5) Evertz Metals buys and stockpiles dolomite to use in its smelting processes. Before all
this dolomite is used, however, they alter their smelting process so that calcite limestone is
used instead. How is the inventory cost of the unused dolomite best categorized?
A) an acquisition cost
B) a carrying cost
C) an order cost
D) a holding cost
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
6) What of the following best describes just-in-time inventory management?
A) Inventory is maintained as a bufer to meet uncertainties in demand, supply, and
movements of goods.
B) Production ineiciencies arising when production capacity stands idle for lack of
materials are minimized by holding a small stock of essentials at all times.
C) A irm acquires inventory precisely when needed so that its inventory balance is always
at, or close to, zero.
D) A irm minimizes the time lags present in the supply chain by maintaining a certain
amount of inventory to use in these lag times.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
7) Which of the following is the major beneit to a irm of using just-in-time inventory
management?
A) minimizes the risk of stock-outs
B) minimizes the total number of orders that the irm places
C) reduces acquisition costs for placing goods in inventory
D) largely eliminates the carrying costs of maintaining a large inventory
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
30
8) Which of the following is not a direct cost associated with inventory?
A) acquisition costs
B) order costs
C) carrying costs
D) stock-out costs
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
9) Which of the following statements is FALSE?
A) Under the Modigliani-Miller assumptions of perfect capital markets, the amount of
inventory is irrelevant.
B) Unlike trade credit, inventory represents one of the required factors of production.
C) It is the irm’s inancial manager who must arrange for the inancing necessary to
support the irm’s inventory policy and who is responsible for ensuring the irm’s overall
proitability.
D) Inventory management receives extensive coverage in courses on operations
management.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
10) Which of the following statements is FALSE?
A) Firms may hold inventory because factors such as seasonality in demand mean that
customer purchases do not perfectly match the most eicient production cycle.
B) Inventory helps minimize the risk that the irm will not be able to obtain an input it
needs for production.
C) If a irm holds too much inventory, stock-outs, the situation when a irm runs out of
product, may occur, leading to lost sales.
D) Because excessive inventory uses cash, eicient management of inventory increases
irm value.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
31
11) ALT had $25 million in sales last year. Its cost of goods sold was $15 million and its
average inventory balance was $3 million. What was its average days of inventory?
A) 43.8 days
B) 36.5 days
C) 73.0 days
D) 9.1 days
AACSB Objective: Analytic Skills
Author: WC
Question Status: Previous Edition
12) ALT had $25 million in sales last year. Its cost of goods sold was $15 million and its
average inventory balance was $3 million. The average days of inventory in the industry is
65 days. What would ALT’s average inventory need to be so that it would meet the industry
average?
A) $4.45 million
B) $3.65 million
C) $3.33 million
D) $2.67 million
AACSB Objective: Analytic Skills
Author: WC
Question Status: Previous Edition
13) What are the advantages of holding inventory?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
14) What are the costs of holding inventory?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
32
19.6 Cash Management
1) The level of cash a irm holds is irrelevant; it can never be short of cash since a irm is
able to raise new money instantly at a fair rate, while it can never have surplus cash since
the irm can invest excess cash at a fair rate to earn a net present value (NPV) of zero.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
2) A inancial manager who wants her investment to have a higher return would choose to
invest some of her irm’s excess cash in commercial paper over Treasury bonds.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
3) Which of the following is NOT a motivation for holding cash?
A) to meet its day-to-day needs
B) to compensate for the uncertainty associated with cash lows
C) to satisfy bank requirements
D) to place in short-term investments
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
4) What is a transactions balance?
A) the cash a irm holds to counter the uncertainty surrounding its future cash needs
B) the cash a irm places into short-term investments
C) the cash a irm holds in order to pay its bills
D) the cash a irm holds to gain tax advantages
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
33
5) What is a precautionary balance?
A) the cash a irm holds to counter the uncertainty surrounding its future cash needs
B) the cash a irm places into short-term investments
C) the cash a irm holds in order to pay its bills
D) the cash a irm holds to gain tax advantages
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
6) What is a compensating balance?
A) the cash a irm places into short-term investments
B) the cash a irm holds in order to pay its bills
C) the cash a irm holds to gain tax advantages
D) the cash a irm holds in an account at the bank in order for the bank to perform services
for that irm
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
7) If a irm wishes to invest cash that might be needed at short notice in the very near
future, they would be most likely to invest in which of the following securities?
A) Treasury bills
B) certiicates of deposit
C) repurchase agreements
D) banker’s acceptances
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
34
8) Which of the following best describes short-term debt issued by banks with a minimum
denomination of $100,000?
A) certiicates of deposit
B) repurchase agreements
C) banker’s acceptances
D) commercial paper
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
9) Which of the following short-term securities would a irm invest in if they wanted to
invest cash for a term of only a few days?
A) Treasury bills
B) repurchase agreements
C) banker’s acceptances
D) commercial paper
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
10) If a irm wishes to invest cash that might be needed at short notice in the very near
future, they would be most likely to invest in which of the following securities?
A) Treasury bills
B) certiicates of deposit
C) repurchase agreements
D) banker’s acceptances
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
35
11) Which of the following is the term used to describe short-term, unsecured debt issued
by large corporations, usually in denominations greater than $100,000 or more?
A) certiicates of deposit
B) repurchase agreements
C) banker’s acceptances
D) commercial paper
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
12) Which of the following is the term used to describe debt issued by state and local
government which has a maturity of one to six months?
A) certiicates of deposit
B) banker’s acceptances
C) commercial paper
D) short-term tax exempts
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
13) Which of the following money market investments is a short-term debt obligations of
the U.S. government?
A) Treasury bills
B) repurchase agreement
C) commercial paper
D) certiicates of deposit
E) banker’s acceptance
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
36
14) Which of the following money market investments is short-term debt issued by a bank
with a minimum denomination of $100,000?
A) Treasury bills
B) banker’s acceptance
C) repurchase agreement
D) commercial paper
E) certiicates of deposit
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
15) Which of the following money market investments is essentially a loan arrangement
wherein a securities dealer is the “borrower” and the investor is the “lender”? The investor
buys securities from the securities dealer, with an agreement to sell the securities back to
the dealer at a later date for a speciied higher price.
A) certiicates of deposit
B) commercial paper
C) banker’s acceptance
D) repurchase agreement
E) Treasury bills
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
16) Which of the following money market investments is a draft written by the borrower
and guaranteed by the bank on which the draft is drawn? It is typically used in
international trade transactions. The borrower is an importer who writes the draft in
payment for goods.
A) Treasury bills
B) repurchase agreement
C) certiicates of deposit
D) banker’s acceptance
E) commercial paper
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
37
17) Which of the following money market investments is a short-term, unsecured debt
obligation issued by a large corporation? The minimum denomination is $25,000, but most
have a face value of $100,000 or more.
A) banker’s acceptance
B) commercial paper
C) repurchase agreement
D) certiicates of deposit
E) Treasury bills
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
18) The amount of cash a irm needs to be able to pay its bills is sometimes referred to as
a(n) ________.
A) operating balance
B) compensating balance
C) transactions balance
D) precautionary balance
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
19) The amount of cash a irm holds to counter the uncertainty surrounding its future cash
needs is known as a(n) ________.
A) speculative balance
B) compensating balance
C) operating balance
D) precautionary balance
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
38