Credit policy has an impact on working capital since it has the potential to influence sales levels and the speed with which cash is collected.. Ski Lifts’ working capital financing poli
Trang 1WORKING CAPITAL POLICY
Which of the following statements is incorrect about working capital policy? (M)
a A company may hold a relatively large amount of cash if it anticipates uncertain sales
levels in the coming year
b Credit policy has an impact on working capital since it has the potential to influence sales
levels and the speed with which cash is collected
c The cash budget is useful in determining future financing needs
d Holding minimal levels of inventory can reduce inventory carrying costs and cannot lead to
any adverse effects on profitability
e Managing working capital levels is important to the financial staff since it influences
financing decisions and overall profitability of the firm Brigham
Conservative Working Capital Policy
* Compared to other firms in the industry, a company that maintains a conservative working
capital policy will tend to have a (D)
a Greater percentage of short-term financing
b Greater risk of needing to sell current assets to repay debt
c Higher ratio of current assets to fixed assets
1 As a company becomes more conservative with respect to working capital policy, it would tend
to have a(n)
a Increase in the ratio of current liabilities to noncurrent liabilities
b Decrease in the operating cycle
c Decrease in the quick ratio
d Increase in the ratio of current assets to noncurrent assets CMA 1290 1-23
2 As a company becomes more conservative in its working capital policy, it would tend to have
a(n)
A Decrease in its acid-test ratio
B Increase in the ratio of current liabilities to noncurrent liabilities
C Increase in the ratio of current assets to units of output
D Increase in funds invested in common stock and a decrease in funds invested in
Ski Lifts Inc is a highly seasonal business The following summary balance sheet
provides data for peak and off-peak seasons (in thousands of dollars):
From this data we may conclude that (M)
a Ski Lifts has a working capital financing policy of exactly matching asset and liabilitymaturities
b Ski Lifts’ working capital financing policy is relatively aggressive; that is, the companyfinances some of its permanent assets with short-term discretionary debt
c Ski Lifts follows a relatively conservative approach to working capital financing; that is,some of its short-term needs are met by permanent capital
d Without income statement data, we cannot determine the aggressiveness or conservatism
of the company’s working capital financing policy Brigham
Aggressive Working Capital Policy
* A firm following an aggressive working capital strategy would (M)
a Hold substantial amount of fixed assets
b Minimize the amount of short-term borrowing
c Finance fluctuating assets with long-term financing
d Minimize the amount of funds held in very liquid assets RPCPA 1091
3 The working capital financing policy that subjects the firm to the greatest risk of being unable tomeet the firm’s maturing obligations is the policy that finances (E)
a Fluctuating current assets with long-term debt
b Permanent current assets with long-term debt
c Permanent current assets with short-term debt
d Fluctuating current assets with short-term debt CMA 1295 1-2
Trang 24 Since Marsh, Inc is experiencing a sharp increase in sales activity and a steady increase in
production, the management of Marsh has adopted an aggressive working capital policy
Therefore, the company's current level of net working capital
A Would most likely be the same as in any other type of business condition as business
cycles tend to balance out over time
B Would most likely be lower than under other business conditions in order that the
company can maximize profits while minimizing working capital investment
C Would most likely be higher than under other business conditions so that there will be
sufficient funds to replenish assets
D Would most likely be higher than under other business conditions as the company's profits
Aggressive vs Conservative Working Capital Policy
5 Clay Corporation follows an aggressive financing policy in its working capital management
while Lott Corporation follows a conservative financing policy Which one of the following
statements is correct?
A Clay has a low ratio of term debt to total debt while Lott has a high ratio of
short-term debt to total debt
B Clay has a low current ratio while Lott has a high current ratio
C Clay has less liquidity risk while Lott has more liquidity risk
D Clay's interest charges are lower than Lott's interest charges CMA 1284 1-22
Trang 3WORKING CAPITAL MANAGEMENT
Appropriate Level of Working Capital
6 Determining the appropriate level of working capital for a firm requires (E)
a Evaluating the risks associated with various levels of fixed assets and the types of debt
used to finance these assets
b Changing the capital structure and dividend policy for the firm
c Maintaining short-term debt at the lowest possible level because it is ordinarily more
expensive than long term debt
d Offsetting the profitability of current assets and current liabilities against the probability of
technical insolvency
e Maintaining a high proportion of liquid assets to total assets in order to maximize the
return on total investments CMA 0689 1-10, 0696 1-16, RPCPA 0596
7 Which of the following statements about current asset management is most correct? (E)
a A positive net float means that a company has more cash available for its use than the
amount shown in the company’s books
b Use of a lockbox reduces the possibility that petty cash will be lost
c Depreciation has an impact on the cash budget
Working Capital
Working Capital Defined
* The amount of long-term capital that is made to revolve in conducting operations and serves
as the lifeblood of the company (E)
8 The working capital is the difference between
A Current assets and current liabilities C Total assets and total liabilities
B Fixed assets and fixed liabilities D Equity and cash CMA 0692 1-25
3 Net Working Capital is the:
A Difference between short-term assets and short term liabilities
B Difference between long-term assets and long term liabilities
C Difference between long-term assets and short term liabilities
Effect of Transactions on Working Capital
9 Starrs Company has current assets of $300,000 and current liabilities of $200,000 Starrscould increase its working capital by the (E)
A Prepayment of $50,000 of next year's rent
B Refinancing of $50,000 of short-term debt with long-term debt
C Purchase of $50,000 of temporary investments for cash
D Collection of $50,000 of accounts receivable CMA 1293 1-19
10 Starrs has current assets of 300,000 and current liabilities of 200,000 Starrs could increase itsworking capital by the
A Prepayment of 50,000 of next year's rent
B Refinancing of 50,000 of short-term debt with long-term debt
C Acquisition of land valued at 50,000 through the issuance of common shares
D Purchase of 50,000 of financial assets held for trading for cash CMA 1293 1-19
* Which of the following transactions causes an increase in working capital?
