Corporate Finance, 12e (Ross)
1) Net working capital is defined as the:
A) current assets of a business.
B) difference between current assets and current liabilities.
C) present value of short-term cash flows.
D) difference between all assets and liabilities.
E) difference between total current assets and cash.
2) Which one of the following is a source of cash?
A) An increase in accounts receivable
B) An increase in fixed assets
C) A decrease in long-term debt
D) The payment of a cash dividend
E) An increase in accounts payable
3) Which one of the following is a use of cash?
A) Selling goods from inventory
B) Sale of a marketable security held by the firm
C) Submitting taxes to the government
D) Obtainment of a long-term loan
E) Collection of a past-due accounts receivable
4) Which one of the following will increase net working capital? Assume the current ratio is
greater than 1.0.
A) Using cash to pay an accounts payable
B) Using cash to pay a long-term debt
C) Selling inventory at cost
D) Collecting an accounts receivable
E) Using a long-term loan to buy inventory
5) Which one of the following will decrease the net working capital of a firm? Assume the
current ratio is greater than 1.0.
A) Selling inventory at a profit
B) Collecting an accounts receivable
C) Paying a payment on a long-term debt
D) Selling a fixed asset for book value
E) Paying an accounts payable
6) One use of cash is represented by:
A) an increase in borrowing.
B) an increase in operating cash flow.
C) a decrease in accounts payable.
D) an increase in notes payable.
E) a decrease in inventory.
7) A use of cash is associated with:
A) a decrease in a liability.
B) an increase in an asset.
C) an increase in retained earnings.
D) both an increase in an asset and an increase in retained earnings.
E) both a decrease in a liability and an increase in an asset.
8) Cash increases when:
A) long-term debt decreases.
B) equity decreases.
C) current liabilities decrease.
D) accounts payable increases.
E) fixed assets increase.
9) If a firm needs to increase its cash holdings it could:
A) increase fixed assets.
B) decrease accounts payable.
C) decrease long-term debt.
D) increase other current assets.
E) increase current liabilities.
10) Cash decreases when:
A) current assets other than cash increase.
B) fixed assets decrease.
C) current liabilities increase.
D) retained earnings increase.
E) long-term debt increases.
11) The cash cycle is defined as the time between:
A) the arrival of inventory and cash collected from receivables.
B) selling a product and paying the supplier of that product.
C) selling a product and collecting the accounts receivable.
D) cash disbursements and cash collection for an item.
E) the sale of inventory and cash collection.
12) The cash cycle equals the:
A) inventory period plus the accounts receivable period.
B) change in net working capital divided by daily sales.
C) operating cycle plus the accounts payable period.
D) operating cycle minus the inventory period.
E) operating cycle minus the accounts payable period.
13) The operating cycle can be decreased by:
A) paying accounts payable faster.
B) discontinuing the discount given for early payment of an accounts receivable.
C) decreasing the inventory turnover rate.
D) collecting accounts receivable faster.
E) increasing the accounts payable turnover rate.
14) The operating cycle will decrease if you decrease the:
A) days sales in inventory.
B) days in accounts payable.
C) cash cycle by increasing the accounts payable period.
D) accounts receivable turnover rate.
E) speed at which inventory is sold.
15) Which one of the following will not affect the operating cycle?
A) Decreasing the payables turnover from 7 times to 6 times
B) Increasing the days sales in receivables
C) Decreasing the inventory turnover rate
D) Increasing the average receivables balance
E) Decreasing the credit repayment times for the firm’s customers
16) You can decrease the cash cycle by:
A) increasing the cash discount offered to customers who pay their accounts early.
B) increasing the percentage of customers paying with credit rather than cash.
C) increasing the amount of raw materials kept in inventory.
D) paying your suppliers earlier to receive a discount on your purchases.
E) increasing your inventory to prevent stock-outs.
17) The cash cycle will decrease as a result of increasing the:
A) payables turnover.
B) days sales in inventory.
C) operating cycle.
D) inventory turnover rate.
E) accounts receivable period.
18) ABC Manufacturing historically produced products that were held in inventory until they
could be sold to a customer. The firm is now changing its policy and only producing a product
when it receives an actual order from a customer. All else equal, this change will:
A) increase the operating cycle.
B) lengthen the accounts receivable period.
C) shorten the accounts payable period.
D) decrease the cash cycle.
E) decrease the inventory turnover rate.
19) Which one of these statements concerning the cash cycle is correct?
A) The cash cycle is equal to the operating cycle minus the inventory period.
B) A negative cash cycle is actually preferable to a positive cash cycle.
C) Granting credit to slower paying customers tends to decrease the cash cycle.
D) The cash cycle plus the accounts receivable period is equal to the operating cycle.
E) The most desirable cash cycle is the one that equals zero days.
20) Which one of these statements is correct concerning the cash cycle?
A) The longer the cash cycle, the more likely a firm will need external financing.
B) Increasing the accounts payable period increases the cash cycle.
