Finance Final 15

the "red-line method" refers to A method of controlling inventories by drawing a red line on the inside of a bin. A method of controlling receivables by drawing a red line on invoices of companies that are expected to pay late. The use, in Dun & Bradstreet's reports, of a red line to show the maximum amount of credit which should be extended to a given customer; companies using this limit when they screen customers' orders are said to be using the "red-line method." Restrictions imposed by companies which insure credit risks. The policy of drawing a red line around certain neighborhoods on a map and then refusing to sell on credit to people who live within those areas.

A method of controlling inventories by drawing a red line on the inside of a bin.

A firm's target cash balance should be set as the smaller of (1) its transaction balance plus a precautionary (safety stock) balance or (2) its required compensating balance.

F

If a firm has a large percentage of accounts over 30 days old, it is a sign that the firm's receivables management needs to be reviewed and improved.

F

Net working capital is defined as current assets divided by current liabilities.

F

Net working capital may be defined as current assets minus current liabilities. This also defines the current ratio.

F

Offering trade credit discounts is costly to a firm and as a result, firms that offer trade discounts are usually those that are performing poorly and need cash quickly.

F

Target cash balances are generally not affected by compensating balance requirements except during periods of high interest rates and tight money

F

The primary motivation behind out-sourcing is to provide the firm with an alternative source of supply in the event that its primary supplier is unable to meet the firm's raw material or component needs.

F

The primary purpose of compensating balances required of borrowers is to compensate the bank in the event the borrower defaults on the loan.

F

Other things held constant, which of the following will cause an increase in working capital? Merchandise is sold at a profit, but the sale is on credit. Cash is used to buy marketable securities. A cash dividend is declared and paid. Long-term bonds are retired with the proceeds of a preferred stock issue. Missing inventory is written off against retained earnings.

Merchandise is sold at a profit, but the sale is on credit.

Which of the following is typically part of the cash budget? Payments lag. Payment for plant construction. Cumulative cash. All of the above. Only answers a and c above.

Payments Lag

A just-in-time system of inventory control requires that manufacturers coordinate production with suppliers so that raw materials or components arrive just as they are needed in the production process. The main objective of such a system is to reduce carrying costs.

T

Determination of a firm's investment in current assets and how that investment is financed are elements of working capital policy.

T

Firms hold cash balances in order to complete transactions that are necessary in business operations and as compensation to banks for providing loans and services.

T

If you receive some goods on April 1 with the following terms; 3/20, net 30, June 1 dating, it means that you will receive a 3 percent discount if the bill is paid on or before June 20 and that the full amount must be paid 30 days after receipt of the goods.

T

Shorter-term cash budgets, in general, are used for actual cash control while longer-term budgets are used primarily for planning purposes.

T

The aging schedule is a commonly used method of monitoring receivables.

T

The central goal of inventory management is to provide sufficient incentives to ensure that the firm never suffers a stock-out (i.e., runs out of an inventory item).

T

The principal goal of most inventory management systems is to balance the costs of ordering, shipping, and receiving goods with the cost of carrying those goods, while simultaneously meeting the firm's policy with respect to avoiding running short of stock and disrupting production schedules.

T

The quick ratio, measured by current assets less inventories divided by current liabilities, is also referred to as an "acid test" ratio and provides a measure of a company's ability to meet current obligations.

T

Two motives for a firm to hold cash are transactions and precautions.

T