finance exam 2 conceptuals

examples of credit-related marginal costs are all of the following excpet

-advertising costs associated with promoting the company's credit policy -opportunity costs associated with supporting higher level of receivables -labor costs associated with checking new credit accounts and collecting receivables -bad-debt expenses

in determining the creditworthiness of a customer from financial statements, the statements can indicate all of the following except -financial strength -ability to repay credit obligations -length of time needed to repay on credit -proposed budgetary expenses for the near future

-lenght of time needed to repay on credit

which factors affects the firm's level of investment in working capital

-the length of the firm's operating cycle -the firm's sales level -the firm's inventory and credit policies

the cash management function is concerned with determining

-the optimal size of a firm's liquid asset balance -the appropriate types and amounts of short-term investments the firm should make -the most efficient methods of controlling the collection and disbursement of cash

if a firm shows a profit on the quarterly income statement, then any of these may be correct:

-there will be a need for additional financing -the firm may need additional financing -the firm will increase its cash balance

which of the following methods is(are) used to transfer surplus funds from local (collection) bank accounts to concentration (disbursement) bank accounts?

-wire transfers -electronic depository transfer checks -(mail) depository transfer checks

which of the following statements concerning "zero balance" system is (are) correct?

-zero balance system helps utilize disbursement float more efficiently -exactly enough funds are transferred into the zero balance accounts each day to cover the checks that have cleared -the function of the concentration account is to receive all deposits coming into the zero balance system

In considering factoring accounts receivable, which of the following statements is/are correct? I. Maturity factoring occurs when the firm receives payment at the normal collection or due date of the factored accounts II. Advance factoring occurs when the firm receives payment in prior to the normal collection or due date of the factored accounts

Both I and II

the most widely known credit-reporting organization is

Dun & Bradstreet Credit Services

the most widely known credit reporting organization is

Dun and Bradstreet

which of the following types of marketable securities is considered to have the lowest default risk

US treasury issues

an anticipated need for short-term borrowed funds is best shown in

a cash budget

all of the following would be viable securities to purchase with temporary excess cash except

a recently issued 30 year Baa corporate bond

increasing collection expenditures is likely to result in

a shorter average collection period and reduced bad-debt losses

all other things being equal, the application of a seasonal dating to the terms of credit offered by the firm would be expected to generate additional sales for each firm except -a christmas novelty manufacturer -an agricultural implements manufacturer -a wholesale frozen food supplier -a swimsuit manufacturer

a wholesale frozen food manufacturer

a firm's working capital position is important from an internal and external standpoint. Which of the following apply:

a working capital position determines its level of common stock sales

liquid asset balances include all of the following except

accounts receivables

____ are useful in monitoring the status and composition of a firm's accounts receivable

aging of accounts schedule

the firm's cash conversion period (measured in days) is equal to its accounts receivables divided by its ______

annual credit sales/365

The ____ measures the promptness with which customers repay their credit obligations

average collection period

the proportion of the total receivables volume a company never collects is the

bad-debt loss ratio

________ are short-term debt instruments issued as part of a commercial transaction, with payment guaranteed by a commercial bank

bankers' acceptance

accounts receivable consists of the credit sales of the business. it can rake the form of which of the following? I. Trade credit II. Consumer credit

both I and II

cash discounts are offered for which of the following reasons? I. speed up collection of accounts receivable II. Reduce a company's level of receivables investment and associated costs

both I and II

efficient current assets management refers to the firm's ability to economize on which of the following? I. Inventory II. Marketable securities

both I and II

maximizing shareholder wealth by investing in accounts receivables is considered when: I. Marginal costs are exceeded by marginal revenue II. The cost of the funds invested are exceeded by expected marginal returns

both I and II

the _____ shows the time interval over which additional non-spontaneous sources of working capital financing must be obtained to carry out the firm's activities

