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CFIN4
Chapter 15 – Managing Short- Term Assets
1. Firms hold cash balances in order to complete transactions that are necessary in business operations and as
compensation to banks for providing loans and services.
a. True
b. False
2. Two of the primary motives for a firm to hold cash are the transaction motive and the precautionary motive.
a. True
b. False
3. A firm's target cash balance should be set as the smaller of (1) its transaction balance plus a precautionary (safety
stock) balance or (2) its required compensating balance.
a. True
b. False
4. For a firm that makes heavy use of float, being able to forecast its collections and disbursement check clearings is
essential.
a. True
b. False
5. Lockbox arrangements are one way for a firm to speed up the receipt of payments from customers.
a. True
b. False
CFIN4
Chapter 15 – Managing Short- Term Assets
6. Target cash balances are generally not affected by compensating balance requirements except during periods of
high interest rates and tight money.
a. True
b. False
7. The primary purpose of compensating balances required of borrowers is to compensate the bank in the event the
borrower defaults on the loan.
a. True
b. False
8. Fixed dividend preferred stock is a good candidate for marketable security holdings designed to provide liquidity
because 70 percent of the dividends are excludable from taxable income, hence the preferred would provide a
relatively high after-tax rate of return.
a. True
b. False
9. The term "interest rate price risk" refers to the probability that a firm will be unable to continue making interest
payments on its debt.
a. True
b. False
10. The benefits of a sound cash management program are not sensitive to interest rates.
a. True
b. False
CFIN4
Chapter 15 – Managing Short- Term Assets
11. If there are large fluctuations in a firm's cash flows, or if there are large costs associated with selling securities,
then the firm should hold relatively small average cash balances.
a. True
b. False
12. The average accounts receivables balance is determined jointly by the volume of credit sales and the days sales
outstanding.
a. True
b. False
13. The four major elements in a firm's credit policy are (1) credit standards, (2) credit terms, (3) monitoring function,
and (4) collection policy.
a. True
b. False
14. Credit associations and credit reporting agencies are two major sources of external credit information on credit
customers.
a. True
b. False
15. If you receive some goods on April 1 with the terms 3/20, net 30, June 1 dating, it means that you will receive a 3
percent discount if the bill is paid on or before June 20 and that the full amount must be paid 30 days after receipt of
the goods.
a. True
b. False
CFIN4
Chapter 15 – Managing Short- Term Assets
16. Offering trade credit discounts is costly to a firm and as a result, firms that offer trade discounts are usually those
that are performing poorly and need cash quickly.
a. True
b. False
17. Inventory management focuses on three basic questions: (1) how many units to hold in stock, (2) how many units of
each item to order, and (3) at what point to reorder.
a. True
b. False
18. The central goal of inventory management is to provide sufficient incentives to ensure that the firm never suffers a
stock-out (i.e., runs out of an inventory item).
a. True
b. False
19. Inventory management is largely self-contained; that is, only minimum coordination among other departments such
as sales, purchasing, and production is required for successful inventory management.
a. True
b. False
20. Generally, ordering costs are the single most important cost element in inventory management, because they are
greater in magnitude than carrying costs.
a. True
b. False
CFIN4
Chapter 15 – Managing Short- Term Assets
21. The economic order quantity is that order quantity which results in the minimum ordering costs.
a. True
b. False
22. If the unit sales of a firm double, the optimal order quantity as determined by the EOQ model will also double.
a. True
b. False
23. If the forecasted sales or usage rate is not accurate, the EOQ model may not lead to efficient inventory
management.
a. True
b. False
24. The ABC method of inventory classification helps management concentrate resources on those inventory items that
are most critical to the firm's operations.
a. True
b. False
25. A just-in-time system of inventory control requires that manufacturers coordinate production with suppliers so that
raw materials or components arrive just as they are needed in the production process. The main objective of such a
system is to reduce carrying costs.
a. True
b. False
CFIN4
Chapter 15 – Managing Short- Term Assets
26. The primary motivation behind out-sourcing is to provide the firm with an alternative source of supply in the event
that its primary supplier is unable to meet the firm's raw material or component needs.
a. True
b. False
27. A Eurodollar is a U.S. dollar deposited in a bank outside the United States.
a. True
b. False
28. Credit policy for the multinational firm is generally riskier due in part to the additional consideration of exchange
rates and also due to uncertainty regarding the credit worthiness of many foreign customers.
a. True
b. False
29. Exchange rates influence a multinational firm's inventory policy because changing currency values can affect the
value of inventory.
a. True
b. False
30. The threat of expropriation creates an incentive for the multinational firm to minimize inventory holdings and to
bring in goods only as needed.
a. True
b. False
CFIN4
Chapter 15 – Managing Short- Term Assets
31. The credit period is length of time for which credit is granted; after that time, the credit account is considered
delinquent.
