
(c)credi
tpoli
cies
(d)credi
tanaly
ses
Answer :A
LevelofDiff
icul
ty:
1
Learni
ngGoal :5
Topic:Credi
tColl
ecti
onPol
i
cy

148.Themostst r
ingentstepi
nthecol
l
ect
ionpr
ocessi
s
(a)l
ett
ers.
(b)per
sonalv i
sit
s.
(c)col
l
ectionagencies.
(d)l
egalacti
on.
Answer :D
LevelofDiff
icul
ty:
1
Learni
ngGoal :5
Topic:Credi
tColl
ecti
onPol
i
cy

149.Thefir
ststepinthecoll
ecti
onofover
dueaccount
sis
(a)alett
er.
(b)contacti
ngacollect
ionagency
.
(c)l
egal act
ions.
(d)apersonal v
isi
t.
Answer :A
LevelofDiff
icul
ty:
1
Learni
ngGoal :5
Topic:Credi
tColl
ecti
onPol
i
cy
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  620

150.2/15net45transl
atesas
(a)15percentcashdiscountifpai
din2days,
net45-daycredi
tperi
od.
(b)45percentofaccountduei n15days,
paymentpri
ortoday15r ecei
vesa2percent
di
scount.
(c)2percentcashdiscounti
fpaidpri
orto15days,i
fcustomerdoesnottakeacash
di
scount,thebal
anceisduei n45days.
(d)2percentofthebalanceisduein15days,t
heremaini
ngbalanceisduein45days.
Answer :C
LevelofDiff
icul
ty:
2
Learni
ngGoal :5
Topic:Credi
tTerms

151.Atechniquethatprovi
dest heanal
ystwit
hthei
nfor
mationconcer
ningthepropor
tionof
eachtypeofaccountt hathasbeenoutst
andi
ngforaspeci
fi
edperiodofti
mei scall
ed
(a)credi
tanalysi
s.
(b)credi
tscori
ng.
(c)agingofreceiv
ables.
(d)theeconomi corderquanti
tymodel.
Answer :C
LevelofDiff
icul
ty:
2
Learni
ngGoal :5
Topic:AgingofAccount
sRecei
vabl
e

152.Whenaf irminiti
atesori ncr
easesacashdi scount,
salesareexpect
edto______
___
,the
i
nvestmenti naccount sr eceivabl
ei sexpect edto____
_ _
___,
thebaddebtexpensei
s
expectedt o___ _
__ ___,
andt hepr ofitperunitisexpectedto___
_____
_.
(a)decr ease;increase; i
ncrease;increase
(b)decr ease;decr ease; i
ncrease;increase
(c)increase;increase; decrease;decr ease
(d)increase;decr ease; decrease;decr ease
Answer:D
LevelofDiff
icul
ty:
3
Learni
ngGoal :5
Topic:I
nit
iat
ingorIncr
easi
ngCashDi
scount
s

153.Whenaf irm decreasesorcancel sacashdi scount

,salesar
eexpectedto__
_____
__,t
he
i
nvestmenti naccount sr eceivabl
ei sexpectedto_______
__,
thebaddebtexpenseis
expectedt o_ _____ ___,
andt hepr ofitperuniti
sexpectedto___
____
__ .
(a)decr ease; i
ncr ease; i
ncrease;increase
(b)decr ease; decr ease; i
ncrease;increase
(c)increase; i
ncr ease; decrease;decr ease
(d)increase; decr ease; decrease;decr ease
Answer :A
LevelofDiff
icul
ty:
3
Learni
ngGoal :5
Topic:Canceli
ngorDecr
easi
ngCashDi
scount
s
621  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

154.I
fthecashdi scountperi
odi
si ncr
eased,thefi
rm’si
nvest
menti
naccount
srecei
vabl
edue
to
non-
discounttakersnowpayingearli
erisexpect
edto
(a)i
ncrease.
(b)decrease.
(c)notchange.
(d)changeinanundet ermi
neddirecti
on.
Answer:B
LevelofDiff
icul
ty:
3
Learni
ngGoal :5
Topic:I
nit
iat
ingorIncr
easi
ngCashDi
scount
s

155.I
fthecashdi scountperi
odisincr
eased,thefi
rm’
sinv
estmenti
naccountsr
ecei
vabl
edue
t
odiscountt aker
sstil
lgett
ingcashdiscount
sbutpayi
nglat
eri
sexpectedt
o
(
a)increase.
(
b)decr ease.
(
c)notchange.
(
d)changei nanundet ermineddir
ect
ion.
Answer:A
LevelofDiff
icul
ty:
3
Learni
ngGoal :5
Topic:I
nit
iat
ingorIncr
easi
ngCashDi
scount
s

156.Ift
hef i
rm’ scashdi scountper i
odisdecr
easedorcancel
l
ed,
thesal
esvol
umecanbe
expectedt o___ _
__ ___,t
hebaddebtexpensescanbeexpectedto___
____
__,
andt
heprof
it
perunitcanbeexpect edt o_ _
____
___.
(a)increase;decr ease; decrease
(b)increase;increase; decrease
(c)decr ease;increase; i
ncrease
(d)decr ease;decr ease; i
ncrease
Answer :C
LevelofDiff
icul
ty:
3
Learni
ngGoal :5
Topic:Canceli
ngorDecr
easi
ngt
heCashDi
scountPer
iod

157.I
fthef i
rm’ scashdi scountper i
odisi
ncr
eased,
thesal
esv ol
umecanbeexpectedto
____
_ _
___ ,t
hebaddebtexpensescanbeexpect edto___
__ _
___
,andt
heprof
itperuni
tcan
beexpect edto_ __ ______.
(a)increase;decr ease; decrease
(b)increase;increase; decrease
(c)decr ease;increase; i
ncrease
(d)decr ease;decr ease; i
ncrease
Answer:A
LevelofDiff
icul
ty:
3
Learni
ngGoal :5
Topic:I
nit
iat
ingorIncr
easi
ngt
heCashDi
scountPer
iod
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  622

158.Ift
hef i
rm’scr
editper i
odi si ncreased,t
hesalesv
olumecanbeexpect
edto__
____
___
,the
i
nvestmentinaccount sr ecei vablecanbeexpect
edto__
____
___
,andthebaddebt
expensescanbeexpect edt o_ __
_____
_.
(a)incr
ease;decr ease; decr ease
(b)incr
ease;i
ncr ease; decr ease
(c)incr
ease;i
ncr ease; i
ncr ease
(d)decrease;decr ease; decr ease
Answer:C
LevelofDiff
icul
ty:
3
Learni
ngGoal :5
Topic:I
nit
iat
ingorIncr
easi
ngt
heCr
edi
tPer
iod

159.Ift
hef i
rm’scr
editper i
odi sdecr eased,
thesal
esvol
umecanbeexpectedt
o_____
___
_,t
he
i
nvestmentinaccount sr ecei vablecanbeexpect
edto_
____
___
_,andthebaddebt
expensescanbeexpect edt o_ ____
____
.
(a)incr
ease;decr ease; decr ease
(b)incr
ease;i
ncr ease; decr ease
(c)incr
ease;i
ncr ease; i
ncr ease
(d)decrease;decr ease; decr ease
Answer :D
LevelofDiff
icul
ty:
3
Learni
ngGoal :5
Topic:Canceli
ngorDecr
easi
ngt
heCr
edi
tPer
iod

Abr eakdownofTef
fan,I
nc.
’
soutst
andi
ngaccount
sreceiv
abledatedJune30,2003onthebasi
s
ofthemont hi
nwhichthecr
edi
tsal
ewasini
ti
all
ymadef ol
lows.Thefi
rm ext
ends30-daycr
edi
t
ter
ms.
Tabl
e14.
5

Mont h Accounts
ofCredi tSal
e Receiv
able
June, 2003 $410,000
May ,2003 340,
000
April
,2003 270,
000
March, 2003 200,
000
February ,
2003orbef
ore 100,
000
Total $1,320,
000

