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