a. True
b. False
32. The terms of credit include the length of the credit period and any cash discounts offered.
a. True
b. False
33. The collection policy refers to the procedures the firm follows to collect its credit accounts.
a. True
b. False
34. Two commonly used methods of monitoring receivables are the DuPont method and the aging schedule.
a. True
b. False
35. All else equal, firms that hold greater amounts of short-term assets are considered more risky than firms that hold
grater amounts of long-term securities.
a. True
b. False
36. Short term assets generally earn a higher rate of return than long-term assets, making short term assets a more
desirable investment than long-term assets.
a. True
b. False
CFIN4
Chapter 15 – Managing Short- Term Assets
37. The target cash balance is the minimum cash balance a firm desires to maintain in order to conduct business.
a. True
b. False
38. The net float is the difference between the disbursement float and the collections float.
a. True
b. False
39. If the carrying costs of inventory increase then the economic ordering quantity of inventory will increase to insure
the firm minimizes the total inventory costs.
a. True
b. False
40. Synchronization of cash flows is an important cash management technique and effective synchronization can
actually increase a firm's profitability.
a. True
b. False
41. Collections float offsets disbursement float. If a firm's collections float is greater than its disbursement float then a
firm is said to operate with positive net float.
a. True
b. False
42. A lockbox plan is one method of speeding up the check-clearing process for customer payments and decreasing the
firm's net float position.
a. True
b. False
43. A firm has a daily average collection of checks equal to $250,000. It takes the firm approximately 4 days to convert
the funds into usable cash. Assume (1) a lockbox system could be employed which would reduce the cash
conversion procedure to 21/2 days, and (2) the firm could invest any additional cash received at 6 percent after
taxes. The lockbox system would be a good buy if it costs only $23,000 annually.
a. True
b. False
44. Borrowing and holding marketable securities are substitute financing alternatives, although the two strategies may
have different costs.
a. True
b. False
45. Other things equal and held constant, a firm with an effective accounts receivable monitoring system, when
compared with a firm without such a monitoring system, will likely have lower additional funds needed.
a. True
b. False
CFIN4
Chapter 15 – Managing Short- Term Assets
46. A firm's collection policy and the procedures it follows to collect accounts receivable play an important role in
keeping its deferrables period short, although too strict a collection policy can result in outright losses due to non-
payment.
a. True
b. False
47. In part because money has time value, cash sales are always more profitable and more valuable than credit sales.
a. True
b. False
48. Generally, the longer the normal inventory holding period of a customer the longer the credit period. One effect of
extending the credit period to match the customer's merchandise holding period is to increase the customer's
payables deferral period which actually serves to shorten the customer's cash conversion cycle.
a. True
b. False
49. If a firm's terms are 2/10, net 30 days, and its DSO is 28 days, we can be certain that the credit department is
functioning efficiently and the percentage of past due accounts is minimal.
a. True
b. False
CFIN4
Chapter 15 – Managing Short- Term Assets
50. If your firm's DSO or aging schedule deteriorates from the first quarter of the year to the second quarter, this is a
clear indication that your firm's credit policy has weakened.
a. True
b. False
51. If the average collection period or days sales outstanding is increasing the firm should consider easing its credit
policy to allow credit to more of its customers.
a. True
b. False
52. Which of the following is (are) typically part of the cash budget?
a. Payment lag.
b. Payment for plant construction.
c. Cumulative cash.
d. All of the above.
e. Only answers a and c above.
53. Which of the following statements concerning the cash budget is true?
a. Depreciation expense is not explicitly included, but depreciation effects are implicitly included in estimated
tax payments.
b. Cash budgets do not include financial expenses such as interest and dividend payments.
c. Cash budgets do not include cash inflows from long-term sources such as bond issues.
d. Answers a and b above.
e. Answers a and c above.
CFIN4
Chapter 15 – Managing Short- Term Assets
54. Which of the following actions in managing the cash account would, in general, either not be feasible or else not be
consistent with the firm's wealth maximization objective?
a. Increase synchronization of inflows and outflows.
b. Use drafts for disbursing funds.
c. Use a lockbox plan.
d. Maintain an average balance which is equal to that required as a compensating balance or that which
minimizes total cash management costs, whichever is lower.
e. None of the above (all would be feasible and consistent actions).
55. A lockbox plan is
a. A method for safe-keeping of marketable securities.
b. Used to identify inventory safety stocks.
c. A system for slowing down the collection of checks written by a firm.
d. A system for speeding up a firm's collections of checks received.
e. Not described by any of the above statements.
56. Which of the following investments is not likely to be a proper investment for temporarily idle cash?
a. Commercial paper.
b. Treasury bills.
c. Recently issued long-term corporate bonds.
d. Government bonds due shortly.
e. AT&T bonds due within one year.