160.Accountsrecei
vabl
eov
er90day
stot
al(
SeeTabl
e14.
5)
(a)$200,000.
(b)$470,000.
(c)$300,000.
(d)$100,000.
Answer :C
LevelofDiff
icul
ty:
3
Learni
ngGoal :5
Topic:AgingofAccount
sRecei
vabl
e
623  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

161.Anev aluationofthefir
m’scol
lecti
oneff
ort
sbasedont
heagi
ngschedul
ewoul
dsuggest
(See
Tabl
e14. 5)
(a)poorcr edi
tmanagement.
(b)sat i
sfactorycredi
tmanagement .
(c)super iorcredi
tmanagement .
(d)ov erzealouscoll
ecti
oneff
orts.
Answer :A
LevelofDiff
icul
ty:
3
Learni
ngGoal :5
Topic:AgingofAccount
sRecei
vabl
e

162.Anincreaseincoll
ectionef fortswillr
esulti
n_ ______
__i
nsalesvolume,_
_____
___int
he
i
nvestmenti naccountsr eceivable,___
______inbaddebtexpenses,and___
_____
_in
coll
ect
ionexpenditures.
(a)anincrease;adecr ease; anincrease;adecrease
(b)anincrease;adecr ease; adecrease;anincrease
(c)anincrease;adecr ease; anincrease;anincrease
(d)adecr ease;
adecr ease; adecr ease;anincrease
Answer:D
LevelofDi
ffi
cult
y:3
Learni
ngGoal:5
Topic:I
ncr
easingColl
ect
ionEf
for
ts

163.Adecreaseincoll
ecti
onef f
ortswi l
lresulti
n_ _
_ _
____
_insal
esv ol
ume, _
____
____int
he
i
nvestmentinaccountsreceivable,___
______inbaddebtexpenses,and___
____
_ _i
n
coll
ect
ionexpendi
tures.
(a)anincr
ease;anincrease;anincrease; adecrease
(b)anincr
ease;adecrease;ani ncrease;anincrease
(c)anincr
ease;adecrease;ani ncrease;adecrease
(d)adecrease;adecrease;adecr ease;anincrease
Answer :A
LevelofDiffi
cul
ty:
3
Learni
ngGoal :5
Topic:Decreasi
ngCol
l
ect
ionEf
for
ts

164.Anincreaseinaccountsr
ecei vableturnoverduetoanincr
easei ncoll
ect
ionef
for
tswi
l
l
(a)decreasethefi
rm’smar ginalinvestmentsinaccount
sr ecei
vable.
(b)i
ncreasethefir
m’smar ginalinvestmentsinaccountsreceiv
able.
(c)decreasethefi
rm’scol
lect i
onexpense.
(d)i
ncreasethefir
m’sbaddebtexpense.
Answer:A
LevelofDi
ffi
cult
y:3
Learni
ngGoal:5
Topic:I
ncr
easingColl
ect
ionEf
for
ts
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  624

Tabl
e14.
6
DizzyAnimators,Inc.curr
entlymakesal lsal
esoncr editandof fer
snocashdi scount .The
fi
rmi sconsi
deringa3per centcashdiscountforpaymentwi thin10day s.Thef i
rm’scur rent
averagecoll
ecti
onper i
odis90day s,
salesare400f i
lmspery ear,sel
l
ingpr i
cei s$25,000
perfil
m, v
ari
ablecostperf i
lmis$18,750perf i
l
m, andt heav er
agecostperf il
mi s
$21,000.Thef i
rm expectsthatthechangei ncredi
ttermswi llresul
tinami nori ncreasei n
salesof10f i
lmspery ear,that75percentofthesaleswi llt
aket hediscount,andt he
averagecoll
ectionperiodwi l
ldropto30day s.Thefirm’sbaddebtexpensei sexpect edto
becomenegl igi
bleundert heproposedplan.Thebaddebtexpensei scurrentl
y0. 5
percentofsales.Thef i
rm’srequir
edr et
urnonequal -
riskinvestmentsis20per cent.

165.Whatisthefi
rm’smargi
nalpr
ofi
tcont
ri
but
ionfr
om sal
esundert
hepr
oposedpl
anof
i
nit
iat
ingthecashdi
scount
?(SeeTabl
e14.6)
(
a)$22,500
(
b)$40,000
(
c)$62,500
(
d)$100,000
Answer :C
LevelofDiff
icul
ty:
4
Learni
ngGoal :5
Topic:Prof
itContr
ibut
ionf
rom Sal
es

166.Whatisthemargi
nal
inv
est
menti
naccount
srecei
vabl
eundert
hepr
oposedpl
an?(
See
Tabl
e14.6)
(a)$1,
234,375
(b)$1,
382,500
(c)$1,
567,300
(d)$1,
841,570
Answer:A
LevelofDi
ff
icul
ty:
4
Learni
ngGoal:5
Topic:Mar
ginal
Invest
menti
nAccount
sRecei
vabl
e(Equat
ion14.
98)

167.Whatisthecostofmar
ginal
inv
est
menti
naccount
srecei
vabl
eundert
hepr
oposedpl
an?
(See
Tabl
e14.6)
(a)$313,
460
(b)$276,
500
(c)$246,
875
(d)$368,
314
Answer :C
LevelofDiff
icul
ty:
4
Learni
ngGoal :5
Topic:CostofMar gi
nal
Inv
est
menti
nAccount
sRecei
vabl
e(Equat
ion14.
9)
625  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

168.Whatarethesav
ingsofmar
ginal
baddebt
sundert
hepr
oposedpl
an?(
SeeTabl
e14.
6)
(
a)$500,000
(
b)$50,000
(
c)$10,000
(
d)$5,000
Answer :B
LevelofDiff
icul
ty:
4
Learni
ngGoal :5
Topic:CostofMar gi
nal
BadDebt
s

169.Whati
sthecostoft
hemar
ginal
cashdi
scount
?(SeeTabl
e14.
6)
(
a)$768,
750
(
b)$300,
000
(
c)$307,
500
(
d)$230,
625
Answer :D
LevelofDiff
icul
ty:
4
Learni
ngGoal :5
Topic:CostofMar gi
nal
CashDi
scount

170.Whati
sthenetresul
tofi
ncr
easi
ngt
hecashdi
scount
?(SeeTabl
e14.
6)
(
a)$33,
750
(
b)–$33,750
(
c)$128,750
(
d)–$58,750
Answer :C
LevelofDiff
icul
ty:4
Learni
ngGoal :5
Topic:NetBenefit(
Cost
)ofI
ncr
easi
ngt
heCashDi
scount

171.Whenmanagingaccountspay
abl
e,agoodst
rat
egyt
oempl
oyt
hatwon’
thur
tyourcr
edi
t
r
ati
ng
i
sto
(
a)payearl
y .
(
b)payaslateaspossibl
e.
(
c)neverpay.
(
d)payont heduedate.
Answer:B
LevelofDi
ffi
cul
ty:
1
Learni
ngGoal:6
Topic:Managi
ngAccount
sPay
abl
e
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  626

172.Delayi
ngthepay mentofaccountspay
ablei
nor
dert
oimpr
ovecashmanagementi
sknown
as
(a)rui
ningthefir
m’scredi
trat
ing.
(b)stret
chingthepayabl
es.
(c)reducingopti
malcashrequir
ements.
(d)fl
oat.
Answer:B
LevelofDi
ffi
cul
ty:
1
Learni
ngGoal:6
Topic:Managi
ngAccount
sPay
abl
e

173.Whenmanagingaccountsreceivabl
e,agoodstr
ategyt
oempl
oywi
thoutl
osi
ngf
utur
esal
es
i
sto
(
a)sendtheaccountstoacollecti
onagency.
(
b)ti
ghtenthecredi
tterms.
(
c)off
ercashdiscount.
(
d)makef r
equentpersonalvi
sit
st othecust
omer.
Answer:C
LevelofDi
ffi
cul
ty:
1
Learni
ngGoal:6
Topic:Managi
ngAccount
sRecei
vabl
e