a Sale of merchandise on credit at a price above cost
b Sale of marketable securities at a price below cost
c Collection of an account receivable
d Return to supplier of defective merchandise purchased on credit Full credit allowed by
Other things held constant, which of the following will cause an increase in working capital?(M)
a Cash is used to buy marketable securities
b A cash dividend is declared and paid
c Merchandise is sold at a profit, but the sale is on credit
d Long-term bonds are retired with the proceeds of a preferred stock issue
e Missing inventory is written off against retained earnings Brigham
11 Which one of the following would increase the working capital of a firm?
A Cash payment of payroll taxes payable
B Purchase of a new plant financed by a 20-year mortgage
C Cash collection of accounts receivable
D Refinancing a short-term note payable with a two-year note payable CMA 1294 1-15
12 If a firm increases its cash balance by issuing additional shares of common stock, workingcapital (E)
a Remains unchanged and the current ratio remains unchanged
Trang 4b Increases and the current ratio remains unchanged.
c Increases and the current ratio decreases
13 The following transactions occurred during a company's first year of operations:
I Purchased a delivery van for cash
I Borrowed money by issuance of short-term debt
III Purchased treasury stock
Which of the items above caused a change in the amount of working capital?
Comprehensive
14 All of the following statements in regard to working capital are correct except (M)
a Current liabilities are an important source of financing for many small firms
b Profitability varies inversely wit liquidity
c The hedging approach to financing involves matching maturities of debt with specific
financing needs
d Financing permanent inventory buildup with long-term debt is an example of an
CASH MANAGEMENT
Function
15 When managing cash and short-term investments, a corporate treasurer is primarily
concerned with (E)
a Maximizing rate of return
b Minimizing taxes
c Investing in Treasury bonds since they have no default risk
d Investing in common stock due to the dividend exclusion for federal income tax purposes
1 Determining the appropriate target cash balance involves assessing the trade-off between:
A Income and diversification
B The benefit and cost of liquidity
C Balance sheet strength and transaction needs
* Which of the following is not a major function in cash management? (E)
b Cash surplus investment d Obtaining financing services RPCPA 0590
2 Firms would need to hold zero cash when:
A Transaction-related needs are greater than cash inflows
B Transaction-related needs are less than cash inflows
C Transaction-related needs are not perfectly synchronized with cash inflows
D Transaction-related needs are perfectly synchronized with cash inflows B & M
16 Which of the following statements is most correct? (E)
a A good cash management system would minimize disbursement float and maximizecollections float
b If a firm begins to use a well-designed lockbox system, this will reduce its customers’ netfloat
c In the early 1980s, the prime interest rate hit a high of 21 percent In 2000 the prime ratewas considerably lower That sharp interest rate decline has increased firms’ concernsabout the efficiency of their cash management programs
d If a firm can get its customers to permit it to pay by wire transfers rather than having towrite checks, this will increase its net float and thus reduce its required cash balances
e A firm that has such an efficient cash management system that it has positive net float canhave a negative checkbook balance at most times and still not have its checks bounce
Brigham
Motives for Holding Cash
17 According to John Maynard Keynes, the three major motives for holding cash are for
A Transactional, psychological, and social purposes
B Speculative, fiduciary, and transactional purposes
C Speculative, social, and precautionary purposes
D Transactional, precautionary, and speculative purposes CMA 1286 1-32
* A precautionary motive for holding excess cash is (E)
a To enable a company to meet the cash demands from the normal flow of businessactivity
b To enable a company to avail itself of a special inventory purchase before prices rise tohigher levels
c To enable a company to have cash to meet emergencies that may arise periodically
d To avoid having to use the various types of lending arrangements available to cover
Trang 518 The amount of cash that a firm keeps on hand in order to take advantage of any bargain
purchases that may arise is referred to as its
A Transactions balance C Precautionary balance
B Compensating balance D Speculative balance CIA 1194 IV-15
25 Which of the following statements concerning zero balance accounts is not correct?
A They are set up to handle disbursement activity
B The account has a minimum amount at all times
C Checks are automatically transferred into the account as checks presented for payment
D The transfer is automatic and involves an accounting entry only
E The master and the zero balance account locate at the same bank B & M
26 Which of the following is used to control disbursements?
A Concentration banking C Lock-box system
19 All of the following are valid reasons for a business to hold cash and marketable securities
except to
A Satisfy compensating balance requirements
B Maintain adequate cash needed for transactions
C Meet future needs
D Earn maximum returns on investment assets CMA 0694 1-22
Which of the following statements is most correct? (M)
a The cash balances of most firms consist of transactions, compensating, precautionary,
and speculative balances The total desired cash balance can be determined by
calculating the amount needed for each purpose and then summing them together
b The easier a firm’s access to borrowed funds the higher its precautionary balances will be,
in order to protect against sudden increases in interest rates
c For some firms, holding highly liquid marketable securities is a substitute for holding cash
because the marketable securities accomplish the same objective as cash Brigham
d Firms today are more likely to rely on cash than on reserve borrowing power or
marketable securities for speculative purposes because of the need to move quickly
12 A large firm may hold substantial cash balances because:
A These balances are required by the bank
B The company may have accounts in many different banks
C The company may have a very decentralized organization
13 Most large firms hold a cash balance greater than most models imply because:
A It is too difficult to estimate the costs of security transactions
B Banks are compensated by account balances for payment of services
C Corporations have few bank accounts and it is difficult to manage their cash
D Cash is costless and need not be managed closely B & M
14 We should expect cash balances to increase when:
A The transaction costs of buying or selling interest-bearing securities increase
B Interest rates increase
C Sales volume falls
D Uncertainty about day-to-day or week-to-week cash flows decreases B & M
Methods of Accelerating Cash Collections
32 Banks generally offer the following cash management services:
33 Banks generally offer the following services:
A Processing checks C Providing advice and references
Disbursement Float
15 Checks written by the firm are said to generate:
16 The difference between bank cash and book cash is called:
A Disbursement float C Availability float
Maximizing Net Float
20 Which of the following statements is most correct? (E)
a A cash management system that minimizes collections float and maximizes disbursement float is better than one with higher collections float and lower disbursement float.
b A cash management system that maximizes collections float and minimizes disbursement float is better than one with lower collections float and higher disbursement float.