CFIN4
Chapter 15 – Managing Short- Term Assets
57. Which of the following is not a situation which might lead a firm to hold marketable securities:
a. The firm has purchased a fixed asset which will require a large write-off of depreciable expense.
b. The firm must meet a known financial commitment, such as financing an ongoing construction project.
c. The firm must finance seasonal operations.
d. The firm has just sold long-term securities and has not yet invested the proceeds in earning assets.
e. None of the above (all of the situations might lead the firm to hold marketable securities).
58. Which of the following statements is correct?
a. A lockbox system is an example of concentration banking.
b. For a firm that has many divisions or plants operating over a wide geographic area, payables centralization
offers little benefit.
c. If a firm increases its disbursement float, its net float will also increase, other things held constant.
d. There are no actions a firm can take to improve its synchronization of cash flows.
e. A lockbox system does not affect collections float.
59. 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
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.
e. None of the above.
60. 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?
a. It normally stimulates sales.
b. To meet competitive pressures.
c. To increase the firm's deferral period for payables.
d. All of the above.
e. Both a and b above.
61. Which of the following statements is correct?
a. The optimal credit policy is determined primarily by the industry in which the firm operates and by current
economic conditions.
b. Normally, when a credit sale is made, inventory is reduced by the cost of goods sold and an equal amount is
credited to accounts receivable.
c. A typical business credit report provides sufficient information to eliminate the need for informed human
judgment in the credit decision.
d. A customer's credit quality is usually determined in terms of the probability of the customer's default.
e. Computers have had a significant effect in increasing efficiency in the areas of payroll and inventory, but
have had little impact in accounts receivable management.
62. In the text, the "red-line method" refers to
a. The policy of drawing a red line around certain neighborhoods on a map and then refusing to sell on credit to
people who live within those areas.
b. Restrictions imposed by companies which insure credit risks.
c. The use, in Dun & Bradstreet's reports, of a red line to show the maximum amount of credit which should be
extended to a given customer; companies using this limit when they screen customers' orders are said to be
using the "red-line method."
d. A method of controlling inventories by drawing a red line on the inside of a bin.
e. A method of controlling receivables by drawing a red line on invoices of companies that are expected to pay
late.
CFIN4
Chapter 15 – Managing Short- Term Assets
63. Which of the following might be attributed to efficient inventory management?
a. High inventory turnover ratio.
b. Low incidence of production schedule disruptions.
c. High total asset turnover.
d. All of the above.
e. Only answers a and c above.
64. Which of the following is not a reason for a firm to hold cash balances?
a. To cover routine payments and collections.
b. To earn high rates of interest.
c. To meet compensating balance requirements of banks.
d. To provide a safety stock in the event of unforeseen fluctuations into cash flows.
e. To take advantage of bargain purchases that might arise.
65. A minimum checking account balance that a firm must maintain with bank to help offset the costs and services
such as check clearing and cash management advice is called a balance.
a. transactions
b. compensating
c. precautionary
d. speculative
e. convertible
66. A cash balance that is held to enable the firm to take advantage of any bargain purchases that might arise is called
a ____ balance.
a. transactions
b. compensating
c. precautionary
d. speculative
e. convertible
67. A cash balance held in reserve for unforeseen fluctuation in cash flows is called a balance.
a. transactions
b. compensating
c. precautionary
d. speculative
e. cash
68. Having synchronized cash flows enables a firm to
a. increase its cash balances.
b. increase its bank loans.
c. increase interest expense.
d. increase profits.
e. None of the above.
CFIN4
Chapter 15 – Managing Short- Term Assets
69. The value of checks that have been written and disbursed but have not been deducted from the account on which
they were written is the float.
a. disbursement
b. net
c. collections
d. balance
e. deposit
70. The amount of checks that have been received and deposited but have not yet been made available to the account
in which they were deposited is the float.
a. disbursement
b. net
c. collections
d. balance
e. deposit
71. What type of system allows a customer's bank to periodically transfer funds from its account to a selling firm's
bank account for payment of bills?
a. Disbursement agreement.
b. Preauthorized debit system.
c. Lockbox agreement.
d. Concentration banking system.
e. Zero-balance account.
CFIN4
Chapter 15 – Managing Short- Term Assets
72. Which of the following will help a firm accelerate the collection of customer's payments and the conversion of
those payments into cash?
a. Lockbox agreement.
b. Preauthorized debit system.
c. Concentration banking.
d. All of the above.
e. Only answers a and c.
73. is a technique used to reduce float by having payments sent to post office boxes located near the customer.
a. Postal deposit system
b. Preauthorized debit system
c. Concentration banking
d. Lockbox arrangement
e. Zero-balance account
74. Which of the following is one of the common methods of disbursement or cash outflow control?
a. Lockbox agreement.
b. Zero-balance account.
c. Concentration banking.
d. All of the above.
e. Only answers b and c.