174._
___
_____areshort-
term moneymar
keti
nst
rument
sthatcanbeeasi
l
yconv
ert
edi
ntocash.
(
a)Preferr
edstocks
(
b)Treasurybonds
(
c)Accountsreceivable
(
d)Mar ket
ablesecurit
ies
Answer:D
LevelofDi
ff
icul
ty:
1
Learni
ngGoal:6
Topic:Mar
ketabl
eSecur
it
ies

175.Thedept
hofamar ketisdeterminedby
(a)t
heabil
it
ytoabsorbthepur chaseorsal
eofal
argenumberofsecuri
ti
es.
(b)t
henumberofparti
cipants.
(c)t
heabil
it
ytoabsorbthepur chaseorsal
eofal
argedol
laramountofsecur
it
ies.
(d)t
hesafet
yofpri
ncipal.
Answer :C
LevelofDiffi
cul
ty:
1
Learni
ngGoal :6
Topic:BreadthandDept
hoft
heMar
ket
627  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

176.____
_____ar
eobligationsoft
heU.S.Tr
easur
ywi
thcommonmat
uri
ti
esof91t
o182day
s
andthathaveast r
ongsecondarymarket
.
(a)Treasur
ynotes
(b)Treasur
ybil
ls
(c)Federal
agencyi ssues
(d)Banker’
sacceptances
Answer :B
LevelofDiffi
cult
y:1
Learni
ngGoal :6
Topic:TreasuryBil
l
s

177._
___
_____areobligat
ionsoftheU.S.Tr
easurywi
thcommonmaturi
ti
esofonet
osev
en
y
earsandthataregener al
l
yissuedinmini
mum denomi
nat
ionsof$5,
000.
(
a)Treasur
ynot es
(
b)Treasur
ybi l
l
s
(
c)Federalagencyissues
(
d)Banker’
saccept ances
Answer :A
LevelofDiffi
cult
y:1
Learni
ngGoal :6
Topic:TreasuryNotes

178.____
_____arenotobligati
onsoft
heU.S.Government
,butmostpur
chaser
sfeel
thatt
hey
areimpli
cit
lyguaranteedbythef
eder
al gov
ernment.
(a)Treasurynotes
(b)Treasurybil
l
s
(c)Federalagencyissues
(d)Banker’
saccept ances
Answer :C
LevelofDiff
icult
y:1
Learni
ngGoal :6
Topic:FederalAgencyI
ssues

179.Alloft
hef ol
lowingsecuri
ti
esar
egov
ernmenti
ssuesEXCEPT
(a)Treasurynotes.
(b)Treasurybil
l
s.
(c)Federalagencyissues.
(d)Eurodoll
ardeposits.
Answer :D
LevelofDiffi
cult
y:1
Learni
ngGoal :6
Topic:Eurodoll
arDeposi
ts
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  628

180._____
____isashor t-
ter
m, unsecuredpr
omi
ssor
ynot
eissuedbyacor
por
ati
onwi
thav
ery
highcreditstandi
ng.
(a)Anegot iablecer
tif
icateofdeposi
t
(b)Ar epurchaseagreement
(c)Amoneymar ketmut ualf
und
(d)Acommer ci
alpaper
Answer :D
LevelofDiff
icul
ty:
1
Learni
ngGoal :6
Topic:Commer ci
alPaper

181._
________arisefrom ashort-
ter
m credi
tarr
angementusedbybusi
nessestofi
nance
t
ransacti
onsi nvolv
ingfir
msi nfor
eigncountr
iesorf
ir
mswithunknowncredi
tcapaci
ti
es.
(
a)Negot iablecerti
fi
catesofdeposit
(
b)Eur odoll
ardeposits
(
c)Banker ’sacceptances
(
d)Moneymar ketmut ualf
unds
Answer :C
LevelofDiff
icul
ty:
1
Learni
ngGoal :6
Topic:Banker’
sAccept
ances

182.____
_____arefundsdenomi natedi
nU.S.dol
l
arsanddeposi
tedi
nbanksl
ocat
edout
sidet
he
Unit
edSt at
es.
(a)Negot i
abl
ecer t
ifi
catesofdeposi
t
(b)Eurodoll
ardeposits
(c)Banker’sacceptances
(d)Moneymar ketmut ualf
unds
Answer :B
LevelofDiffi
cult
y:1
Learni
ngGoal :6
Topic:Eurodoll
arDeposi
ts

183.A_____
____isapr ofessional
lymanagedpor
tfol
i
oofmar
ket
abl
esecur
it
iesandi
ssol
din
f
ract
ionalparts.
(
a)negotiablecerti
ficateofdeposi
t
(
b)repurchaseagr eement
(
c)moneymar ketmut ualf
und
(
d)commer ci
al paperissue
Answer:C
LevelofDi
ffi
cul
ty:
1
Learni
ngGoal:6
Topic:MoneyMarketMut
ual
Funds
629  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

184.Thenongov er nmentalissuestypi
cal
lyhavesl
ight
lyhi
gheryi
eldst
hangov
ernmenti
ssues
withsimil
armat uri
ti
esduet othesli
ghtl
y____
____
_associat
edwit
hthem.
(a)higherpr ofi
tabi
li
ty
(b)higherrisk
(c)lowerrisk
(d)strongersecondar ymar ket
Answer :B
LevelofDiff
icul
ty:
1
Learni
ngGoal :6
Topic:Governmental
ver
susNongov
ernment
alMar
ket
abl
eSecur
it
ies

185.Theprinci
palnongovernmentalmarket
abl
esecur
it
iesar
eal
loft
hef
oll
owi
ngEXCEPT
(a)agencyissues.
(b)Eurodol
lardeposit
s.
(c)moneymar ketmutualf
unds.
(d)negoti
ablecerti
fi
cateofdeposi
t.
Answer :A
LevelofDiff
icult
y:1
Learni
ngGoal :6
Topic:Nongov er
nment
alMar
ket
abl
eSecur
it
ies

186.Fundsondeposi tatcommer ci
albankshavingv ar
iabl
emat
uri
ti
esandy
iel
dsbasedonsi
ze,
maturi
ty,
andpr evail
ingmoneymar ketcondit
ionsare
(a)negoti
ablecerti
ficatesofdeposit
.
(b)commer ci
al paper.
(c)savi
ngsaccount s.
(d)moneymar ketmut ualf
unds.
Answer :A
LevelofDiff
icult
y:1
Learni
ngGoal :6
Topic:Negotiabl
eCert
if
icat
esofDeposi
t

187.____
_____ref
erstofundsthathav
ebeendi
spat
chedbyapay
erbutar
enoti
naf
ormt
hat
canbespentbyt hepayee.
(a)Thecashconv ersi
oncycle
(b)Float
(c)Adi r
ectsend
(d)Lockboxes
Answer :B
LevelofDi f
fi
cul
ty:
2
Learni
ngGoal :6
Topic:Float
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  630

188.____
_____floatr
esul
tsfrom thedel
aybetweentheti
mewhenacust
omerdeduct
sa
paymentf r
om thecheckingaccountl
edgerandtheti
mewhent
hevendoract
ual
lyr
ecei
ves
thefundsinaspendablef or
m.
(a)Mail
(b)Processing
(c)Collect
ion
(d)Disbursement
Answer :C
LevelofDiff
icul
ty:
2
Learni
ngGoal :6
Topic:Coll
ecti
onFloat

189._____
____floatresul
tsf
rom t
helapsebet
weent
heti
mewhenaf ir
m deductsapay
ment
from i
tscheckingaccountl
edgerandtheti
mewhenfundsar
eactual
l
ywithdr
awnfrom i
ts
account.
(a)Mai l
(b)Processing
(c)Collect
ion
(d)Disbursement
Answer :D
LevelofDiffi
culty
:2
Learni
ngGoal :
6
Topic:DisbursementFl
oat

