MCQ Working Capital

d. The average collection period has increased

A change in a seller's credit policy has caused the following: Sales decreased Discounts taken decreased Investment in accounts receivable increased The number of doubtful accounts increased Based on this information, we can say that a. The company increased the rate of discount offered b. Net profit has decreased c. Gross profit has increased d. The average collection period has increased

c. A draft

A working capital technique that increases the payable float and therefore delays the outflow of cash is a. Electronic data interchange (EDI) b. Automatic fund transfer (AFT) c. A draft d. Baumol cash management model

c. Invest cash for a return while retaining sufficient liquidity to satisfy future needs

An objective of cash management is to a. Maximize the cash balance to avoid the risk of illiquidity b. Minimize the cash balance to maximize the return from the idle cash c. Invest cash for a return while retaining sufficient liquidity to satisfy future needs d. Reserve as much cash as possible for potential investment opportunities

b. Compensates the bank for services rendered by providing it with deposits of funds

Banks sometimes require its borrowers to maintain a certain percentage of the face amount of a loan which the bank requires its borrowers to keep in a non-interest bearing current account. This is called compensating balance, which a. Decreases the effective rate of interest paid by the borrower b. Compensates the bank for services rendered by providing it with deposits of funds c. Represents repaid interest on a loan d. Cannot be used for disbursements by both the borrower and the bank

a. 6,000

Belle Company's average monthly cash receipts is P1,500,000. Its average collection period is ten (10) days. A collection agency has offered to be the company's collector and shorten collection period to four (4) days for a monthly fee of P1,500. The company can invest its excess funds in money market placement at a rate of 8%. If the collection agency's offer is accepted, Belle Company's net annual benefit (loss) is a. P6,000 b. (6,000) c. P270,000 d. P500

a. Is, in effect, financing more than Company B's inventory needs

Company A grants credit terms of 30 days to Company B. The operating cycle of Company B is 20 days. In this case, Company A a. Is, in effect, financing more than Company B's inventory needs b. Is, in effect, financing less than Company B's inventory needs c. Will have a lower level of accounts receivable than those companies granting shorter credit terms d. Can be sure that Company B will be able to convert its inventories into cash before payment is due

a. A conservative working capital policy

Financing inventory build-up with long-term debt is an example of a. A conservative working capital policy, b. Matching policy c. An aggressive working capital policy d. Hedging policy

d. Projected net income and depreciations expenses

For a manufacturing firm, the most direct way of preparing a cash budget requires incorporation of the following, except a. Sales projections and credit terms b. Collection percentages and other cash receipt c. Estimated purchases and payment terms and other cash disbursement d. Projected net income and depreciations expenses

c. 55 days

If the average age of accounts payable is 15 days, the average age of accounts receivables is 60 days, and the average age of inventory is 10 days, the number of days in the operating cash conversion cycle is a. 70 days b. 85 days c. 55 days d. 60 days

b. Operations are operated with too much working capital.

In a conservative or relaxed working capital financing policy, a. Operations are conducted on a minimum amount of working capital. b. Operations are operated with too much working capital. c. Short-term liabilities are used to finance not only temporary current assets, but also part or all of the payment current assets requirements. d. The company is exposed to risk of illiquidity because of low working capital position.

a. Float

In cash management, the difference between the bank balance for a firm's account and the cash balance that the firm shows on its own books is called a. Float b. Bank charges c. Interest income d. Reconciling item

c. P138,000

Onor Corporation had income before tax of P100,000 for the year. Included in this amount was depreciation expense of P20,000, bond discount amortization of P18,000, and the amount paid for salaries and wages of P30,000. The estimated cash flow for the year is a. P100,000 b. P 62,000 c. P138,000 d. P120,000

c. Matching maturities of debt with specific financing needs

The hedging approach to financing involves a. The use of long-term debt to finance current assets b. The use of short-term debt to finance non-current assets c. Matching maturities of debt with specific financing needs d. Issuance of common stocks to raise funds or working capital requirements

d. Cash conversion cycle

The length of time it takes for the initial cash outflows for goods and services to be realized as cash inflows from sales is called a. Product life cycle b. Vicious cycle c. Manufacturing cycle d. Cash conversion cycle

d. Achieve a balance between risk and return.

The primary objective of working capital management is to. a. Maximize the company's total current assets. b. Minimize the company's total current liabilities. c. Balance the amount of current assets and current liabilities. d. Achieve a balance between risk and return.

a. Profitability varies directly with liquidity

Which of the following is incorrect? a. Profitability varies directly with liquidity b. The greater the risk, the greater is the potential for larger return c. Long-term financing has less liquidity risk than short-term financing, but has a higher explicit cost, hence lower return d. More current assets lead to greater liquidity, but yield lower returns

d. Net working capital is the difference between current assets and current liabilities.

Which of the following statements is correct? a. The stockholder's equity is a major component of working capital. b. Net working capital is the difference between quick assets and current liabilities. c. Working capital is a measure of long-term solvency. d. Net working capital is the difference between current assets and current liabilities.

c. A conservative working capital policy is characterized by higher current ratio and acid-test ratio.

Which of the following statements is true? a. Short-term debt is usually more expensive than long-term debt b. Liquid assets do not ordinarily earn higher returns relative to long-term assets, so holding the former will maximize the return on total assets c. A conservative working capital policy is characterized by higher current ratio and acid-test ratio. d. Determining the appropriate level of working capital for a firm requires changing the firm's capital structure and dividend policy