C) A positive cash cycle is preferable to a negative cash cycle.
D) The cash cycle can exceed the operating cycle if the payables period is equal to zero.
E) Adopting a more liberal accounts receivable policy will tend to decrease the cash cycle.
21) If The Deli delays paying its suppliers by an additional ten days, then:
A) its payables turnover rate will increase.
B) it should require less bank financing of its daily operations.
C) its cash cycle will increase by ten days.
D) its operating cycle will increase by ten days.
E) its stock-out costs will rise.
22) Given a fixed level of sales and a constant profit margin, an increase in the accounts payable
period can result from:
A) an increase in the cost of goods sold account value.
B) an increase in the ending accounts payable balance.
C) an increase in the cash cycle.
D) a decrease in the operating cycle.
E) a decrease in the average accounts payable balance.
23) The accounts receivable policy is generally set by the:
A) purchasing manager.
B) credit manager.
C) controller.
D) production manager.
E) payables manager.
24) The manager responsible for applying payments to customer’s accounts is the:
A) controller.
B) payables manager.
C) credit manager.
D) purchasing manager.
E) production manager.
25) The length of time between the acquisition of inventory and the collection of cash from
receivables is called the:
A) operating cycle.
B) inventory period.
C) accounts receivable period.
D) accounts payable period.
E) cash cycle.
26) The length of time between the acquisition of inventory and its sale is called the:
A) operating cycle.
B) inventory period.
C) accounts receivable period.
D) accounts payable period.
E) cash cycle.
27) The length of time between the sale of inventory and the collection of cash from receivables
is called the:
A) operating cycle.
B) inventory period.
C) accounts receivable period.
D) accounts payable period.
E) cash cycle.
28) The length of time between the acquisition of inventory by a firm and the payment by the
firm for that inventory is called the:
A) operating cycle.
B) inventory period.
C) accounts receivable period.
D) accounts payable period.
E) cash cycle.
29) The length of time between the payment for inventory and the collection of cash from
receivables is called the:
A) operating cycle.
B) inventory period.
C) accounts receivable period.
D) accounts payable period.
E) cash cycle.
30) If the average accounts receivable that a firm holds decreases without any decrease in credit
sales, the operating cycle will:
A) remain constant because sales remained constant.
B) remain constant because the change will only affect the cash cycle.
C) decrease because the days’ sales outstanding will decrease.
D) increase because the accounts receivable turnover will decrease.
E) decrease because the accounts receivable turnover will decrease.
31) Flexible short-term financial policies tend to:
A) maintain low accounts receivable balances.
B) support few investments in marketable securities.
C) minimize the investment in inventory.
D) maintain large cash balances.
E) tightly restrict credit sales.
32) The short-term financial policy a firm adopts will be reflected in:
A) the size of the firm’s investment in current assets.
B) the financing of current assets.
C) the financing of fixed assets.
D) both the size and the financing of current assets.
E) both the size and the financing of fixed assets.
33) Costs of the firm that rise with increased levels of investment in its current assets are called
________ costs.
A) carrying
B) shortage
C) order
D) safety
E) trading
34) Costs of the firm that fall with increased levels of investment in its current assets are called
________ costs.
A) carrying
B) shortage
C) debt
D) equity
E) payables
35) A restrictive short-term financial policy tends to:
A) reduce future sales more so than a flexible policy.
B) grant credit to more customers.
C) incur more carrying costs than a flexible policy does.
D) encourage credit sales over cash sales.
E) reduce order costs as compared to a more flexible policy.
36) A firm that adopts a flexible short-term financial policy is more apt to have:
A) lower carrying costs than shortage costs.
B) lower shortage costs than carrying costs.
C) stricter limits on credit sales than the average firm.
D) a relatively low level of current assets.
E) greater short-term financing needs than if the firm adopted a restrictive policy.
37) A flexible short-term financial policy:
A) increases the likelihood that a firm will face financial distress.
B) incurs an opportunity cost due to the rate of return that applies to short-term assets.
C) advocates a smaller investment in net working capital than a restrictive policy does.
D) increases the probability that a firm will earn high returns on all its assets.
E) utilizes short-term financing to fund all the firm’s assets.
38) Miller’s Hardware has a flexible short-term financing policy. Over the course of one year, the
firm should expect to have some months that allow it to:
A) repay all its debts.
B) invest in marketable securities.
C) reduce its total costs below the firm’s normal minimum total cost point.
D) finance all its assets with short-term loans.
E) earn high returns on all its current assets.
39) Shortage costs include all the following except the:
A) opportunity costs related to a low return on assets.
B) order costs.
C) disruption of production schedules.
D) production setup costs.
E) lost sales.
40) Given a flexible financing policy, a growing firm generally has a permanent requirement for:
A) both current and long-term assets.
B) long-term assets only.
C) short-term debt.
D) both short- and long-term debt.
E) current assets and short-term debt.
