INTERPRETING PHASE

THEORIES:

1. Why do firms generally choose to finance temporary net operating working capital with short-
term debt?
a. Matching the maturities of assets and liabilities reduces risk.

b. Short-term interest rates have traditionally been more stable than long-term
interest rates.

c. A firm that borrows heavily on a long-term basis is more apt to be unable to

repay the debt than a firm that borrows short term.

d. The yield curve has traditionally been downward sloping.

2. Baden Company had 375,000 of current assets and 150,000 of current liabilities
before borrowing 75,000 from the bank with a 3-month note payable. What effect did the
borrowing transaction have on the amount of Baden Company's working capital?
a. No effect
b. 75,000 increase
c. 150,000 increase
d. 75,000 decrease
3.

b. Management is a user of
financial analysis. Which of
the following comments does
not
c. represent a fair statement as
to the management
perspective?
d. A. Management is always
interested in maximum
profitability.
e. B. Management is interested
in the view of investors.
f. C. Management is interested
in the financial structure of the
entity.
g. D. Management is
interested in the asset structure
of the entity.
h. Management is a user of
financial analysis. Which of
 the following comments does
not
i.represent a fair statement as to
the management perspective?
j. A. Management is always
interested in maximum
profitability.
k. B. Management is interested
in the view of investors.
l.C. Management is interested
in the financial structure of the
entity.
m.D. Management is
interested in the asset structure
of the entity