c The use of a lockbox is designed to minimize cash theft losses If the cost of the lockbox
is less than theft losses saved, then the lockbox should be installed Brigham
Trang 6d Other things held constant, a firm will need a smaller line of credit if it can arrange to pay
its bills by the 5th of each month than if its bills come due uniformly during the month
Which of the following statements is most correct? (M)
a Poor synchronization of cash flows that results in high cash management costs can be
partially offset by increasing disbursement float and decreasing collections float
b The size of a firm’s net float is primarily a function of its natural cash flow synchronization
and how it clears its checks
c Lockbox systems are used mainly for security purposes as well as to decrease the firm’s
net float
d If a firm can speed up its collections and slow down its disbursements, it will be able to
reduce its net float
e A firm practicing good cash management and making use of positive net float will bring its
check book balance as close to zero as possible, but must never generate a negative
Lock-Box System
21 The most common cash management technique used to speed up collections is:
23 By getting closer to the source of payment, lock-boxes can be used to reduce:
A Availability or clearing float C In-house processing float
21 A lock-box system
A Reduces the need for compensating balances
B Provides security for late night deposits
C Reduces the risk of having checks lost in the mail
A lockbox plan is most beneficial to firms that (M)
a Send payables over a wide geographic area
b Have widely disbursed manufacturing facilities
c Have a large marketable securities account to protect
d Hold inventories at many different sites
Draft
22 A working capital technique that delays the outflow of cash is (E)
23 A working capital technique that increases the payable float and therefore delays the outflow ofcash is (E)
A Concentration banking C Electronic Data Interchange (EDI)
Automated Clearing House (ACH) Electronic Transfer
27 Electronic cash transfers offer several advantages, including:
A A low marginal transactions cost C Easy automation of record-keeping
31 A check processed through ACH (Automated Clearing House):
A Will clear immediately C Will take two or three days to clear
24 An automated clearing house (ACH) electronic transfer is a(n)
a Electronic payment to a company’s account at a concentration bank
b Check that must be immediately cleared by the Federal Reserve Bank
c Computer-generated deposit ticket verifying deposit of funds CMA 0694 1-23)
d Check-like instrument drawn against the payor and not against the bank
Trang 7* The following practices will impact the cash flow of the company: (E)
a Sales personnel are unequivocally responsible for collecting their credit sales
b Sales commissions are based on collected invoices
c Statement of accounts receivable are reconciled with customers and regularly sent for
d Automatic transfer of funds is arranged with banks regarding deposits of branches
Wire Transfer
28 The fastest but most expensive way to transfer surplus funds from the local deposit bank to the
concentration bank is:
A A lock-box system D An in-house processing float system
B A mail float system E An availability float system
Concentration Banking
22 Which of the following is a way for companies to speed up collections?
Comprehensive
* Which of the following actions would not be consistent with good management? (M)
a Increased synchronization of cash flows
b Minimize the use of float
c Maintaining an average cash balance equal to that required as a compensating balance or
that which minimizes total cost
* A company’s management is concerned about the large bank overdraft, which it wishes to
reduce over the budget period of one year Which one of the four items below will not
necessarily result in a lower bank overdraft? (E)
a Reducing bad debts
b Taking longer credit from suppliers without any loss of discounts
c Reducing wastage and loss through damage of regularly-used stock items
25 Methods of accelerating cash collections include all of the following except (E)
A Decentralized collections C Compensating balances
B Electronic funds transfers D Lockbox systems CMA 0689 1-12
26 A typical firm doing business nationally cannot expect to accelerate its cash inflow by
A Establishing multiple collection centers throughout the country
B Employing a lockbox arrangement
C Initiating controls to accelerate the deposit and collection of large checks CMA 1283 1-23
D Maintaining compensating balances rather than paying cash for bank services
Baumol’s Model of Cash Balances
3 Baumol's model of cash balances states that: Q = [(2 x T x C./i]^0.5 where T = annual cash
disbursement, C = cost per sale of T-bills, i = interest rate What is Q?