190.Thebasiccomponent
sofcol
l
ect
ionf
loati
ncl
udeal
loft
hef
oll
owi
ngEXCEPT_
___
___
__
fl
oat.
(a)mail
(b)processing
(c)cl
earing
(d)di
sbur sement
Answer :D
LevelofDiff
icul
ty:
2
Learni
ngGoal :6
Topic:Coll
ecti
onFloat

191.____
_____floatist
hetimethatelapsesbet
weenthedepositofacheckbyt
hepayeeand
theactualavail
abi
li
tyoffunds.Thiscomponenti
sat
tri
butablet
othetimer
equi
redfora
checktogot hr
oughthebankingsystem.
(a)Mai l
(b)Processing
(c)Cleari
ng
(d)Disbursement
Answer :C
LevelofDiff
icul
ty:2
Learni
ngGoal :6
Topic:Clear
ingFloat
631  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

192.Acustomersendspay menttoapostoff
iceboxwhichi
sempt i
edbythefi
rm’
sbankdai l
y.
Thebankt henprocessesthepay
ment sandnoti
fi
esthefi
rm oft
heday’
scoll
ect
ions.Thi
s
coll
ect
iontechniqueisknownas
(a)adirectsend.
(b)concentrat
ionbanking.
(c)thelockboxsy st
em.
(d)control
leddisbursi
ng.
Answer :C
LevelofDiff
icul
ty:
2
Learni
ngGoal :6
Topic:LockboxSystem

193._
___
_____floati
sthedel
aybet
weent
her
ecei
ptofacheckandt
heact
ual
deposi
tofi
tint
o
t
hefi
rm’saccount.
(
a)Disbursement
(
b)Deposit
(
c)Processing
(
d)Cleari
ng
Answer :C
LevelofDiffi
cul
ty:
2
Learni
ngGoal :6
Topic:Processi
ngFloat

194.Disbursementfloathasal
loft
hef
oll
owi
ngbasi
ccomponent
sEXCEPT
(a)mai l.
(b)processing.
(c)collecti
on.
(d)clearing
Answer :C
LevelofDiffi
culty
:2
Learni
ngGoal :
6
Topic:DisbursementFl
oat

195.A___
__ _
___isanunsi
gnedcheckdrawnononeoft
hef
ir
m’sbankaccount
sanddeposi
ted
i
ntoi
tsaccountatanotherbank.
(
a)directsend
(
b)wiretransfer
(
c)depositorytr
ansf
ercheck
(
d)preauthori
zedcheck
Answer :C
LevelofDiff
icult
y:2
Learni
ngGoal :6
Topic:Depositor
yTransf
erChecks
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  632

196.A___
__ _
___isatelegr
aphiccommuni
cati
onthat
,vi
abookkeepi
ngent
ri
es,r
emov
esf
unds
f
rom t
hepay er’
sbankanddeposit
sthem i
nanaccountofthepay
ee’
sbank.
(
a)directsend
(
b)wiretransfer
(
c)depositorytr
ansfercheck
(
d)preauthori
zedcheck
Answer:B
LevelofDif
fi
cul
ty:
2
Learni
ngGoal:6
Topic:Wir
eTransf
er

197.____
_____invol
vesthestrat
egi
cuseofmai
l
ingpoi
ntsandbankaccount
stol
engt
henmai
l
andcleari
ngf l
oats.
(a)Adirectsend
(b)Concentrati
onbanking
(c)Alockbox
(d)Controll
eddisbursi
ng
Answer :D
LevelofDiff
icult
y:2
Learni
ngGoal :6
Topic:Contr
olledDisbur
sing

198._
____
____isamet hodofconsci
ousl
yant
ici
pat
ingt
hemai
l
,pr
ocessi
ng,
andcl
ear
ingt
ime
i
nvol
vedwitht hepaymentprocess.
(
a)Controll
eddi sbur
sing
(
b)Concent r
ationbanking
(
c)Playi
ngt hef l
oat
(
d)Anov erdraftsyst
em
Answer:C
LevelofDi
ffi
cul
ty:
2
Learni
ngGoal:6
Topic:Managi
ngtheFl
oat

199.A_ __
____
__isnotaspeci f
icsecuri
tybutanarrangementwherebyabankorsecur
itydeal
er
sell
sspecif
icmarketablesecuri
ti
estoaf i
rm andagreest
orepurchaset
hesecuri
ti
esinthe
fut
ure.
(a)negoti
ablecer
ti
ficateofdeposit
(b)repur
chaseagreement
(c)moneymar ketmut ualf
und
(d)commer ci
alpaperissue
Answer :B
LevelofDiff
icul
ty:2
Learni
ngGoal :6
Topic:RepurchaseAgr
eement
633  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

200.Theyiel
doncommer ci
alpaperi
sgener
all
yhi
ghert
hant
hey
iel
don
(a)negoti
ableCDs.
(b)acorporatebond.
(c)commonst ock.
(d)aTreasurybill
.
Answer :D
LevelofDiff
icul
ty:
2
Learni
ngGoal :6
Topic:Commer ci
alPaper

201.Eachofthef ol
l
owi nginstr
umentsdemonst
rat
est
hesaf
etyofpr
inci
pal
char
act
eri
sti
c
commont omar ketabl
esecur
it
iesEXCEPT
(a)Treasurybi
lls.
(b)Treasurynotes.
(c)banker’
saccept ances.
(d)commonst ock.
Answer:D
LevelofDi
ff
icul
ty:
2
Learni
ngGoal:6
Topic:Mar
ketabl
eSecur
it
ies

202.Theeaseofsalabilityofmar
ket
abl
esecur
it
iesr
efer
sto
(a)safet
yofreturn.
(b)safet
yofpri
nci pal.
(c)safet
yofmat urity.
(d)ri
skofpayment s.
Answer:B
LevelofDi
ff
icul
ty:
2
Learni
ngGoal:6
Topic:Mar
ketabl
eSecur
it
ies

203.Short-
ter
mi nst
rument sissuedbytheFeder
alHomeLoanBank,t
heFeder
alNat
ional
MortgageAssoci at
ion,andtheFederal
LandBankar
eexamplesof
(a)Treasurynotes.
(b)Treasurybi
ll
s.
(c)federal
agencyi ssues.
(d)banker’
saccept ances.
Answer :C
LevelofDiff
icult
y:2
Learni
ngGoal :6
Topic:FederalAgencyI
ssues
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  634

204.Soundcashmanagementt echniqueswouldsupport
(a)minimizingcoll
ect
ionf
loat,maximizi
ngdisbur
sementf
loat
,andmi
nimizingthecash
conversioncycl
e.
(b)minimizingcoll
ect
ionf
loat,maximizi
ngdisbur
sementf
loat
,andmi
nimizingthecash
tur
nover .
(c)max i
mi zi
ngcoll
ecti
onfloat
,mi ni
mizi
ngdisbur
sementf
loat
,andmi
nimizingoperat
ing
cash.
(d)minimizingcoll
ect
ionf
loat,maximizi
ngdisbur
sementf
loat
,andmaxi
mi zi
ngoperati
ng
cash.
Answer:A
LevelofDi
ffi
cul
ty:
3
Learni
ngGoal:6
Topic:Managi
ngtheFl
oat

205.Afi
rm expect
st ohavef undsof$150, 000idlefor60day s.Ift
hef i
rm couldpur chase
market
ablesecuri
tiesy i
elding10percentandpaybr okeragef eesof$1, 500,thefir
m
(
a)shouldmaket hei nvest mentsi
ncei nt
erestearnedexceedsbr okeragef ees.
(
b)shouldnotmaket hei nvestmentsincebrokeragef eesexceedi nterestearned.
(
c)shouldleavethe$150, 000incash.
(
d)shouldinvestthef undsf ormorethan60day sduet ot hefavorablerate.
Answer:A
LevelofDi
ff
icul
ty:
3
Learni
ngGoal:6
Topic:Mar
ketabl
eSecur
it
iesManagement

