Name:
Class:
Date:
chapter 22
Page 1
Indicate whether the statement is true or false.
1. Net cash flow should be equated with net profit.
a. True
b. False
2. The disadvantage of accounts receivable financing is the negative impact on cash flow.
a. True
b. False
3. Capital budgeting analysis helps managers make decisions about inventory investments.
a. True
b. False
4. The extensive use of discounted cash flow tools by a small firm probably has more to do with the nature of the small
firm itself than it does with the owner’s desire to be perceived as a community-minded business person..
a. True
b. False
5. The longer the cash conversion period, the greater the potential for cash flow problems to exist for a company.
a. True
b. False
6. A firm’s cost of capital is simply the interest rate it must pay on its loans.
a. True
b. False
7. A firm’s working capital cycle refers to the flow of cash to purchase and sell fixed assets.
a. True
b. False
8. Capital budgeting primarily involves short-term decisions on the part of management.
a. True
b. False
9. The goal of the cash conversion period is convert paid-for inventory and accounts receivables into cash as quickly as
possible.
a. True
b. False
10. Factoring account receivables involves the business selling its accounts receivable to a finance company, and the
finance company assumes any bad-debt risk.
a. True
b. False
Name:
Class:
Date:
chapter 22
Page 2
11. A advantage of the accounting return on investment technique is that it ignores the time value of money.
a. True
b. False
12. Inventory is a concern only for manufacturing companies.
a. True
b. False
13. The goal of the cash conversion period is to have as few days as possible in the process so as to be able to finance
other activities with working capital.
a. True
b. False
14. Improperly managed and uncontrolled stockpiling may greatly increase inventory-carrying costs and place a heavy
drain on the funds of a small business.
a. True
b. False
15. Days sales outstanding should be decreased to increase accounts receivable conversion.
a. True
b. False
16. A company should pay accounts payable on Day 30 if funds are available.
a. True
b. False
17. The management of a small firm’s long-term assets is called capital budgeting.
a. True
b. False
18. Expenses occur when items are purchased; disbursements are the receipts made later for these expenses.
a. True
b. False
19. The percentage annual interest rate is the rate a business will pay by not taking a discount.
a. True
b. False
20. The internal rate of return method estimates the rate of return that can be expected from a contemplated investment.
a. True
b. False
21. Inventory management and accounts payable management are intertwined.
Name:
Class:
Date:
chapter 22
Page 3
a. True
b. False
22. Every component of working capital has two dimensions: interest and money.
a. True
b. False
23. Small business managers tend to overbuy inventory due to not understanding inventory management.
a. True
b. False
24. The under-capitalization and liquidity problems of a small firm can directly affect the decision-making process, and
survival often becomes the top priority.
a. True
b. False
25. Accounts receivable are sometimes called near cash because they can be converted to cash whenever a business needs
to do so.
a. True
b. False
26. The payback period technique measures how long it will take to recover the initial cash outlay and the total amount of
interest unearned over the payback period as an opportunity cost.
a. True
b. False
27. Carrie’s decision to research a new product for her children’s party business is considered an example of a capital
budget decision.
a. True
b. False
28. Days in inventory is equal to the number of days a firm waits to be paid for inventory that has been sold.
a. True
b. False
29. The calculation for days in payables is very similar to days sales outstanding and days in inventory.
a. True
b. False
30. Management should be working continuously to shorten the working capital cycle.
a. True
b. False
31. In a healthy business, cash flow is typically even.
Name:
Class:
Date:
chapter 22
Page 4
a. True
b. False
32. Revenue is recorded at the time a sale is made, but cash receipts are recorded when money actually flows into the
firm.
a. True
b. False
33. Discounted cash flow techniques take into consideration that cash received today is more valuable than cash received
at a later date.
a. True
b. False
34. A firm will have difficulty attracting investors if investments in the firm have internal rates of return below an
investor’s required rate of return.
a. True
b. False
35. The last step in managing inventory is to discover how long inventory has been at the company.
a. True
b. False
36. Managing cash flow well will give a company a competitive edge over their competitors.
a. True
b. False
37. Historically, many small business owners have relied on quantitative analysis in making capital budgeting decisions.
a. True
b. False
38. A shortcoming of the accounting return on investment technique is that it is based on accounting profits rather than
cash flows received.
a. True
b. False
39. Accounting profits are identical to actual cash flows.
a. True
b. False
40. A firm’s net cash flow may be determined by examining the company’s bank account.
a. True
b. False
41. The average collection period is the number of days that a firm extends credit to its customers.
Name:
Class:
Date:
chapter 22
Page 5
a. True
b. False
42. Pledging accounts receivable can indicate troublesome accounts.
a. True
b. False
43. In managing accounts payable, the principle of “Buy now, pay later” allows the small business to postpone a payment.
a. True
b. False
44. During the cash conversion period, the firm has the benefit of the financing provided by the supplier.
a. True
b. False
45. The cash conversion period equals the days in inventory plus the days sales outstanding minus days in payables.
a. True
b. False
46. Software programs can provide adequate assistance in inventory identification and control.
a. True
b. False
47. Batching may hold up receipts of customer payments.
a. True
b. False
48. The cash conversion period is the time period between ordering inventory and receiving cash for its sale.
a. True
b. False
49. Use of the accounting return on investment technique answers the question, “How long will it take to recover the
original investment outlay?”
a. True
b. False
50. The payback period technique does not consider the time value of money.
a. True
b. False
51. Working capital management focuses on the attractiveness of long-run investment opportunities.
a. True
b. False
Name:
Class:
Date:
chapter 22
Page 6
Indicate the answer choice that best completes the statement or answers the question.