A The number of times per annum bill should be sold
B The average holding of bills
C The amount of T-bills that should be sold at any one time
9 The Baumol model determines the optimal cash balance by:
A Balancing total costs against opportunity costs
B Minimizing total costs of holding cash against trading securities costs
C Balancing trading securities costs against total costs
10 Concerning the Baumol model, which of the following is not correct (all other things equal)?
A The optimum cash balance is higher at higher interest rates
B The optimum cash balance is higher at higher fixed order costs
C The optimum cash balance is higher at higher total cash requirement
11 The Baumol cash balance model is limited by:
A Assuming the cash flows are variable across the period
B A smooth disbursement rate and now cash inflows over the period
C Having a safety stock set to zero
Cash Conversion Cycle
27 An enterprise plans to produce a new product, which will typically be sold to other firms oncredit The cash conversion cycle resulting from this new product can be measured as thelength of time from
A Cash purchases of raw materials to the collection of accounts receivable
Trang 8B Cash purchases of raw materials to the time the final product is completed
C Cash purchases of raw materials to the sale of the product
D When the product is completed to the sale of the product CIA 1193 IV-52
28 Helena Furnishings wants to sharply reduce its cash conversion cycle Which of the following
steps would reduce its cash conversion cycle? (E)
a The company increases its average inventory without increasing its sales
b The company reduces its DSO
c The company starts paying its bills sooner, which reduces its average accounts payable
without reducing its sales
Ignoring cost and other effects on the firm, which of the following measures would tend to
reduce the cash conversion cycle? (M)
a Maintain the level of receivables as sales decrease
b Buy more raw materials to take advantage of price breaks
c Take discounts when offered
d Forgo discounts that are currently being taken
29 Which of the following actions are likely to reduce the length of a company’s cash conversion
cycle? (M)
a Adopting a just-in-time inventory system that reduces the inventory conversion period
b Reducing the average days sales outstanding (DSO) on its accounts receivable
c Reducing the amount of time the company takes to pay its suppliers
Optimal Mix Between Cash and Short-term Investments
30 When managing cash and short-term investments, a corporate treasurer is primarily
concerned with (E)
A Maximizing rate of return
B Minimizing taxes
C Investing in Treasury bonds since they have no default risk
31 When a company is evaluating whether the ratio of cash and marketable securities to total
assets should be high or low, its decision will be based upon
A Financial leverage considerations
B Operating leverage considerations
C Risk-profitability trade-off considerations
32 Some managers express the opinion that “cash management problems are nothing more thaninventory problems.” They then proceed to use cash management module, such as the EOQmodel to determine the
a Credit and collection policies
b Marketable securities level
c Proper relationship between current assets and current liabilities
d Proper blend of marketable securities and cash CMA 1286 1-33
33 Determining the amount and timing of conversions of marketable securities to cash is a criticalelement of a financial manager's performance In terms of the rate of return forgone onconverted securities and the cost of such transactions, the optimal amount of cash to be raised
D Inversely related to the rate of return forgone and inversely related to the cost of the
34 The economic order quantity (EOQ) formula can be adapted in order for a firm to determinethe optimal mix between cash and marketable securities The EOQ model assumes all of thefollowing except
a The cost of a transaction is independent of the dollar amount of the transaction andinterest rates are constant over the short run
b An opportunity cost is associated with holding cash, beginning with the first dollar
c The total demand for cash is known with certainty
Comprehensive
* The following are desirable in cash management except: (E)
a Cash is collected at the earliest time possible
b Most sales are on cash basis and receivables are aged “current”
c Post-dated checks are not deposited on time upon maturity
Trang 9d All sales are properly receipted and promptly deposited intact RPCPA 0593
* In cash management, which of the following statements is false? (M)
a Capital costs, delinquency costs, and default costs are costs associated with cash
management
b Short costs, long costs, and procurement costs are costs associated with optimal cash
balance model approach
c Obtaining financing services and controlling cash flow are some of the major functions of
cash management
d Funds sourcing and custodianship must be done at the lowest possible cost, where
excess funds must be invested for a return that is best in the market RPCPA 1090
MARKETABLE SECURITIES
Criteria
* The criteria that should be considered in investing surplus cash (E)
a Safety of the company’s funds c Yield on the principal
b Liquidity of the principal d All of the above RPCPA 0588
35 Which of the following are criteria for selection among securities available for a marketablesecurities portfolio? (M)
A Default risk, taxability, and relative yields
B Planning, major investment decisions, and interaction with capital markets
C The operating, payment, and cash conversion cycles CIA 0589 IV-52
D Inventory conversion, receivables conversion, and payable deferral periods
Which of the following is not a situation that might lead a firm to hold marketable securities?
c The firm must finance seasonal operations
d The firm has just sold long-term securities and has not yet invested the proceeds in
Money Market Instruments
7 The following are money market instruments except:
B Federal agency discount notes D Preferred stocks B & M
8 The three money market securities with the greatest volume of business are:
A Treasury bills, commercial paper, repurchase agreements
B Negotiable CDs, federal agency discount notes, T-bills
C Commercial paper, bankers' acceptances, tax-exempt municipal notes
D Federal agency discount notes, repurchase agreements, medium-term notes B & M
Marketable Securities Portfolio
Which of the following statement completions is most correct? If the yield curve is upwardsloping, then a firm’s marketable securities portfolio, assumed to be held for liquidity purposes,should be (M)
a Weighted toward long-term securities because they pay higher rates
b Weighted toward short-term securities because they pay higher rates
c Weighted toward U S Treasury securities to avoid interest rate risk
d Weighted toward short-term securities to avoid interest rate risk
e Balanced between long- and short-term securities to minimize the effects of either an
Trang 10Treasury Bills
36 Which security is most often held as a substitute for cash? (E)
9 For which of the following investments is there a very active secondary market?
37 The marketable securities with the least amount of default risk are
A Federal government agency securities C Repurchase agreements
B U.S Treasury securities D Commercial paper CMA 0691 1-11
38 Of the following four investments, is considered to be the safest (E)
c Treasury bills
39 Which of the following financial instruments can be traded in international money markets?
B Preferred shares D U.S Treasury bonds CIA 1195 IV-65
Repurchase Agreement
15 A repurchase agreement occurs when:
A A company agrees to buy back its commercial paper before maturity
B A bank depositor agrees, in advance, to re-invest money in a negotiable certificate of
deposit
C An investor buys part of a government security dealer's inventory and simultaneously
agrees to sell it back
Negotiable Certificates of Deposit
40 Which one of the following is not a characteristic of a negotiable certificate of deposit?
Negotiable certificates of deposit (D)
A Have a secondary market for investors
B Are regulated by the Federal Reserve System
C Are usually sold in denominations of a minimum of $100,000 CMA 0691 1-12
D Have yields considerably greater than bankers' acceptances and commercial paper
10 Negotiable CDs are issued by:
B The common stock of a Aaa rated company
C The commercial paper of a Aaa rated company
EuroCommercial Paper
14 Commercial papers sold in the international markets are called:
A Negotiable commercial papers C MTNs
Floating Rate Preferred Stock
16 Floating-rate preferred stock offers competitive rates of return with traditional money-market instruments but:
A Is not rated by Moody's or Standard & Poor's
B Still provides the corporate investor with the tax exclusion on dividend income
C Has a fixed rate of dividend income
17 A tax-paying corporation would prefer to invest short-term money in:
B Floating-rate preferred stock D Long-term bonds B & M
21 Even though the dividend rate on a floating-rate preferred stock is floating to keep in line with interest rates, the instrument still suffers from risk such as:
A A thin market causing potential principal risk and liquidity concerns
B The risk of downgrades from the narrow range of issuers
C The impact of tax law changes, which may reduce the after-tax value of the instrument
Trang 11Money Market Mutual Funds
42 In smaller businesses in which the management of cash is but one of numerous functions
performed by the treasurer, various cost incentives and diversification arguments suggest that
surplus cash should be invested in
A Commercial paper C Money market mutual funds
B Bankers' acceptances D Corporate bonds CMA 1280 1-1
Eurodollar Deposit
2 "Eurodollars" or "international dollars" are:
A Dollar deposits in banks outside the US
B Dollars deposited in the US by foreigners
C Dollars held by foreign governments
44 US dollars deposited in a German bank are called:
B American depositing receipts D None of the above B & M
43 Of the following, a characteristic of Eurobonds is that they are
A Always denominated in Eurodollars
B Always sold in some country other than the one in whose currency the bond is
denominated
C Sold outside the country of the borrower but are denominated in the currency of the
