HB 311 Ch 16 Quiz

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1. The aggressive approach to the financing of a firm's b 6. An effective program of working capital management b
current assets uses a ____ proportion of short-term debt requires that:
and a ____ proportion of long-term debt. a. the firm run with the absolute minimum in each
a. low, high current asset account.
b. relatively high, relatively low b. a series of cost/benefit tradeoffs be considered
c. high interest, low interest because running a business is easier with more
d. None of the above working capital than with less, but holding working
capital costs money.
2. An aggressive working capital policy would include: c
c. large inventories be maintained to adequately
a. using short term financing to finance only the peak
service customers.
temporary working capital.
d. credit can be easily granted to customers to
b. using short term financing to finance all temporary
encourage higher sales.
working capital.
c. using short term financing to finance all temporary 7. Net working capital is defined as: a
and some permanent working capital. a. current assets minus current liabilities.
d. both a. and b. above describe aggressive working b. working capital minus short-term debt.
capital policies. c. current assets plus current liabilities.
e. All of the above describe aggressive working capital d. All of the above
policies.
8. The objectives of cash management include to: d
3. The cash conversion cycle measures the time: c a. earn a return.
a. between the creation of receivables and their b. hold cash to a minimum consistent with efficient
collection. operation.
b. it takes for inventory to be turned into product and c. ensure adequate liquidity.
sold. d. Both b & c.
c. between payment for inventory and collection of e. All of the above
cash for its subsequent sale as product.
9. A revolving credit agreement: d
d. for a check to clear the banking system.
a. is similar to a line of credit except that it is binding on
4. Credit extended in connection with goods purchased for c the bank.
resale is called: b. does not guarantee the availability of funds.
a. commercial paper. c. requires the lender to pay a commitment fee.
b. bank loans. d. Both a& c.
c. trade credit or payables. e. All of the above
d. commercial credit.
10. A revolving-credit agreement between a firm and its d
5. Credit terms of 1/10, net 30 mean: d bankers:
a. purchases made between the first and tenth day of a. is a contractual agreement between the firm and its
the month must be paid by month end. bank.
b. if the vendor is not paid within 30 days, 1% interest is b. does not need to be "cleaned up" during the term of
charged for every 10 days thereafter. the arrangement.
c. the vendor will grant a discount of 10% for payment c. involves payment of a commitment fee to the bank.
within 30 days. d. All of the above
d. the vendor will grant a 1% discount if paid within 10
11. Seasonal peaks in business are supported by: c
days; otherwise the bill is due in full
a. permanent working capital.
within 30 days.
b. long-term financing.
c. temporary working capital.
d. discretionary financing.
12. Seasonal working capital needs are best financed by: a
a. short-term loans.
b. sales of long-term debt.
c. forgoing dividend payments.
d. selling inventories.
13. Short-term loans are generally used to: c 20. Which of the following is a component of a firm's gross a
a. finance permanent additions to working capital. working capital?
b. finance additions to fixed assets. a. Cash
c. finance seasonal working-capital requirements. b. Accounts payable
d. retire equity, thus changing a firm's capital structure. c. Fixed assets
d. a and b
14. Temporary working capital is: c
e. All of the above
a. the seasonal borrowing capacity of a firm.
b. incremental working capital necessary to finance 21. Which of the following is a source of short-term e
slower than expected collections of customer financing?
receivables. a. Accounts Payable
c. incremental working capital necessary to support b. Accruals
peak activity in seasonal businesses. c. Commercial Paper
d. additional payroll cost and expenses incurred during d. Both a & c
seasonal peaks. e. All of the above
15. The term "net working capital" means: d 22. Which of the following is not a source of short-term c
a. the firm's gross working capital minus spontaneous financing?
financing. a. Spontaneous financing from payables and accruals
b. the firm's cash, accounts receivable, and inventory b. Unsecured bank loans
minus short-term payables and accruals. c. Five year bonds with a call feature exercisable within
c. the firm's current assets minus its current liabilities. one year
d. All of the above d. Commercial paper
16. Which of the following account changes would reduce a d 23. Which of the following is not associated with short- d
firm's net working capital if all other account term debt?
balances are held constant? a. Easily available to most companies.
a. Increase in inventories b. It is usually the lowest cost financing.
b. Increase in accounts payable c. It is a flexible form of financing.
c. Decrease in accounts receivable d. It is usually used to finance property, plant,
d. b and c equipment.
e. None of the above
24. Which of the following represents spontaneous c
17. Which of the following assets (if any) are not part of a d financing?
firm's working capital investment? a. The origination of a 9-month bank loan
a. Cash b. The issuance of a note payable with a maturity of
b. Accounts receivable less than one year
c. Inventory c. An increase in accounts payable resulting from the
d. None of the above purchase of inventories on 30-day credit
d. a and c
18. Which of the following bank loans/agreements requires c
e. All of the above
a fee even if no money is borrowed?
a. Promissory note 25. Which of the following transactions will cause net b
b. Line of credit working capital to decrease?
c. Revolving credit agreement a. Inventory is purchased on credit.
d. Compensating balance b. The firm declares and pays a cash dividend.
e. None of the above has fees if no money is borrowed. c. An account payable is paid with cash.
d. Inventory is sold for cash.
19. Which of the following creates spontaneous financing? e
e. None of the above would cause net working capital
a. Accounts payable
to decrease.
b. Accrual liabilities
c. Trade credit 26. ____ working capital arises from the seasonal or cyclical c
d. Both a. and b. create spontaneous financing. nature of a company's sales.
e. All of the above create spontaneous financing. a. Current
b. Permanent current
c. Temporary
d. None of the above
27. Working capital policy involves a tradeoff between easier operation and ____. d
a. more working capital
b. spontaneous liabilities
c. temporary financing
d. the cost of carrying short-term assets