cash conversion cycle

______ are processed through the Automated Clearing House (ACH) System

check-like electronic images

the primary components or sources of float include all of the following except

collection float

____ consists of short-term unsecured promissory notes issued by large, well-known corporations and finance companies

commercial paper

which of the following types of marketable securities has a relatively weak secondary market

commercial paper

which of the following is(are) not related to the extension of credit to customers

compensating balances and quantity discounts

traditional discussion of guidelines for examining credit worthiness include the "five Cs of credit." Each of the following is one of the five Cs except -capacity -cooperation -character -conditions

cooperation

in examining the term structures of interest rates, the interest rates of _____ have exceeded short-term rates

corporate bonds

the firm's inventory conversion period (measured in days) is equal to its average inventory divided by its _________

cost of sales/365

potential losses can occur in the credit evaluation process when

credit is denied to a credit-worthy customer and the credit decision is delayed too long

_____ are the criteria the firm uses to screen credit applicants in order to determine which of its customers should be offered credit and how much

credit standards

the credit policy variables that a firm can use to exercise control over its level of receivables investment include

credit standards, credit terms, and collection effort

net working capital is defined as

current assets minus current liabilities

the effect of a change in a firm's credit terms from "net 20" to "2/10, net 30" on its customer's balance sheet is likely to be

decreased accounts payable

the effect of a change in a firm's credit terms from "net 20" to "2/10, net 30" on its own balance sheet is likely to be

decreased accounts receivable

the likelihood that a customer will fail to repay credit extended toit is referred to

default risk

seasonal datings are offered to specific retailers. These retailers

do not have the ability to finance a buildup of inventory in advance of the peak selling period

______, which are similar to other checks except they are not payable on demand, primarily to provide for centralized control over payments authorized in field offices

drafts

all of the following are methods used in expediting the collection of cash EXCEPT

drafts

the objective of offering seasonal datings to customers is to

encourage customers to place their orders prior to the peak selling period

in addition to providing their commercial customers with lines of credit and/or term loans, banks provide all of the following tangible services except

establishment of credit terms

when the level of working capital is increased, all of the following are expected to occur except -expected profitability decreases -expected profitability increases -risk decreases -none of the above

expected profitability increases

which of the following working capital financing policies subjects the firm to the greatest risk

financing permanent current assets with short-term debt

Working capital policy involves day-to-day decisions that determine all of the following except -firm's level of long-term assets -proportions of short-term and long-term debt used to finance assets -level of each type of current assets -specific sources and mix of short-term liabilities the firm should employ

firm's level of long term assets

the difference between the firm's checking account balance shown on the books of the bank and the account balance shown on its own books is known as

float

the ____ assets are those that are affected by the seasonal or cyclical nature of company sales

fluctuating current

the primary reason(s) why firms hold liquid asset balances is (are)

for transaction and precautionary purposes

the costs of a lockbox collection systems include

forgone returns on the required compensating balances and service fees charges by the bank

all of the following are reliable sources of the creditworthiness of a customer EXCEPT -credit reporting organizations -company's experience -banks -general credit application

general credit application

the size and nature of a firm's investment in current assets is a function of a number of different factors including all of the following except: -how efficient the firm manages its fixed assets -the length of the operating cycle -the sales level -credit policies

how efficient the firm manages its fixed assets

for the firm with a seasonal sales pattern, offering seasonal datings to its customers is likely to result in

increased sales

_____ serves as a buffer between the various phases in the procurement-production-sales cycle of a manufacturing firm

inventories

the length of the operating cycle is equal to the length of the

inventory conversion period PLUS receivables conversion period

A firm's operating cycle is equal to its _______

inventory conversion period plus receivables conversion period

a firm's working capital position is important since

it is a measure of risk

the rate of return on fixed assets is normally assumed to be ______ the rate of return on current assets (especially cash and marketable securities)

large

under a conservative approach to working capital management, a firm tends to hold a relatively ____ proportion of its total assets in the form of current assets