country in which the issue is sold
44 Which of the following statements does not properly describe a Eurodollar deposit?
A Eurodollar deposits are U.S dollar deposits in banks outside of the U.S
B Eurodollar deposits are outside the direct control of the U.S monetary authorities
C Eurodollar deposit rates tend to be lower than domestic U.S rates on equivalent
D Interest rates on Eurodollar deposits are tied to the London Interbank Offer Rate (LIBOR)
45 Interest rates received by depositors on Eurodollar deposits tend to be higher than domestic
U.S rates on equivalent instruments because
A Borrowers pay higher rates than domestic U.S rates on equivalent instruments
B The deposits involve different currencies
C Eurodollar deposits are for smaller amounts
D The Eurodollar market is outside the direct control of the U.S monetary authorities and
3 There is a difference between "Eurodollar" or "international dollar" rate and short-term interest rate in the US because:
A Banks are not subject to reserve requirements on international dollars
B Banks need not insure international dollar deposits with the FDIC
C Both A and B
Variable Rate Demand Bond
11 A variable rate demand bond (VRDB):
A Is a long-term security
B Has interest payments linked to the level of short-term interest rates
C May periodically be sold back to the issuer at face value
D Is tax-exempt
Not a Proper Investment for Idle Cash
46 All of the following are alternative marketable securities suitable for investment except
A U.S Treasury bills C Commercial paper
* Which of the following investments is not likely to be a proper investment for temporary idlecash? (E)
a Initial public offering of an established profitable conglomerate
b Commercial paper
c Treasury bills
Short Selling
47 The term “short selling” is the
a Selling of a security that was purchased by borrowing money from a broker
b Selling of a security that is not owned by the seller
c Selling of all the shares you own in a company in anticipation that the price will decline
d Betting that a stock will increase by a certain amount within a given period of time
Trang 12Riding the Yield Curve
* In the process of investing of surplus cash, the term “riding the yield curve” refers to (E)
a Diversifying securities portfolio so that the firm has an equal balance of long-term versus
short-term securities
b Swapping different maturities of similar quality debt securities in order to obtain higher
yield
c Purchasing only the longest maturities for given rates of return
d Adherence to the liquidity preference theory of securities investment RPCPA 0596
RECEIVABLES MANAGEMENT
Which of the following statements is most correct? (M)
a A firm that makes 90 percent of its sales on credit and 10 percent for cash is growing at a
rate of 10 percent annually If the firm maintains stable growth it will also be able to
maintain its accounts receivable at its current level, since the 10 percent cash sales can
be used to manage the 10 percent growth rate
b In managing a firm’s accounts receivable it is possible to increase credit sales per day yet
still keep accounts receivable fairly steady if the firm can shorten the length of its
collection period
c 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
d Since receivables and payables both result from sales transactions, a firm with a high
receivables-to-sales ratio should also have a high payables-to-sales ratio Brigham
Monitoring Receivables
Analyzing days sales outstanding (DSO) and the aging schedule are two common methods for
monitoring receivables However, they can provide erroneous signals to credit managers when
(E)
a Customers’ payments patterns are changing
b Sales fluctuate seasonally
c Some customers take the discount and others do not
d Sales are relatively constant, either seasonally or cyclically Brigham
Days Sales Outstanding
48 An enterprise's receivables collection period is equal to
A The inventory conversion period
B The cash conversion cycle
C The day's sales outstanding
D The inventory divided by average daily sales CIA 0597 IV-27
49 The average collection period for a firm measures the number of days (E)
a After a typical credit sale is made until the firm receives the payment
b It takes a typical check to “clear” through the banking system
c Beyond the end of the credit period before a typical customer payment is received
d Before a typical account becomes delinquent CMA 1295 1-4 Which of the following statements is most correct? (M)
a If a firm’s volume of credit sales declines then its DSO will also decline
b If a firm changes its credit terms from 1/20, net 40 days, to 2/10, net 60 days, the impact
on sales can’t be determined because the increase in the discount is offset by the longernet terms, which tends to reduce sales
c The DSO of a firm with seasonal sales can vary While the sales per day figure is usuallybased on the total annual sales, the accounts receivable balance will be high or lowdepending on the season
d An aging schedule is used to determine what portion of customers pay cash and whatportion buy on credit
e Aging schedules can be constructed from the summary data provided in the firm’s
Aging of Accounts Receivable
50 An aging of accounts receivable measures the
a Ability of the firm to meet short-term obligations
b Average length of time that receivables have been outstanding CMA 1290 1-22
c Percentage of sales that have been collected after a given period of time
d Amount of receivables that have been outstanding for given lengths of time
Which of the following statements is most correct? (M)
a Other things held constant, the higher a firm’s days sales outstanding (DSO), the better itscredit department
b If a firm that sells on terms of net 30 changes its policy and begins offering all customersterms of 2/10, net 30, and if no change in sales volume occurs, then the firm’s DSO willprobably increase
c If a firm sells on terms of 2/10, net 30, and its DSO is 30 days, then its aging schedulewould probably show some past due accounts
Credit & Collection Policy
* The goal of credit policy is to (E)
a Extend credit to the point where marginal profits equal marginal costs
Trang 13b Minimize bad debt losses.