41) If your accounts receivable period is 30 days, you will collect payment for your ________
sales during the second quarter of a calendar year.
A) December, January, and February
B) January, February, and March
C) February and March
D) February, March, and April
E) March, April and May
42) Baxter’s collects 30 percent of its sales in the month of sale, 55 percent in the month
following the month of sale, and 13 percent in the second month following the month of sale.
Given this, the company will collect ________ sales during the month of May.
A) 30 percent of May
B) 55 percent of March
C) 13 percent of April
D) 55 percent of May
E) 13 percent of February
43) A manufacturing firm has a 90-day collection period. The firm produces seasonal
merchandise and thus has the least sales during the first quarter of a year and the highest level of
sales during the third quarter of a year. The firm maintains a relatively steady level of production
which means that its cash disbursements are approximately equal in all quarters. The firm is most
apt to face a cash-out situation in:
A) the first quarter.
B) the second quarter.
C) the third quarter.
D) the fourth quarter.
E) any quarter, equally.
44) A financially solid firm is most apt to have a quarterly cash shortfall when it encounters a:
A) period of relatively constant sales.
B) major fixed asset expenditure.
C) period of rising interest rates.
D) period of declining interest rates.
E) period of increased cash collections.
45) Which one of these statements is true?
A) The cumulative finance surplus requirement is computed prior to adjusting for the minimum
cash balance.
B) A financially sound firm will always have a positive quarterly net cash flow.
C) A negative cumulative cash surplus indicates a borrowing need.
D) Most firms plan on maintaining a zero cash balance.
E) The minimum cash balance generally increases on a quarterly basis.
46) A cumulative cash deficit indicates a firm:
A) has at least a short-term need for external funding.
B) is facing long-term financial distress.
C) will go out of business within the year.
D) is capable of funding all its needs internally.
E) is using its cash wisely.
47) A prearranged, short-term bank loan up to a specified limit, made on a formal or informal
basis, is called a:
A) letter of credit.
B) cleanup loan.
C) compensating balance.
D) line of credit.
E) roll-over.
48) A fraction of the available credit on a loan agreement deposited by the borrower with the
bank in a low or non-interest-bearing account is called a:
A) compensating balance.
B) cleanup loan.
C) letter of credit.
D) line of credit.
E) roll-over.
49) A short-term loan where the lender holds the borrower’s receivables as security is called:
A) a compensating balance.
B) assigned receivables financing.
C) a letter of credit.
D) factored receivables financing.
E) a bond.
50) A type of short-term loan where the borrower sells its receivables to the lender up-front, but
at a discount to face value, is called:
A) a compensating balance.
B) assigned receivables financing.
C) a letter of credit.
D) factored receivables financing.
E) a bond.
51) A short-term loan which is secured by inventory that is held in trust is referred to as:
A) a blanket inventory lien.
B) a secured line of credit.
C) a banker’s acceptance.
D) a trust receipt financing arrangement.
E) field warehousing financing.
52) The most common means of financing a temporary cash deficit is a:
A) long-term secured bank loan.
B) short-term secured bank loan.
C) short-term issue of corporate bonds.
D) long-term unsecured bank loan.
E) short-term unsecured bank loan.
53) A compensating balance:
A) requirement generally applies to inventory-type loans.
B) is a means of paying for banking services received.
C) requirement is generally set equal to one percent of the amount borrowed.
D) decreases the cost of short-term bank financing.
E) refunds a portion of the borrower’s interest if a loan is repaid early.
54) Which one of these statements is correct?
A) A farmer generally uses trust receipt financing to finance operations during the growing
season.
B) An auto dealer is most apt to use purchase order financing.
C) A drug store is most apt to use trust receipt financing.
D) Trust receipt financing is most applicable to large, easily identifiable types of inventory.
E) Blanket inventory lien financing is another term for purchase order financing.
55) Commercial paper is generally issued:
A) by large firms.
B) for 190 days or less.
C) by commercial banks.
D) for 90 to 180 days.
E) at the prime rate offered by the firm’s bank.
56) Which party(ies) is(are) ultimately responsible for an invoice from a supplier that is subject
to a bankers’ acceptance?
A) The bank which issued the acceptance
B) The purchasing firm
C) The investors who purchased the banker’s acceptance
D) The vendor who issued the invoice
E) Both the bank and the purchasing firm jointly
57) Brook Side reported sales of $738,000 and cost of goods sold of $584,000 for the year. The
firm had a beginning inventory of $51,000 and an ending inventory of $46,000. What is the
length of the inventory period?
A) 15.24 days
B) 15.16 days
C) 31.19 days
D) 29.87 days
E) 30.31 days
58) Last year, Wilson’s had credit sales of $927,000 and cost of goods sold of $762,000. The
beginning of the year inventory was $138,000 and the end of the year inventory was $154,300. If
the accounts receivables average $87,400, what is the operating cycle?
A) 88.23 days
B) 104.42 days
C) 78.60 days
D) 70.01 days
E) 92.09 days