206.Theri
skofani nv
estmentinaEurodoll
ardepositispart
ial
l
ydueto
(a)t
hefactthatthecent
eroftheEurodol
larmar keti
sinLondon.
(b)t
hefactthatthemajor
ityoft
hesedepositsar enoti
nthefor
m ofU.
S.dol
l
ars.
(c)t
hepresenceofsomef orei
gnexchangerisk.
(d)t
hefactthatthesei
nstr
umentsonlypayinterestatmatur
it
y.
Answer :C
LevelofDiffi
cult
y:3
Learni
ngGoal :6
Topic:Eurodoll
arDeposi
ts

207.Whi
choft hef ol
l
owingist rueofaEur odol l
ardeposi t
?
(
a)Eurodollardeposi
tst endtoprov i
dey iel
dsbel ownear l
yal l
ot hermar ketabl
esecuri
ties
withsimi l
armaturi
tiesduet otheirlowr i
sk.
(
b)Eurodollardeposi
tsar enon-negotiableandpayi nter
estonl yatmat urit
y,hencethey i
eld
ishigherthanonot hermar ketabl
esecur i
tieswithsimilarmat uri
ti
es.
(
c)Eurodollardeposi
tst endtoprov i
dey iel
dsabov enearl
yal lothermar ketabl
esecurit
ies
withsimi l
armaturi
tiesduet othehi gherrisk.
(
d)Eurodollardeposi
tst endtoprov i
dehi ghery i
eldsabov enear l
yallothermar ket
able
securit
ieswi t
hsimilarmaturit
iesduet otheabsenceofanact ivesecondar ymarket.
Answer :C
LevelofDiffi
cult
y:4
Learni
ngGoal :6
Topic:Eurodoll
arDeposi
ts
635  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  636

208.Deposit
orybanksholdingEurodol l
ardeposit
sare
(a)general
l
ymor ecloselyregulatedthanU.S.banksandarethereforemoreri
sky.
(b)general
l
ylesscloselyregulatedthanU.S.banksandarethereforemoreri
sky.
(c)general
l
ymor ecloselyregulatedthanU.S.banksandarethereforel
essri
sky.
(d)l
argelyl
ocatedoutsideoftheEur opeancountri
esandarethereforemoreri
sky.
Answer :B
LevelofDiffi
cult
y:4
Learni
ngGoal :6
Topic:Eurodoll
arDeposi
ts

209.Afir
m hasar rangedf oralockboxsystem tor
educecollecti
ontimeofaccountsreceivable.
Curr
entl
yt hefir
m hasanav eragecol
lecti
onperi
odof43day s,anaver
ageageofi nventory
of50day s,andanav er
agepay mentperiodof10days.Thel ockboxsystem wi
l
lreducet he
aver
agecol l
ectionper i
odby3day sbyr educi
ngprocessing,mail,
andcleari
ngfl
oat.The
fi
rm’scashconv er
sioncycle_____
____.
(a)i
ncreasesby3day s
(b)decreasesby3day s
(c)wil
lnotchange
(d)i
s93day s
Answer :B
LevelofDiff
icul
ty:
4
Learni
ngGoal :6
Topic:LockboxSystem

210.Apopularextensionofmat erialsrequir
ementplanni
ngt
hatint
egrat
esdat
afr
om numerous
areassuchasaccount ing, fi
nance, engineer
ing,
andmanuf
acturi
ngusi
ngasophi
sti
cat
ed
computersystem iscalled
(a)computerizedmat erialsintegrati
onI I
.
(b)manufacturingresour cepl anningII
.
(c)inv
entor
yal locat
ionpl anningI I
.
(d)noneoftheabov e.
Answer :B
LevelofDiff
icul
ty:
3
Learni
ngGoal :3
Topic:LockboxSystem
637  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

 EssayQuest
ions
1. MinnyFi shingPr oductsisanalyzi
ngtheper formanceofi t
scashmanagement .Ont he
average, thefi
rm holdsinventory65day s,
pay sitssuppli
ersin35day s,andcol l
ectsits
receiv
abl esin15day s.Thef ir
m hasacur rentannual out
layof$1,960,000onoper ating
cycleinvestment s.Minnycur r
entl
ypay s10per centforit
snegotiatedfinancing.(
Assumea
360dayy ear.)
(a)Cal culatethefir
m’ scashconv er
sioncy cl
e.
(b)Cal culatethefir
m’ soperati
ngcycle.
(c)Cal culatethedailyexpenditur
eandt hef i
rm’sannualsavingsiftheoper ati
ngcycleis
r
educedby15day s.
Answer
s:
(
a)CCC6515–3545
(
b)OC651580
(
c)Dai
lyexpendit
ure$1,960,
000/
360$5,
444.
44
Annualsavi
ngs$5,444.44150.
10$8,167
LevelofDi
f f
icul
ty:
3
Learni
ngGoal :2
Topic:ManagingtheOper
ati
ngandCashConv
ersi
onCy
cles(
Equat
ion14.
1,Equat
ion14.
2,
andEquation14.3)

2. Afir
m hasar rangedforalockboxsy stem t
or educecoll
ectiontimeofaccount sreceivable.
Curr
entlythefirm hasanav er
agecollect
ionper i
odof43day s,anaverageageofi nventory
of50day s,andanav eragepaymentper i
odof10day s.Thel ockboxsystem wil
l r
educet he
aver
agecol l
ect i
onperiodbythreedaysbyr educingprocessing,mail,
andcl ear
ingfl
oat .
Thefir
m hast otalannualoutl
aysof$15,000,000andcur rentlypays9per centf
orits
negoti
atedfinancing.
(a)Calculat
et hecashconv er
sioncyclebeforeandaf t
erthel ockboxsystem.
(b)Calculat
et hesavingsinfi
nanci
ngcost sfrom thelockboxsy stem.
Answer
s:
(
a)CCCbeforelockbox4350–1083
CCCafterlockbox4050–1080
(
b)$15,
000,000/360$41,
666.
67perday30.
09$11,
250
LevelofDiff
icul
ty:
3
Learni
ngGoal :2
Topic:LockboxSystem andt
heCashConv
ersi
onCy
cle(
Equat
ion14.
2andEquat
ion14.
3)
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  638

3. Li
gureJewelershasseasonalfi
nancingneedst hatvar
yf r
om $250,
000to$2,725,000.The
per
manentfinancingrequi
rementis$4,100,000.Checktheappropr
iat
eboxindicati
ngthe
bet
terst
rat
egyf oreachofthefol
lowingev ents.