c Minimize collection expenses
* It is held that the level of accounts receivable that the firm has or holds reflects both the
volume of a firm’s sales on account and a firm’s credit policies Which one of the following
items is not considered as part of the firm’s credit policies? (M)
a The minimum risk group to which credit should be extended
b The extent (in terms of money) to which a firm will go to collect an account
c The length of time for which credit is extended
d The size of the discount that will be offered RPCPA 1095
51 The one item listed below that would warrant the least amount of consideration in credit and
collection policy decisions is the
A Quality of accounts accepted C Cash discount given CMA 0684 1-3
B Quantity discount given D Level of collection expenditures
52 When a company analyzes credit applicants and increases the quality of the accounts
rejected, the company is attempting to (M)
A Maximize sales C Increase the average collection period
B Increase bad-debt losses D Maximize profits CMA 1286 1-34
If easing a firm’s credit policy lengthens the collection period and results in a worsening of the
aging schedule, then why do firms take such actions? (E)
a It normally stimulates sales
b To meet competitive pressures
c To increase the firm’s deferral period for payables
Which of the following statements is most correct? (M)
a If credit sales as a percentage of a firm’s total sales increases, and the volume of credit
sales also increases, then the firm’s accounts receivable will automatically increase
b It is possible for a firm to overstate profits by offering very lenient credit terms that
encourage additional sales to financially “weak” firms A major disadvantage of such a
policy is that it is likely to increase uncollectible accounts
c A firm with excess production capacity and relatively low variable costs would not be
inclined to extend more liberal credit terms to its customers than a firm with similar costs
that is operating close to capacity
d Firms use seasonal dating primarily to decrease their DSO
e Seasonal dating with terms 2/15, net 30 days, with April 1 dating, means that if the originalsale took place on February 1st, the customer can take the discount up until March 15th,
Average Gross Receivables Balance
53 Which of the following represents a firm’s average gross receivables balances?
I Days’ sales in receivables x accounts receivable turnover
II Average daily sales x average collection period
III Net sales ÷average gross receivables (E)
A Has a relaxed (lenient) credit policy
B Offers small discounts
C Uses a lockbox system, synchronizes cash flows, and has short credit terms
D Has an inefficient credit and collection department Gleim
55 A decrease in the firm's receivable turnover ratio means that (D)
A It is collecting credit sales more quickly than before
B It is collecting credit sales more slowly than before
C Sales have gone up
56 Accounts receivable turnover will normally decrease as a result of (E)
a The write-off of an uncollectible account (assume the use of the allowance for doubtfulaccounts method)
b A significant sales volume decrease near the end of the accounting period
c An increase in cash sales in proportion to credit sales
d A change in credit policy to lengthen the period for cash discounts CMA 0690 4-14
Credit Terms
57 An organization would usually offer credit terms of 2/10, net 30 when
a The organization can borrow funds at a rate exceeding the annual interest cost
b The orgnization can borrow funds at a rate less than the annual interest cost
c The cost of capital approaches the prime rate
Trang 14d Most competitors are offering the same terms and the organization has a shortage of
58 Which one of the following statements is most correct if a seller extends credit to a purchaser
for a period of time longer than the purchaser’s operating cycle? The seller (E)
a Will have a lower level of accounts receivable than those companies whose credit period
is shorter than the purchaser’s operating cycle
b Is, in effect, financing more than just the purchaser’s inventory needs
c Can be certain that the purchaser will be able to convert the inventory into cash before
payment is due
d Has no need for a stated discount rate or credit period CMA 1296 1-13
Change in Credit Policy
59 An increase in sales resulting from an increased cash discount for prompt payment would be
expected to cause (M)
A An increase in the operating cycle
B An increase in the average collection period
C A decrease in the cash conversion cycle
* If a firm had been extending trade credit on a 2/10, net/30 basis, what change would be
expected on the balance sheet of its customer if the firm went to a net cash 30 policy? (M)
a Increased payables and increased bank loan
b Increased receivables
c Decreased receivables
* The level of accounts receivable will most likely increase as (M)
a Cash sales increase and number of says sales
b Credit limits are expanded, credit sales increase, and credit terms remain the same
c Credit limits are expanded, cash sales increase, and aging of the receivables is improving
d Cash sales increase, current receivables ratio to past due increases, credit limits remain
60 A change in credit policy has caused an increase in sales, an increase in discounts taken, adecrease in the amount of bad debts, and a decrease in the investment in accountsreceivable Based upon this information, the company’s (E)
A Average collection period has decreased
B Percentage discount offered has decreased
C Accounts receivable turnover has decreased
61 A change in credit policy has caused an increase in sales, an increase in discounts taken, areduction of the investment in accounts receivable, and a reduction in the number of doubtfulaccounts Based on this information, we know that: (E)
a Net profit has increased
b The average collection period has decreased
c Gross profit has declined
d The size of the discount offered has decreased
e The bad debt loss percentage has increased RPCPA 1095, CMA 1289 1-15
* The credit and collection policy of Amargo Co provides for the imposition of credit block whenthe credit line is exceeded and/or the account is past due During the month, because of thecampaign to achieve volume targets, the general manager has waived the credit block policy
in a number of instances involving big volume accounts The likely effect of this move is (M)
a Deterioration of aging of receivables only
b Increase in the level of receivables only
c Deterioration of aging and increase in the level of receivables
d Decrease in collections during the month the move was done RPCPA 1094
62 The sales manager at Ryan Company feels confident that, if the credit policy at Ryan’s werechanged, sales would increase and, consequently, the company would utilize excess capacity.The two credit proposals being considered are as follows:
Proposal A Proposal B
Trang 15Contribution margin 20% 20%
Currently, payments terms are net 30 The proposed payment terms for Proposal A and
Proposal B are net 45 and net 90, respectively An analysis to compare these two proposals
for the change in credit policy would include all of the following factors except the
a Cost of funds for Ryan
b Current bad debt experience
c Impact on the current customer base of extending terms to only certain customers
d Bank loan covenants on days’ sales outstanding CMA 0697 1-14
* A strict credit and collection policy is in place in Star Co As Finance Director you are asked to
advise on the propriety of relaxing the credit standards in view of stiff competition in the
market Your advise will be favorable if (E)
a The competitor will do the same thing to prevent lost sales