52. The cash conversion period is the time between
a. cash payment for inventory and collection of accounts receivable.
b. placement of an order and cash payment for it.
c. receipt of inventory and cash payment for it.
d. sale of inventory and cash collection of accounts receivable.
53. Pearl has been asked by her boss to manage the company’s working capital. This means Pearl is now in charge of
a. cash, fixed assets, and inventory.
b. cash, accounts receivable, inventory, and accounts payable.
c. cash, accounts receivable, and fixed assets.
d. accounts receivable, accounts payable, and long-term investments.
54. Lucinda has decided to use a _______________ to speed up the processing of inovice payments.
a. customer box.
b. deposit box.
c. lock box.
d. mail box.
55. The goal of the managing cash conversion period is to _____ the number of days.
a. increase
b. maintain
c. decrease
d. match the industry average for
56. Nicholas wouild like to improve the management of his company’s accounts payable. One metric he might find useful
is:
a. days in credit.
b. days in inventory.
c. days in payables.
d. days sales outstanding.
57. Accounts receivable financing might include
a. using a bank, lender, or other finance company.
b. lending money against receivables and aging accounts receivable.
c. providing cash discounts and charging interest on delinquent accounts.
d. giving a customer more time to pay.
58. Long-term investments are the focus of
a. cash budgeting.
b. capital budgeting.
c. corporate planning.
d. investment planning.
59. Inventory is called a “necessary evil”; it is “necessary” because
Name:
Class:
Date:
chapter 22
Page 7
a. it ties up funds that are not actively productive.
b. supply and demand cannot be managed precisely with day-to-day operations.
c. it reduces cash when it is sold.
d. it deteriorates so therefore a certain percent is lost to spoilage and waste.
60. An understanding of the present value of a future dollar is important when one is using
a. the payback period method.
b. discounted cash flow techniques.
c. the accounting return on investment technique.
d. the investment outlay valuation technique.
61. Why do small business managers tend to overbuy inventory?
a. They forecast greater demand than is realistic
b. Vendor’s insist that prices may be going down.
c. They don’t want to disappoint vendors and suppliers.
d. Maximizing inventory is a good way to decrease taxes.
62. Margaret has just sold merchandise to a small beauty salon and has given the salon 45 days to pay the invoice. She is
at the beginning of
a. the life cycle of receivables.
b. the cash conversion period.
c. the working capital management cycle.
d. the inventory management cycle.
63. The main purpose of capital budgeting is to help managers make decisions about
a. discounts to offer to customers.
b. long-term investments.
c. non-financial constraints on expansion.
d. short-term investments.
64. Net cash flow and revenue are
a. opposites.
b. different.
c. identical.
d. identical after adjustment for depreciation.
65. Nadine would like to improve the management of inventory in her company. One of her first activities should be to:
a. discount current items.
b. discover how long items have been there.
c. organize current items by skew number.
d. purchase new items.
66. Owen was surprised when he calculated the percentage annual interest rate on his accounts payable. He discovered
that failure to take advantage of the discount offered by suppliers
a. makes small difference since a business does not pay a high interest rate.
b. makes a large difference since a business pays a high interest rate.
Name:
Class:
Date:
chapter 22
Page 8
c. has no effect on cash flow since the interest rates are so low.
d. will have erratic effects on rates for the use of a supplier’s money.
67. “How does the present value of future benefits from the investment compare to the initial investment outlay?” is
answered using
a. analysis of long-term investment.
b. discounted cash flow analysis.
c. investment outlay valuation.
d. ratio analysis.
68. Lester is watching the bank balance decline throughout the month and hopes his company won’t run out of money
before it runs out of month. Lester is concerned about the net cash flow, which is:
a. is the difference between cash inflows and outflows.
b. is the difference between revenues and expenses.
c. is the same as net profit.
d. is the same as working capital plus inventory.
69. The terms 2/10, net 45 offer
a. a 2 percent discount on purchases paid for within 45 days.
b. a 10 percent discount on purchases paid for within 2 days.
c. a 2 percent discount on purchases paid for within 10 days.
d. a 10 percent discount on purchases paid for within 45 days.
70. Average annual after-tax profits per year divided by the average book value of the investment equals
a. payback period technique.
b. average investment outlay.
c. average investment capability.
d. accounting return on investment.
71. Madeleine would like to know how long it takes, on average, from the time inventory is received until it is
sold. Madeleine is interested in the:
a. days in credit.
b. days in inventory.
c. days in payables.
d. days sales outstanding.