Aggressiv
e Conservati
ve
Ev
ent Financing Financing
Str
ategy Str
ategy
1.Duet ohigh — —
inflati
on, shor t
-
termi nter estrates
ar emuchhi gherthan
long- t
ermr ates.
2.Salesr evenuei s — —
unpr edictable.
3.Thef i
rm hasa — —
l
ar gepr opor ti
on
ofi tsasset sin
fixedasset s.
4.Theav erage — —
seasonal financing
needi s$1, 000,000.
5.Theav erage — —
seasonal financing
needi s$2, 000,000.
Answer
:

Aggressi
ve Conservat
ive
Event Fi
nancingStr
ategy Fi
nanci
ngSt r
ategy
1.Duet ohigh — X
i
nflati
on, shor t-
terminter estr ates
aremuchhi gher
than
l
ong- t
ermr ates.
2.Salesrevenuei s — X
unpredictabl e.
3.Thef i
rm hasa — X
l
argepr opor tion
ofitsasset si n
fi
xedasset s.
4.Theav erage X —
seasonal f i
nanci ng
needis$1, 000, 000.
5.Theav erage — X
seasonal f i
nanci ng
needis$2, 000, 000.
639  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

LevelofDif
fi
cul
ty:
3
Learni
ngGoal:2
Topic:Aggr
essi
vever
susConser
vat
iveFi
nanci
ngSt
rat
egy
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  640

Tabl
e14.
7
AceBusinessFor
ms
Curr
ent Fixed Tot
al
Month Assets Asset s Assets
January $125,
000 $250, 000 $375,
000
Februar
y 130,
000 250, 000 380,
000
March 135,
000 250, 000 385,
000
Apri
l 150,
000 250, 000 400,
000
May 150,
000 250, 000 400,
000
June 125,
000 250, 000 375,
000
Jul
y 115,
000 250, 000 365,
000
August 120,
000 250, 000 370,
000
September 115,
000 250, 000 370,
000
October 100,
000 250, 000 350,
000
November 110,
000 250, 000 360,
000
December 115,
000 250, 000 365,
000

4. AceBusi nessFormshascompi ledseveralfactor srelat

ivet
oitsfi
nanci
ngmix.Thef
ir
m
pays
8per centonshort-
termf undsand10per centonl ong- t
ermfunds.Thefi
rm’
smonthl
y
current,f
ixedandtotalassetrequi
rement sfort hepr evi
ousyeararesummari
zedinTabl
e
14.7.
Deter mi
ne:
(a)t hemont hl
yaveragepermanentf undsrequi rement
(b)t hemont hl
yaverageseasonal f
undsr equirement
(c)t heannualfi
nancingcosts(aggressivestrategy)
(d)t heannualfi
nancingcosts(conservati
vest rategy )
Answer
s:
(
a)$350,
000
(
b)

Total Permanent Seasonal

Mont
h Assets Requi
rement Requi
remen
t
January $375,000 $350,000 $25,
000
Februar
y 380,000 350,
000 30,
000
March 385,000 350,
000 35,
000
Apri
l 400,000 350,
000 50,
000
May 400,000 350,
000 50,
000
June 375,000 350,
000 25,
000
Jul
y 365,000 350,
000 15,
000
August 370,000 350,
000 20,
000
September 370,000 350,
000 15,
000
October 350,000 350,
000 0
November 360,000 350,
000 10,
000
December 365,000 350,
000 15,
000
641  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

Monthl
y $24,
167
Av
erage
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  642

(
c)

$350,000(0.
10) $35,
000
24,167(0.
08)  1,933
Totalfi
nanci
ngcost $36,
933
(Aggressi
ve
str
ategy)

(
d)Tot
alf
inanci
ngcost(
Conser
vat
ivest
rat
egy
)$400,
000(
0.10)$40,
000
LevelofDif
fi
cul
ty:
4
Learni
ngGoal:2
Topic:Aggr
essi
vever
susConser
vat
iveFi
nanci
ngSt
rat
egy

5. AceBusi nessFormspay s8per centonshor t

-termfundsand10per centonlong-t
erm
funds.Determinei
tsannual f
inancingcostsusi ngt
het r
ade-offstr
ategydescri
bed: Ace
BusinessFormshasseasonal fi
nancingrequirementsrangingfrom zeroto$50,000per
mont h.Basedonthisrange,thefir
m hasdeci dedtofinance$25,000permont hoft he
seasonal f
undswithlong-t
erm debtandt herestoftheseasonal fundswithshort-
term debt
.
Theper manentfundsrequir
ementwi l
lbefinancedwithlong-t
ermf unds.(SeeTable14.7)
Answer
:Tr
ade-
offst
rat
egyannual
financi
ngcost
s:

(
$350,000$25,
000) $37,
500
(
0.10)
(
$5,417)(0.
08)  433
$37,
933
LevelofDif
fi
culty:
4
Learni
ngGoal :
2
Topic:Tr
ade-offFi
nanci
ngSt
rat
egy

6. Studi
oOne,adealeri
ncontempor
aryar
t,hasf
orecast
edi
tsseasonal
financi
ngneedsf
or
thenextsi
xmonthsasfol
lows:

Mont h SeasonalRequir
ement
January $1,
450,000
Februar
y 1,
895,000
March 2,
000,000
Apri
l 1,
575,000
May 1,
342,000
June 1,
562,000

(
a)Thefi
rm pr
oject
sshort
-ter
mfundswil
lcost11per
centandl
ong-
ter
mfundswi
l
lcost13
per
centannuall
y.
(
b)Thefi
rm’spermanentf
undsrequi
rementi
s$500,
000.

Cal
culat
efi
nanci
ngcost
sfort
hef
ir
stsi
xmont
hsusi
ngt
heaggr
essi
veandconser
vat
ive
st
rat
egi
es.
643  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

Answer
:Av er
agemonthl
yseasonal
fundsr
equi
rement
:
$9,
824,
000/
6$1,637,
333

Aggr
essi
vestr
ategy
:
$1,
637,
333(0.
11/2) 
$90,
053
500,
000(0.
13/
2)  32,
500

$122,
553

Conser
vat
ivestrat
egy:
$2,
500,
000(0.13/2)$162,
500
LevelofDif
fi
cul
ty:
4
Learni
ngGoal:2
Topic:Aggr
essi
vever
susConser
vat
iveFi
nanci
ngSt
rat
egy

7. Tim’sSonsCompanyisint
erestedi
nmaki ngsuretheyhav
eenoughmoneytofinancethei
r
assets.Thecompany
’scur
rentasset
sandf ixedasset
sforthemont
hsofJanuarythr
ough
Decemberar egi
veni
nthefoll
owingtabl
e.

Mont
h Current Fi
xed Total
Assets Assets Assets
January $60,000 $70,000 $130,000
Februar
y 58,000 70,000 128,000
March 55,000 70,000 125,000
Apri
l 47,000 70,000 117,000
May 40,000 70,000 110,000
June 41,000 70,000 111,000
Jul
y 40,000 70,000 110,000
August 37,000 70,000 107,000
September 38,000 70,000 108,000
October 33,000 70,000 103,000
November 40,000 70,000 110,000
December 50,000 70,000 120,000

(
a)Fi
ndtheaveragemont hlyseasonalandpermanentf undsrequir
ement .
(
b)Whatisthetotal costoffi
nancingundertheaggressiveandconservativ
est rat
egi
es.
Assumeshor t
-termf undscosts4.5percentandthei nt
erestr
ateforlong-termfundsi
s
12percent
.
(
c)Fi
ndthenetwor kingcapit
alundertheaggressi
veandconser vati
vestrategies.
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  644

Answer
s:

Cur r
ent Fi
xed Tot
al Permanent Seasonal
Mont h Assets Assets Asset
s Requirement Requi
rement
January $60,000 $70,000 $130,
000 $103,000 $27,
000
February 58,000 70,000 128,
000 $103,000 25,
000
March 55,000 70,000 125,
000 $103,000 22,
000
Apri
l 47,000 70,000 117,
000 $103,000 14,
000
May 40,000 70,000 110,
000 $103,000 7,
000
June 41,000 70,000 111,
000 $103,000 8,
000
Jul
y 40,000 70,000 110,
000 $103,000 7,
000
August 37,000 70,000 107,
000 $103,000 4,
000
September 38, 000 70,000 108,
000 $103,000 5,
000
October 33,000 70,000 103,
000 $103,000 0
November 40,000 70,000 110,
000 $103,000 7,
000
December 50,000 70,000 120,
000 $103,000 17,
000
$143,
000

(
a)Mont hl
ypermanentrequir
ement$103, 000
Averageseasonalr
equirement143,000/12$11,
916.
67
(
b)Aggressiv
e:
Totalcosts
11,
916.670. 045103,0000.12$12,
896.
25
Conservati
ve:
Totalcosts103,
0000. 12$15,600