large

all other things being equal, a policy of financing its assets with a relatively _____ proportion of short-term debt will tend to result in ______ expected after-tax earnings for the firm

large, higher

all other things being equal, a policy of financing its assets with a relatively ______ proportion of short-term debt will tend to ____ the variability (or risk) of the after-tax earnings of the firm

large, increase

many ______ contain provisions requiring firms to maintain a minimum net working capital provision

loan agreements with commercial banks AND bond indentures

a numerical credit scoring system may rate all of the following except -D & B credit rating -location of the business -financial characteristics of the applicant -current ratio of the applicant

location of the business

with the matching approach to meeting the financing needs of the firm, fixed and permanent current assets are financed with

long-term debt and equity funds

in general, the ____ a firm's production cycle, the ____ its work-in-process inventory

longer; larger

all of the following are possible solutions to a large bad-debt loss ratio EXCEPT -loosening credit -offering cash discounts for prompt payment -seasonal datings -determine creditworthiness of customers

loosening credit

the "shortage" costs associated with inadequate liquid asset balances include all of the following except

lost sales

lenders normally feel that the relative risk associated with short-term debt is _____ the risk associated with long-term debt

lower than

if a firm uses only short-term debt to finance the fluctuating level of current assets, the firm is said to be using the _____ approach to asset financing

matching

sources of debt financing are classified according to their

maturities

the optimal level of working capital investment is the level that is expected to

maximize shareholder wealth

the primary goal of accounts receivable management should be

maximizing shareholder wealth

which of the following types of marketable securities is most suitable for a smaller firm with only a few thousand dollars to invest at any given time

money market mutual funds

lengthening the credit period is likely to result in all of the following except -higher sales -more cash sales -larger investment in receivables -longer average collection period

more cash sales

When pledging accounts receivables, which of the following statements is/are correct? I. Pledging requires permission of the SEC II. In pledging accounts receivables, the firm loses title to the receivables and they are no longer listed on the balance sheet

neither I or II are correct

the_____ is the optimal working capital investment and financing policy -aggressive policy -moderate policy -conservative policy -none of the above

none of the above

which of the following assets (if any) are not part of a firm's working capital investment? -current -permanent current -fluctuating current -none of the above

none of the above

the average collection period measures the

numbers of days between when a typical credit sale is made and when the firm receives the payment

factoring accounts receivable is done

on a non-recourse basis

when a company measures its marginal costs and marginal returns it is developing

optimal credit extension policy

computerized financial planning models may be classified as any of the following except -deterministic -optimistic -probabilistic -none of the above

optimistic

all of the following are assumptions of the basic EOQ model except -annual demand known with certainty -ordering costs fluctuate --demand is uniform throughout the year -orders are filled instantaneously

ordering costs fluctuate

a firm's cash conversion cycle is equal to its operating cycle minus its

payables deferral period

the length of the operating cycle for a firm is equal to the length of the

payables deferral period PLUS cash conversion cycle

of the accounts listed, the account(s) that is (are) NOT part of a firm's working capital is

plant and equipment

the "shortage" costs associated with inadequate liquid asset balances include

possible financial insolvency

Relaxing (i.e., lowering) the firm's credit standards is likely to result in

possible higher pre-tax profits

inventory related costs are all of the following except -ordering costs -product advertising costs -carrying costs -stockout costs

product advertising costs

when an order is placed for an item that is manufactured internally within a company, ordering costs consist primarily of ________

production set-up costs

basically the overall working capital policy decision involves a _____ of alternative policies

profit-risk tradeoff

the operating cycle begins with the ______ and ends with the ______

purchases of resources, receipt of cash

which of the following is not a cost related to the extension of credit to customers? -bad-debt losses -cash discounts -quantity discounts -collections costs