b there is a decrease in the distribution level of your product, and a more aggressive stance
in necessary to retain market share
c The projected margin from increased sales will exceed the cost of carrying the
incremental receivables
d The account receivable level is improving, so the company can afford the carrying cost of
63 A company serves as a distributor of products by ordering finished products once a quarter
and using that inventory to accommodate the demand over the quarter If it plans to ease its
credit policy for customers, the amount of products ordered for its inventory every quarter will
be
A Increased to accommodate higher sales levels
B Reduced to offset the increased cost of carrying accounts receivable
C Unaffected if safety stock is part of the current quarterly order
D Unaffected if the JIT inventory control system is used CIA 0593 IV-53
Assignment
35 In a loan arranged through the assignment of accounts receivable the lender:
A Accepts the actual receivable to be collected
B Has a lien on the receivables and recourse to the borrower
C Assumes full risk of default
Factoring
64 Factoring is the (E)
A Selling of accounts receivable by one company to another
B Selling of inventory by one company to another
C Conversion of accounts receivable to bad debt on financial statements for accounts that
D Adjustment of inventories on financial statements for supplies that have become obsolete
* Debt capital be it long-term or short-term in nature, can be raised from a number of differentsources including
66 In general, as a company increases the amount of short-term financing relative to long-termfinancing, the
A Greater the risk that it will be unable to meet principal and interest payments
B Leverage of the firm increases
C Likelihood of having idle liquid assets increases
Firms generally choose to finance temporary assets with short-term debt because (M)
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 long-term is more apt to be unable to repay the debt than afirm that borrows heavily short-term
d The yield curve has traditionally been downward sloping Brigham
e Sales remain constant over the year, and financing requirements also remain constant
67 Which of the following statements is most correct? (M)
Trang 16a Under normal conditions, a firm’s expected ROE would probably be higher if it financed
with short-term rather than with long-term debt, but the use of short-term debt would
probably increase the firm’s risk
b Conservative firms generally use no short-term debt and thus have zero current liabilities
c A short-term loan can usually be obtained more quickly than a long-term loan, but the cost
of short-term debt is likely to be higher than that of long-term debt
d If a firm that can borrow from its bank buys on terms of 2/10, net 30, and if it must pay by
Day 30 or else be cut off, then we would expect to see zero accounts payable on its
balance sheet
e If one of your firm’s customers is “stretching” its accounts payable, this may be a nuisance
but does not represent a real financial cost to your firm as long as the firm periodically
Which of the following statements is most correct? (M)
a Under normal conditions the shape of the yield curve implies that the interest cost of
short-term debt is greater than that of long-term debt, although short-term debt has other
advantages that make it desirable as a financing source
b Flexibility is an advantage of short-term credit but this is somewhat offset by the higher
flotation costs associated with the need to repeatedly renew short-term credit
c A short-term loan can usually be obtained more quickly than a long-term loan but the
penalty for early repayment of a short-term loan is significantly higher than for a long-term
loan
d Statements about the flexibility, cost, and riskiness of short-term versus long-term credit
are dependent on the type of credit that is actually used Brigham
e Short-term debt is often less costly than long-term debt and the major reason for this is
that short-term debt exposes the borrowing firm to much less risk than long-term debt
Trade Credit
68 Which one of the following provides a spontaneous source of financing (E)
69 Which one of the following is a spontaneous source of financing?
70 Which one of the following financial instruments generally provides the largest source of
short-term credit for small firms?
A Installment loans C Trade credit
71 Which one of the following statements about trade credit is correct?
a Not an important source of financing for small firms
b A source of long-term financing to the seller
c Subject to risk of buyer default
d Usually an inexpensive source of external financing CMA 1296 1-12
72 The correct equation for calculating the approximate percentage cost, on an annual basis, of
A
periodDiscount -
goutstandinis
credit Days
360
x
%Discount -
100
%Discount
B
periodDiscount -
goutstandinis
credit Days
360
x 100
%Discount
C
periodDiscount -
goutstandinis
credit Days
360
x
%Discount
%Discount
100
D
360
periodDiscount -
goutstandinis
credit Days
x
%Discount -
100
%Discount
73 A company obtaining short-term financing with trade credit will pay a higher percentagefinancing cost, everything else being equal, when (D)
A The discount percentage is lower
B The items purchased have a higher price
C The items purchased have a lower price
D The supplier offers a longer discount period CIA 0597 IV-51
74 Which one of the following statements concerning cash discount is correct? (E)
A The cost of not taking a 2/10, net 30 cash discount is usually less than the prime rate
B With trade terms of 2/15, net 60, if the discount is not taken, the buyer receives 45 days of
C The cost of not taking the discount is higher for terms of 2/10, net 60 than for 2/10, net 30
D The cost of not taking a cash discount is generally higher than the cost of a bank loan
75 A small retail business would most likely finance its merchandise inventory with
A Commercial paper C A line of credit
B A terminal warehouse receipt loan D A chattel mortgage CMA 0689 1-17
Trang 1776 Which of the following statements is most correct? (M)
a Accruals are an expensive way to finance working capital
b A conservative financing policy is one in which the firm finances all of its fixed assets with
long-term capital and part of its permanent current assets with short-term,
nonspontaneous credit
c If a company receives trade credit under the terms 2/10 net 30, this implies the company
has 10 days of free trade credit
77 Merkle, Inc has a temporary need for funds Management is trying to decide between not
taking discounts from one of their three biggest suppliers, or a 14.75% per annum renewable
discount loan from its bank for 3 months The suppliers' terms are as follows:
Using a 360-day year, the cheapest source of short-term financing in this situation is (D)
Bank Loans
Which one of the following aspects of banks is considered most relevant to businesses when
choosing a bank? (M)
a Convenience of location
b Competitive cost of services provided
c Size of the bank’s deposits
d Experience of personnel
22 Which of the following describes short-term bank loans?
A Often secured by a factoring agent
B Almost never secured by inventory
C Often prearranged as a line of credit
D Cannot be from an international bank because of Federal Reserve System regulations
23 Which of the following describes short-term bank loans?
A If unsecured, banks often require borrower to "clean up" the loan for 1 month in the year
B Often secured by commercial paper
C Almost never secured by accounts receivable
D Cannot be from an international bank because Federal Reserve System regulationsprohibit Eurodollar borrowing