(
c)NetWor ki
ngCapital
:
Aggressiv
eStrat
egy:$33,
000
Conservati
veStr
ategy:
$60,000
LevelofDif
fi
cul
ty:
4
Learni
ngGoal:2
Topic:Aggr
essi
vever
susConser
vat
iveFi
nanci
ngSt
rat
egy
8. Sansatri
pProduct
shastendi
fferenti
temsinit
sfi
nishedgoodsi
nv ent
ory
.Theaver
age
numberofunitshel
dininv
entoryandtheaver
ageunitcostar
eli
stedforeachi
tem.The
fi
rm usesanABCsy st
em ofi
nventorycont
rol
.
Aver
ageNumber AverageCost
I
tem ofUni
tsi
nInvent
ory PerUnit
1 3,
000 $1.50
2 500 10.00
3 4,
000 12.00
4 50 40.00
5 10,
000 5.00
6 340 15.00
7 1,
500 3.00
8 460 30.00
9 2,
500 25.00
10 390 4.10
645  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

(
a)Whichit
emsshoul
dbeconsi
der
edt
obei
ntheAcat
egor
yofanABCsyst
em of
i
nventor
y?
(
b)Whichit
emsshoul
dbeconsi
der
edt
obei
ntheBcat
egor
yofanABCsy
stem of
i
nventor
y?
Answer
s:

Av
er ageCost Av
erageNumber Average
I
tem PerUnit ofUnit
si nInv
ent
ory Investment
1 $1.50 3,000 $4,500
2 10.00 500 5,000
3 12.00 4,000 48,000
4 40.00 50 2,000
5 5.00 10,000 50,000
6 15.00 340 5,100
7 3.00 1,500 4,500
8 30.00 460 13,800
9 25.00 2,500 62,500
10 4.10 390 1,599
Total $196,999

(
a)I
tems3, 5,and9shoul
dbeconsi
deredi
ntheAcategory
.
(
b)I
tem 10clearl
ybel
ongstotheCcat
egor
y.Al
lther
estoftheinv
ent
oryit
ems
haveaboutanequali
nvest
mentandmostli
kel
ybelongint
heBcategory
.
LevelofDi
ff
icult
y:3
Learni
ngGoal:3
Topic:ABCInvent
oryManagementSy
stem

9. Contex,I
nc.uses800unitsofaproductpery earonacont i
nuousbasis.Theproducthas
carr
yingcostsof$50perunitperyearandordercost sof$300perorder.I
ttakes30days
torecei
veashipmentaf t
eranorderisplacedandt hefi
rmrequir
esasaf etyst
ockof5day s
usageininvent
ory.
(a)Calcul
atetheeconomicorderquanti
ty(EOQ) .
(b)Determinethereor
derpoint
.
Answer
s:
(
a)EOQ 98uni
ts
(
b)Reor
derpoi
nt[
30day
s(
800/
360)][
5(
800/
360)
]66.
711.
1177.
81
–78unit
s
LevelofDi
ff
icult
y: 3
Learni
ngGoal:3
Topic:EOQInventoryModel
andI
nvent
oryReor
derPoi
nt(
Equat
ion14.
7andEquat
ion14.
8)
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  646

10. Sharon’
sAppleFarm uses12,
600basketsay earf
orappleshipment.Deter
minethe
opti
mum orderquant
ityofbasketsassumingtheordercost
sperorderis$600anditcost
s
$2tocarryauni
tofbasketininvent
oryperperi
od.
Answer:EOQ 2,750unit
s
LevelofDi
ff
icult
y: 3
Learni
ngGoal:3
Topic:EOQInventoryModel
(Equat
ion14.
7)

11. Shar
onuses35basketseachdayt opackappl
esforshi
ppi
ng.Itt
akes5day storecei
vea
shi
pmentofbasket
safteranorderispl
acedandshewouldl
ikeasaf et
ystockof3daysi
n
i
nventor
y.Atwhatl
evel
ofinventor
yshouldShar
onplaceanorderforbasket
s?
Answer
:Reor
derpoi
nt535335280uni
ts
LevelofDif
fi
culty
:3
Learni
ngGoal :
3
Topic:I
nventor
yReorderPoi
nt(
Equat
ion14.
8)

12. Dataproduct s, I
nc.,uses2,400unit
sofapr oductpery earonacont inuousbasis.The
productcarryingcost sare$60pery earandor deringcost sare$250peror der.I
ttakes20
daystoreceiv eashi pmentaf t
eranor derispl acedandt hefir
mr equi r
esasaf etystockof8
daysofusagei ninventor
y.
(a)Calcul
at et heeconomi corderquantity(roundupt ot henearestwhol eunit).
(b)Calcul
at et het ot
alcostperyeartoor derandcar rythisit
em.
(c)Theirsuppl ierhasnot i
fi
edthecompanyt hatiftheyincreasethei rorderquanti
tyby58
unit
st heywi l
lgivethecompanyadi scount .Calculatethedollardiscountthatthe
companywi llhavetogiveDataproductst or esulti
nanetbenef ittothecompany .
Answer
s:
(
a)EOQ 142units
(
b)Tot
alcost(2,
400/142)(
$250)(142/2)(
$60)$8,485
(
c)Tot
alcostatnewlevel(2,
400/
200)($250)(200/
2)($60)$9,
000

Theyearl
ydiscountwi
llhav
etobeatl east$515(
$9,000–$8,
485)t
omaket
he
deci
sionneutr
al;ov
er$515toresul
tinanetbenefi
ttothecompany.
LevelofDi
ff
icult
y: 4
Learni
ngGoal:3
Topic:EOQInventoryModel
andSaf
etySt
ock(
Equat
ion14.
7)
647  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

13. Nel
l
ie’
sFi
ner
y

CreditScor
ingPol
i
cy
Financialand Pr
edetermi
ned
CreditCharacteri
stics Weight
Creditref
erences 0.
25
Education 0.
05
Homeowner ship 0.
15
I
ncomer ange 0.
30
Paymenthi story 0.
15
Yearsonj ob 0.
10

Fi
nanci aland
Credi
tChar acteri
sti
cs Appl
i
cantA Appl
i
cantB
Credi
trefer ences 90 70
Educati
on 80 95
Homeowner ship 70 50
I
ncomer ange 50 95
Paymenthi story 75 70
Yearsonj ob 80 70

Nelli
e’sFineryusest hecreditscor i
ngtechniquetoeval
uateretai
l appli
cati
ons.The
fi
nanci alandcreditcharacter i
sti
csconsideredandweightsi
ndicat i
ngtheirrelati
ve
i
mpor t
ancei nthecr edi
tdeci si
onar eshownabov e.Thefi
rm’screditstandardsar eto
acceptal lappli
cantswi t
hcr editscoresof85ormor e,t
oextendl i
mi tedcredittoappli
cants
withscor esrangingf r
om 75t o84,andtor ej
ectall
appli
cant
sbel ow75.Thef i
rmis
currentlyprocessingtwoappl i
cants.Thescoresofeachapplicantoneachoft hefi
nanci
al
andcr editcharacteri
sti
csar esummar i
zedabov e.Wouldyourecommendei therofthese
applicantsforcreditextension?
Answer
:ApplicantA’
scredi
tscor
e71.25
Appl
icantB’
scredi
tscor
e75.75
Rej
ectAppli
cantAandacceptAppl
i
cantBonal
i
mit
edbasi
s.
LevelofDi
ffi
cul
ty:
3
Learni
ngGoal:4
Topic:Managi
ngCredi
tSt
andar
ds
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  648

14. KrugGoldCoi n, I
nc.i sconsideri
ngshor t
eningitscreditperiodfr
om 30day sto20day sand
beli
eves,asar esul toft hi
schange,it
sav eragecollecti
onper i
odwi l
ldecreasefrom 36days
to30day s.Baddebtexpensesar eal
soexpect edtodecr easef r
om 1.2percentto0.8
percentofsales.Thef i
rmiscurrentl
ysell
ing300,000uni tsbutbelievesasar esul
tofthe
change,saleswi l
l declineto275,000units.On300, 000uni ts,
salesrevenueis$4,200,
000,
vari
ablecostst otal $3,300,
000,andfixedcostsar e$300, 000.Thefir
m hasar equir
ed
ret
urnonsi milar-
riski nvestmentsof15per cent.Evaluatethisproposedchangeandmake
arecommendat iont ot hefir
m.
Answer
:300,000–275,00025, 000unitsdecli
nei
nsal
es
Pri
ceP4,200,000/300,000$14
Vari
abl
ecostperunitv3, 300,000/
300,
000$11