quantity discounts

safety stock is needed to absorb

random fluctuation in sales

the primary objective of offering a cash discount is to

reduce the firm's level of receivables investment

the aggressive approach to the financing of a firm's current assets uses a _____ proportion of short-term debt and a ____ proportion of long-term debt

relatively high, relatively low

the _______ is the inventory level at which an order should be placed for replenishment of an item

reorder point

the cost of funds invested in inventories is measured by the

required rate of return

a firm's net working capital position is a widely used measure of its ______

risk

to minimize the possibility of running out of inventory, most companies add _____ to their inventory

safety stock

all of the following are components of carrying costs except -insurance -storage costs -handling costs -set-up costs

set-up costs

commercial paper is

short-term with maturities that do not exceed nine months

the firm's optimal liquid asset balance occurs where the sum of the opportunity holding and _____ costs is minimized

shortage

all other things being equal, a policy of holding a relatively _____ proportion of the firm's total assets in the form of current assets will tend to result in a ______ expected profitability or rate of return on the total assets of the firm

small, higher

all other things being equal, a policy of holding a relatively ______ proportion of the firm's total assets in the form of current assets will tend to result in a _____ risk of the firm encountering financial difficulties

small, higher

in general the ______ the number of checks being handled and the _____ the dollar amount of each check, the greater the benefit of a lockbox arrangement to the firm

smaller; greater

the objective of cash collection and disbursement policies is to

speed up collections and slow down disbursements

the size of a firm's investment in current assets is a function of al of the following factors except -sales level -inventory policies -credit policies -stockholders equity

stockholders equity

the relationship between the maturity of debt and its associated cost (interest rate) is referred to as

term structure of interest rates

the relationship between the maturity of debt and its associated cost (interest rate) is referred to as the

term structure of interest rates

Capacity, which is one of the traditional "five C's" of credit analysis, refer to

the ability of an applicant to meet its financial obligations

which of the following factors does not directly affect the firm's level of investment in working capital -the firm's inventory and credit policies -the age of the firm's plant and equipment -the firm's sales level -the length of the firm's operating cycle

the age of the firm's plant and equipment

net working capital represents

the amount of current assets financed by noncurrent sources of funds

possible sources of relevant information about a credit applicant include

the applicant's financial statements and credit reporting agencies

when factoring accounts receivables, the factor is the

the financial institution that buys the accounts receivable

the optimal amount of the firm's liquid asset balance to be invested in marketable securities is a function of

the interest earned over the expected holding period and the transaction cost involved in buying and selling the securities

the primary reason(s) that firms do not hold long-term US treasury securities in their marketable securities portfolios is because

the interest-rate risk associated with these securities is too high

the reorder point is

the lead time multiplied by the daily usage plus safety stock

which of the following statements concerning auction rate money market preferred stocks is (are) true?

the price of the stock stays near par

fluctuating current assets are those that are affected by

the seasonal nature of the company

all of the following are cash management strategies to expedite collection except

the use of drafts instead of checks

Character, which is one of the traditional "five C's" of credit analysis, refers to

the willingness of applicants to meet its financial obligations

negotiated short-term credit sources are all of the following except -commercial paper -inventory loans -trade credit -bank credit

trade credit

which of the following types of marketable securities has the lowest yields

treasury bills

borrowers (ex business firms) feel that there is more risk associated with short-term debt (as compared with long-term debt) because of the

uncertainty arising from interest rate fluctuation AND risk of being unable to refund the debt

historically, the yield curve has generally been _____, which indicates that long-term interest rates usually have been ____ short-term interest rates

upward sloping, higher than

which of the following statements concerning drafts is correct

when a draft is transmitted to the firm's bank for collection, the bank must present the draft to the firm for acceptance before payment is made

the fastest method for moving funds between banks is

wire transfers

the types of inventories that manufacturing firms generally hold include all of the following except: -raw materials -working stock -finished goods -work-in-process

working stock

which of the following criteria is generally least important in selecting marketable for inclusion in the firm's portfolio

yield