Term Loan
24 Which of the following statements describes bank term loans?
A Typical maturity is between 2 and 4 years
B Usually repaid in level amounts over the term of the loan
C Interest rate is usually fixed
D Borrower is often obliged to have the bank mange its corporate cash accounts B & M
25 Which of the following statements describe bank term loans?
A Typical maturity is between 1 and 2 years
B Usually repaid in increasing amounts over the term of the loan
C Interest rate is usually fixed
D Borrower is often obliged to maintain compensating balance B & MInterest rates
78 Short-term interest rates are
a Usually lower than long-term rates
b Usually higher than long-term rates
c Lower than long-term rates during periods of high inflation only
d Not significantly related to long-term rates CMA 0691 1-5
79 The prime rate is the (D)
A Size of the commitment fee on a commercial bank loan
B Effective cost of a commercial bank loan
C Effective cost of commercial paper
D Rate charged on business loans to borrowers with high credit ratings CMA 0688 1-18
80 The prime lending rate of commercial banks is an announced rate and is often understatedfrom the viewpoint of even the most credit-worthy firms Which one of the followingrequirements always results in a higher effective interest rate?
A A floating rate for the loan period
B A covenant that restricts the issuance of any new unsecured bonds during the existence
of the loan
Trang 18C The imposition of a compensating balance with an absolute minimum that cannot be met
by current transaction balances
D The absence of a charge for any unused portion in the line of credit CMA 1280 1-3
Nominal Interest Rate
81 A one year, $20,000 loan with a 10% nominal interest rate provides the borrower with the use
of <List A> if interest is charged on a <List B> basis (E)
Compensating Balance
82 A minimum checking account balance that a firm must maintain with a commercial bank is a
A Transactions balance C Precautionary balance
B Compensating balance D Speculative balance CIA 1190 IV-49
83 A compensating balance
A Compensates a financial institution for services rendered by providing it with deposits of
B Is used to compensate for possible losses on a marketable securities portfolio
C Is a level of inventory held to compensate for variations in usage rate and lead time
D Is an amount paid by financial institutions to compensate large depositors
Which of the following statements is most correct? (M)
a Compensating balance requirements apply only to businesses, not to individuals
b Compensating balances are essentially costless to most firms, because those firms would
normally have such funds on hand to meet transactions needs anyway
c If the required compensating balance is larger than the transactions balance the firm
would ordinarily hold, then the effective cost of any loan requiring such a balance is
increased
d Banks are prohibited from earning interest on the funds they force businesses to keep as
Effective Rate
84 Discounted interest is based on the borrowed amount but is paid in advance The formula forcalculating the discounted interest rate for a 1-year loan is (E) GleimA
amountBorrowed
Interest
C
Interest-
amount Borrowed
Interest
Collateral
* In assessing the loan value of inventory, a banker will normally be concerned about the portion
of inventory that is work-in-process because (E)
a WIP inventory is relatively easy to sell because it does not represent a raw material or afinished product
b WIP inventory usually has the highest loan value of the different inventory types
c WIP generally has the lowest marketability of the various types of inventories
d WIP represents a lower investment by a corporation as opposed to other types of
34 Firms provide the following as security for short-term loans:
Syndicated Loan
30 When banks have to make large loans, they form a group of banks for the purpose of making the loan The group is called a:
A Bank holding company C Golden umbrella
Loan Sales by Commercial Banks
32 Loan sales by commercial banks may take the form of:
33 Loan participations are different from syndicated loans in that:
A The lead bank provides a "certificate of participation" to each bank
B Each participating bank has a separate loan agreement with the borrower
C The loans are transferred to new lenders
Trang 19D None of the above B & M
Banker’s Acceptance
85 The credit instrument known as a banker's acceptance
A Calls for immediate payment upon delivery of the shipping documents to the bank's
customer and acceptance of goods by the bank
B Involves an invoice being signed by the banker upon receipt of goods, after which both the
banker and the seller record the transaction on their respective books
C Is a time draft payable on a specified date and guaranteed by the bank
D Is a method of sales financing in which the bank retains title to the goods until the buyer
The forms of short-term borrowing that are unsecured credit are
A Floating lien, revolving credit, chattel mortgage, and commercial paper
B Factoring, chattel mortgage, bankers' acceptances, and line of credit
C Floating lien, chattel mortgage, bankers' acceptances, and line of credit CMA 1286 1-35
D Revolving credit, bankers' acceptances, line of credit, and commercial paper
Commercial Paper
87 Short-term, unsecured promissory notes issued by large firms are known as
B Bankers' acceptances D Repurchase agreements
88 Commercial paper
A Has a maturity date greater than 1 year
B Is usually sold only through investment banking dealers
C Ordinarily does not have an active secondary market
D Has an interest rate lower than Treasury bills CMA 0691 1-10
89 The principal advantage of using commercial paper as a short-term financing instrument is that
it (E)
A Is usually cheaper than a commercial bank loan
B Is readily available to almost all companies
C Offers security, i.e., collateral, to the lender
D Can be purchased without commission costs CMA 1289 1-22
90 Which one of the following responses is not an advantage to a corporation that uses thecommercial paper market for short-term financing?
a This market provides more funds at lower rates than other methods provides
b The borrower avoids the expense of maintaining a compensating balance with a commercial bank
c There are no restrictions as to the type of corporation that can enter into this market
d This market provides a broad distribution for borrowing CMA 0696 1-14
37 Large companies often raise short-term debt by selling:
Which of the following statements concerning commercial paper is incorrect? (E)
a Commercial paper is generally written for terms less than 270 days
b Commercial paper generally carries an interest rate below the prime rate.
c Commercial paper is sold to money market mutual funds, as well as to other financialinstitutions and nonfinancial corporations
d Commercial paper can be issued by virtually any firm so long as it is willing to pay the
e Commercial paper is a type of unsecured promissory note issued by large, strong firms
91 Which of the following statements is incorrect? (E)
a Commercial paper can be issued by virtually any firm so long as it is willing to pay thegoing interest rate
b Accruals represent a source of “free” financing in the sense that no explicit interest is paid