Reduct
ioni
nprof
itcontri
but
ionfr
om decl
i
neinsal
es
(
300,
000–275, 000unit
s)(
14–11)–$75,
000

Costofmargi
nal
invest
mentinA/
R:
Turnov
erofA/Rwit
hproposedpl
an360/
3012

Av
eragei
nvest
mentwi
thpr
oposedpl
an

Tur
nov
erofA/
Rwi
thpr
esentpl
an360/
3610

Av
eragei
nvest
mentwi
thpr
oposedpl
an

Mar
ginal
inv
est
menti
nA/
R
$77,
917

Reduct
ioni
ncostofmar
ginal
inv
est
menti
nA/
R77,
917(
0.15)$11,
687

Reduct
ioni
nmargi
nalbaddebts:
Baddebtswi
thpr
oposedplan(
0.012)
(4,
200,
000)$50,
400

Baddebt
swi
thpr
esentpl
an
(0.
008)
(275,
000)
(14)$30,
800

Netl
ossf
rom i
mpl
ement
ati
onofpr
oposedpl
an 

$19,
600
Donotr
ecommend. –$43,
713
LevelofDi
ffi
cul
ty:
4
Learni
ngGoal:4
Topic:Managi
ngCredi
tSt
andar
ds
649  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

15. BrunswickAdAgency’
saccount
srecei
vabl
etot
aled$451,
000onJanuar
y30,
2003.An
agingsummaryofrecei
vabl
esatthi
sdatef
oll
ows:

EndofMont h Amount
Januar y
,2003 $250,
000
December ,2002 100,
000
Nov ember,2002 50,
000
October,2002 30,
000
September ,2002 21,
000
before
Total $451,
000

Thefi
rm extends30-daycr
edi
ttermstoal
lit
scredi
tcust
omer
s.
(a)Pr
epareanagi ngschedul
eforBr
unswickAdAgency.
(b)Ev
aluatethefi
rm’scoll
ect
ionper
formance.
Answer
s:
(
a)

Agi
ngSchedule
0–30day
s 31–60 61–90 91–120 121and
Abov e
$250,
000 100,000 50,
000 30,000 21,000
55% 22% 11% 7% 5%

(
b)45percentoft
hefi
rm’srecei
vabl
esareover
due(
great
erthan30day
s).
I
mpr ovementi
sneededincoll
ect
ionsorsomeot
herareaofcr
edi
tpoli
cy
(cr
editst
andar
dsorcredi
tter
ms).
LevelofDiff
icul
ty:
3
Learni
ngGoal :5
Topic:AccountsRecei
vabl
eAgi
ngSchedul
e

16. Landr
um Dist
ri
buti
ng,I
nc.hascompl et
edananalysi
sofcheck-cl
eari
ngtimesoff
ivekey
suppl
ier
s.Onaweeklybasis,
thefir
m hasa$50,000checkdisbursedtoeachoft
hese
suppl
ier
s,t
otal
ing$250,
000.Inexaminingt
hecheck-cl
ear
ingti
mesofeachsupplier
,the
fi
rmreveal
ed:

NumberofBusi
ness
Days Suppl
i
er
f
orChecktoCl
ear
3 1
5 2
6 3
7 4
8 5

Giv
enthi
sinf
ormati
on,
whatrecommendat
ionwoul
dyougi
vet
hef
ir
m wi
thr
espectt
o
payi
ngit
ssuppl
ier
sweekl
y?Explai
n.
 Chapt
er14 Wor
kingCapi
tal
andCur
rentAsset
sManagement
  650

Answer
:
Deposi
t: $50,
000onday3t
ocov
erSuppl
i
er
1
$50,
000onday5t
ocov
erSuppl
i
er
2
$50,
000onday6t
ocov
erSuppl
i
er
3
$50,
000onday7t
ocov
erSuppl
i
er
4
$50,
000onday8t
ocov
erSuppl
i
er
5

Thefinancial
managershoul
dmoni
torcl
ear
ingsbycal
l
ingt
hebankatt
hest
artof
thebusinessday
.
LevelofDi
ffi
cul
ty:
3
Learni
ngGoal:6
Topic:Managi
ngtheFl
oat

17. Don’sSonsCompanyhasbeenof fer

edbyi t
sbanktomanagei tscashatacostof$35, 000
peryear.Undertheproposedcashmanagement,thefir
m canreducethecashr equi
redon
handby$180, 000.Si
ncethebankisalsodoingalotofrecor
dkeeping,t
hef i
rm’s
administr
ati
vecostwoulddecreaseby$2,000permonth.Whatr ecommendat i
onwould
yougivethefirm wi
threspectt
otheproposedcashmanagementassumi ngthefir
m’s
opport
unitycostis12percent?
Answer
s:
Addit
ionalbenefi
tfr
om r educedr
equir
edcash
$180,
0000.12 $21,
600
Reducti
oninadmi nistr
ativ
ecosts$2,00012 $24,
000
 Tot alBenefi
t $45,
600
Less:Cost(Bank’sfee) $35,
000
 Addi t
ionalbenefi
t $10,
600

Sincebenefi
ts(
$45,
600)aregr
eatert
hancost
s($35,
000)
,thef
ir
m shoul
daccept
theproposedcashmanagement.
LevelofDi
ffi
cult
y:3
Learni
ngGoal:6
Topic:Out
sourci
ngCashManagementAct
ivi
ti
es
651  Gi
t  Pr
man • inci
plesofFi
nance,
Elev
ent
hEdi
ti
on

18. Matcheachmar ketablesecur i

t ywithitsdescript
ion.
(a)Eurodol lardeposi t
(b)Banker ’saccept ance
(c)Feder al agencyi ssue
(d)Commer cialpaper
(e)Repur chaseagr eement
(f)Treasur ybi l
l
(g)Moneymar ketmut ual f
und
(h)Negot iabl ecer tifi
cateofdeposi t
(i
) Treasur ynot e
1. ____ _Ashor tterm, unsecur edpr omissorynoteissuedbyacor porat
ion.
2. ____ _Anobl i
gationoft heU. S.Treasurywithcommonmat ur
itiesof91t o182day s.
3. ____ _Apor t
folioofmar ketablesecur i
ti
es.
4. ____ _Anar r
angementwher ebyabankorsecur it
iesdeal ersellsspecifi
cmar ketable
secur i
tiest oaf irm andagr eest opur chasethem int hefuture.
5. ____ _Anobl i
gationoft heU. S.Treasurywithmut ualmat uri
ti
esofbet weenoneand
sev eny ear s.
6. ____ _Negot iableinst rumentev idencingthedeposi tofacer t
ai nnumberofdol larsina
commer ci albank.
7. ____ _Ani nstrumenti ssuedbyt heFederalNational MortgageAssoci ation.
8. ____ _Fundsdeposi tedi nbanksl ocatedoutsi
det heU. S.anddenomi natedinU.S.
dollars.
9. ____ _Shor tterm credi tarrangementusedbybusi nessest of inancetransacti
onswi th
foreigncount ri
esorf irmswi thunknowncr editcapaci t
ies.
Answer
s:

1.(
d) 2.(f
) 3.
(g)
4.(
e) 5.(i
) 6.
(h)
7.(
c) 8. 9.
(a) ( b)

LevelofDi
ff
icul
ty:
3
Learni
ngGoal:6
Topic:Mar
ketabl
eSecur
it
ies