20) In which quarter are Fancy’s seasonal working capital needs the smallest?
A) 1
B) 2
C) 3
D) 4
AACSB Objective: Analytic Skills
Author: JP
Question Status: Previous Edition
21) What do we understand by seasonality?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Revised
22) What do we understand by negative cash low shocks?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
11
23) What do we understand by positive cash low shocks?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Revised
20.2 The Matching Principle
1) According to the matching principle, short-term needs for funds should be inanced by
short-term sources of funds; long-term need for funds should be inanced by long-term
sources of funds.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
2) Which short-term inancing policy states that short-term cash needs should be inanced
with short-term debt and long-term cash needs should be inanced with long-term sources
of funds?
A) aggressive policy
B) evergreen credit
C) matching principle
D) conservatism principle
AACSB Objective: Analytic Skills
Author: JP
Question Status: Previous Edition
3) What is permanent working capital?
A) the amount that a irm must keep invested in its short-term assets to support its
continuing operations
B) the diference between the actual level of investment in short-term assets and the
amount that a irm must keep invested in its short-term assets to support its continuing
operations
C) the amount that a irm keeps invested in its short-term assets to support its continuing
operations which are inanced by short-term debt
D) the amount that a irm keeps invested in its short-term assets to support its continuing
operations which are inanced by long-term debt
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
4) What is temporary working capital?
A) the amount that a irm must keep invested in its short-term assets to support its
continuing operations
12
B) the diference between the actual level of investment in short-term working capital
needs and its permanent working capital investment
C) the amount that a irm keeps invested in its short-term assets to support its continuing
operations which are inanced by short-term debt
D) the amount that a irm keeps invested in its short-term assets to support its continuing
operations which are inanced by long-term debt
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
5) Which of the following statements regarding how a irm should inance its cash needs is
true?
A) Permanent working capital should be inanced by long-term sources of funds, while
temporary working capital should be inanced by short-term sources of funds.
B) Permanent working capital should be inanced by short-term sources of funds, while
temporary working capital should be inanced by long-term sources of funds.
C) Both permanent working capital and temporary working capital should be inanced by
short-term sources of funds.
D) Both permanent working capital and temporary working capital should be inanced by
long-term sources of funds.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
13
6) Q1 Q2 Q3 Q4
Minimum Cash Balance $800 $800 $800 $800
Accounts Receivable 1400 800 700 3700
Inventory 1100 3100 5200 550
Accounts Payable (600) (600) (600) (600)
The data above shows the net working capital requirements for Blunderstone Shoes, a
company that makes waterproof boots. All igures are in thousands of dollars. What can be
considered the irm’s permanent working capital?
A) $2,700,000
B) $3,300,000
C) $4,100,000
D) $4,450,000
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
14
7) Q1 Q2 Q3 Q4
Minimum Cash Balance$800 $800 $800 $800
Accounts Receivable 1400 800 700 3700
Inventory 1100 3100 5200 550
Accounts Payable (600) (600) (600) (600)
The data above shows the net working capital requirements for Blunderstone Shoes, a
company that makes waterproof boots. All igures are in thousands of dollars. What are
Blunderstone’s temporary working capital requirements in the third quarter?
A) $2,700,000
B) $3,400.000
C) $5,450,000
D) $6,100,000
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
15
8) Q1 Q2 Q3 Q4
Minimum Cash Balance$300 $300 $300 $300
Accounts Receivable 80 640 360 100
Inventory 1060 420 60 440
Accounts Payable (330) (330) (330) (330)
The data above shows the net working capital requirements for Flinder’s Camping, a
company that makes tents. All igures are in thousands of dollars. What can be considered
the irm’s permanent working capital?
A) $390,000
B) $510,000
C) $720,000
D) $1,030,000
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
16
9) Q1 Q2 Q3 Q4
Minimum Cash Balance$300 $300 $300 $300
Accounts Receivable 80 640 360 100
Inventory 1060 420 60 440
Accounts Payable (330) (330) (330) (330)
The data above shows the net working capital requirements for Flinder’s Camping, a
company that makes tents. All igures are in thousands of dollars. What are Flinder’s
temporary working capital needs in the quarter in which they are greatest?
A) $390,000
B) $510,000
C) $720,000
D) $1,111,000
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
10) Which of the following best describes an aggressive inancing policy?
A) inancing part or all of the permanent working capital with short-term debt
B) inancing part or all of the permanent working capital with long-term debt
C) inancing part or all of the temporary working capital with short-term debt
D) inancing part or all of the temporary working capital with long-term debt
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
17
11) Which of the following best describes a conservative inancing policy?
A) inancing part or all of the permanent working capital with short-term debt
B) inancing part or all of the permanent working capital with long-term debt
C) inancing part or all of the temporary working capital with short-term debt
D) inancing part or all of the temporary working capital with long-term debt
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
12) Which of the following is NOT a reason why a irm would choose to follow an
aggressive inancing policy?
A) to reduce sensitivity to the irm’s credit quality
B) to reduce agency costs
C) to take advantage of lower interest rates
D) to reduce exposure to funding risk
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
13) Bradford Maintenance, a irm which provides lawn care services, has some seasonal
variations in its cash low needs, since much of the demand for its services is in the
summer months. It uses long-term sources of funds to inance its assets such as its leet of
vehicles and lawn-care equipment and for the permanent funds that it must have at all
times. For its peak seasonal needs it uses long-term sources and some short-term debt.
What best describes the inancial policy being followed by Bradford?
A) matching
B) conservative
C) integrated
D) seasonal
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
18
Use the information for the question(s) below.
14) The above graph shows the levels of ixed assets, permanent working capital and
temporary working capital for a certain company. If the graphs below show the level of
short-term debt that the irm borrows each quarter, which best illustrates an aggressive
inancing policy?
A)
B)
C)
D)
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
19
15) The above graph shows the levels of ixed assets, permanent working capital and
temporary working capital for a certain company. If the graphs below show the excess cash
reserves on hand each quarter, which best illustrates a conservative inancing policy?
A)
B)
C)
D)
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
16) Which of the following is not a speciic inancing option for temporary working capital?
A) secured inancing
B) commercial paper
C) bank loans
D) repurchase agreements
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
20