72. Assuming that cash is available, payment for an account payable with terms of 3/10, net 30 should be made on day
a. 3.
b. 10.
c. 13.
d. 30.
73. Cash deposits during a month less checks written during the same period equal
a. net cash flow.
b. net profit.
c. net working capital.
Name:
Class:
Date:
chapter 22
Page 9
d. operating profit.
74. The number of days, on average, that a firm is extending credit to its customers is called
a. cash conversion period
b. days in inventory.
c. days sales outstanding.
d. cash flow cycle.
75. Accounts payable ____ cash available for the firm when payment is made.
a. increase the amount of
b. reduce the amount of
c. have no effect on the
d. represent all of the
76. Discounted cash flow techniques answer the question of:
a. Do the cash returns of the investment exceed the cash outlays?
b. How does the present value of future benefits from the investment compare to the investment outlay?
c. How long will it take to recover the original investment outlay?
d. How much average profit is generated per dollar of average investment?
77. Which question do all types of capital budgeting techniques try to answer?
a. Do the future benefits from the investment exceed the cost of making the investment?
b. Is the investment too expensive?
c. Will the firm’s cash flows be adequate to pay for the investment?
d. Will the investment’s time requirements fit the needs of the company?
78. A company with accounts payables of $35,000 and cost of goods sold of $300,000 would have days in payables of
a. 24 days.
b. 32 days.
c. 43 days.
d. The answer is not one of the above choices.
79. Under the NPV method, the rate of return required to satisfy the firm’s investors is the
a. opportunity cost.
b. internal rate of return.
c. cost of capital.
d. accounting return on investment.
80. Which statement is true concerning inventory management programs?
a. A yearly inventory for accounting purposed should be sufficient for most small businesses.
b. Keeping stock for “just in case” is suggested for customer satisfaction and is needed for inventory.
c. Software programs supplemented by a required physical inventory will assist in inventory control.
d. Slow moving items in a company’s inventory are limited concerns since they can be marked down and sold.
81. Accounts receivable financing
a. allows small businesses to extend credit to customers.
Name:
Class:
Date:
chapter 22
Page 10
b. delays the time a company receives money from receivables.
c. means borrowing money against the firm’s accounts receivable.
d. is not a suggested practice due to the cost.
82. The payback period and accounting return on investment techniques
a. recognize the economic life of a project.
b. ignore the time value of money.
c. consider only the return for the first year of the investment.
d. are more difficult to use than the net present value method.
83. IRR
a. takes into account that cash received today is more valuable than cash received later.
b. estimates the rate of return that can be expected from an investment.
c. estimates the current value of future cash flows.
d. compares the present value of future cash flows with cash outlay.
84. Tres has received a large contract and has taken a loan to buy inventory. Considering the timing of the loan, Tres may
be ____________ to complete the contract.
a. selling short
b. pledging receivables
c. mortgaging
d. factoring
85. “How many dollars in average profits are generated per dollar of average investment?” is answered using
a. accounting return on investment.
b. net present value.
c. internal rate of return.
d. investment outlay valuation.
86. The third day in the working capital time line is
a. accounts payable are paid.
b. collect accounts receivable.
c. inventory is sold on credit.
d. pay accounts payable.
87. If the net present value of a proposed investment is positive,
a. the cost of the investment is more than the present value of the future cash flows.
b. the investment does not earn the required rate of return.
c. the present value of the future cash flows would be unaffected by the proposed investment.
d. the firm should make the investment because the present value of the future cash flows is more than the cost of
the investment.
88. A company has 30 days in payables, 15 days in inventory, and 20 days for the average collection period. How many
days are in the company’s cash conversion process?
a. 5
b. 25
Name:
Class:
Date:
chapter 22
Page 11
c. 45
d. 65
89. Which statement is true about firms with a cash culture?
a. Cash policies are not their first priority.
b. They are less likely to have good vendor terms.
c. Their metrics are murky.
d. They need less working capital.
90. “How long will it take to recover the original investment outlay?” is answered using
a. accounting ratio analysis.
b. discounted cash flow.
c. net present value.
d. payback period technique.
91. A reason that a small firm would not use a discounted cash flow technique in evaluating capital investments would be
a. company management has a preference for another quantitative method.
b. liquidity is less of an issue for a small company.
c. non-financial issues may be more important for a small firm.
d. small firms invest more in short-term assets than large companies.
92. Working capital management
a. deals with assigning cash values to employees.
b. is not important to small businesses.
c. involves managing short-term assets and sources of financing.
d. involves managing long-term assets and liabilities.
93. The first step in the working capital cycle process is to
a. order inventory.
b. purchase or produce inventory for sale.
c. receive inventory.
d. sell the inventory for cash or credit.
Match the term with its definition. Some terms may not be used.
a. Cash conversion period
b. Cost of capital
c. Days in inventory
d. Days in payables
e. Days sales outstanding
f. Lock box
g. Pledged accounts receivable
h. Working capital management
94. A post office box for receiving remittances from customers