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75. Which of the following is not a reason for firms to own marketable securities?
a. Marketable securities serve as a substitute for cash balances.
b. Marketable securities offer a place to temporarily put cash balance to work earning a positive return.
c. Marketable securities are used as a temporary investment to finance seasonal or cyclical operations.
d. Marketable securities are used as a temporary investment to amass funds to meet financial requirements in
the near future.
e. Marketable securities are more liquid than cash balances.
76. A liquid asset is an asset can be sold in a period of time at a price its fair market value.
a. relatively long; way below
b. relatively long; near
c. relatively short; way below
d. relatively short; near
e. None of the above.
77. A report showing how long accounts receivable have been outstanding is called what?
a. Time line.
b. Preauthorized debit system.
c. Aging schedule.
d. Cash discount.
e. Credit period.
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78. Which of the following statements is correct?
a. Shorter term cash budgets, in general, are used primarily for planning purposes while longer term budgets are
used for actual cash control.
b. The cash budget and the capital budget are planned separately and although they are both important to the
firm, they are independent of each other.
c. Since deprecation is a non–cash charge, it does not appear on nor have an effect on the cash budget.
d. The target cash balance is set optimally such that it need not be adjusted for seasonal patterns and
unanticipated fluctuations in receipts, although it is changed to reflect long–term changes in the firm’s
operations.
e. The typical actual cash budget will reflect interest on loans and income from investment of surplus cash.
These numbers are expected values and actual results might turn out differently.
79. Which of the following statements about cash management is false?
a. Depreciation expense does not appear explicitly on the cash budget, but its tax effects are included.
b. If cash flows are not uniform during the month, then weekly or perhaps daily cash budgets should be
prepared rather than monthly budgets.
c. Compensating balance requirements do not affect a firm’s target cash balance.
d. Cash management involves costs, and it is important to analyze whether the benefits received outweigh the
costs incurred.
e. The cash budget is the foundation of good cash management.
80. Which of the following statement completions is correct? If the yield curve is upward sloping, then a firm’s
marketable securities portfolio, assumed to be held for liquidity purposes, should be
a. Weighted toward long-term securities because they pay higher rates.
b. Weighted toward short-term securities because they pay higher rates.
c. Weighted toward U.S. Treasury securities to avoid interest rate risk.
d. Weighted toward short-term securities to avoid interest rate risk.
e. Balanced between long- and short-term securities to minimize the effects of either an upward or a
downward trend in interest rates.
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81. Which of the following statements is correct?
a. Poor synchronization of cash flows which results in high cash management costs can be partially offset by
increasing disbursement float and decreasing collections float.
b. The size of a firm’s net float is primarily a function of its natural cash flow synchronization and how it clears
its checks.
c. Lockbox systems are used mainly for security purposes as well as to decrease the firm’s net float.
d. If a firm can speed up its collections and slow down its disbursements, it will be able to reduce its net float.
e. A firm practicing good cash management and making use of positive net float will bring its check book
balance as close to zero as possible, but must never generate a negative book balance.
82. Which of the following statements is correct?
a. Compensating balance requirements apply only to businesses, not to individuals.
b. Compensating balances are essentially costless to most firms, because those firms would normally have such
funds on hand to meet transactions needs anyway.
c. If the required compensating balance is larger than the transactions balance the firm would ordinarily hold,
then the effective cost of any loan requiring such a balance is increased.
d. Banks are prohibited from earning interest on the funds they force businesses to keep as compensating
balances.
e. All of the above statements are correct.
83. Which of the following statements is correct?
a. Depreciation is included in the estimate of cash flows (Cash flow = Net income + Depreciations), so
depreciation is set forth on a separate line in the cash budget.
b. If cash inflows and cash outflows occur on a regular basis, such as the situation where inflows from
collections occur in equal amounts each day and most payments are made regularly on the 10th of each
month, then it is not necessary to use a daily cash budget. A cash budget prepared at the end of the month
will suffice.
c. Lockboxes are more important for fast food retailers such as McDonald‘s which deal primarily with cash
than for manufacturers such as Xerox which are generally paid by check.
d. A concentration banking system should not be used by firms that collect customers’ payments using lockbox
arrangements.
e. Statements a, b, c, and d are all false.
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84. Which of the following statements is correct?
a. A firm which makes 90 percent of its sales on credit and 10 percent for cash is growing at a rate of 10
percent annually. If the firm maintains stable growth it will also be able to maintain its accounts receivable at
its current level, since the 10 percent cash sales can be used to manage the 10 percent growth rate.
b. In managing a firm’s accounts receivable it is possible to increase credit sales per day yet still keep accounts
receivable fairly steady if the firm can shorten the length of its collection period.
c. If a firm has a large percentage of accounts over 30 days old, it is a sign that the firm’s receivables
management needs to be reviewed and improved.
d. Since receivables and payables both result from sales transactions, a firm with a high receivables-to-sales
ratio should also have a high payables-to-sales ratio.
85. Which of the following statements is correct?
a. If a firm’s volume of credit sales declines then its DSO will also decline.
b. If a firm changes its credit terms from 1/20, net 40 days, to 2/10, net 45 days, the impact on sales can’t be
determined because the increase in the discount is offset by the longer net terms which tends to reduce
sales.
c. The DSO of a firm with seasonal sales can vary because while the sales per day figure is usually based on
the total annual sales, the accounts receivable balance will be high or low depending on the season.
d. An aging schedule is used to determine what portion of customers pay cash and what portion buy on credit.
e. Aging schedules can be constructed from the summary data provided in the firm’s financial statements.
86. Which of the following statements is correct?
a. Other things held constant, the higher a firm’s days sales outstanding (DSO), the better its credit department.
b. A firm will relax its credit standards only if it expects bad debts will not increase because of the change.
c. If a firm which sells on terms of “net 30“ changes its policy and begins offering all customers terms of “2/10,
net 30,” and if no change in sales volume occurs, then the firm’s DSO will probably increase.
d. If a firm sells on terms of 2/10, net 30, and its DSO is 30 days, then its aging schedule would probably show
some past due accounts.
e. Statements a, b, c, and d are all false.
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87. Which of the following would cause average inventory holdings to decrease, other things held constant?
a. Fixed order costs double.
b. The purchase price of inventory items decreases by 50 percent.
c. The carrying cost of an item decreases (as a percent of purchase price).
d. The sales forecast is revised downward by 10 percent.
e. None of the above (all would cause average inventory to increase).
88. Which of the following activities will increase the short–term net cash flow for a firm?
a. Increase a cash bonus for employees.
b. Increase the firm’s days sales outstanding ratio without an increase in sales.
c. Write off old accounts receivable that are considered uncollectible.
d. Increase the average amount of time the firm takes to pay accounts.
e. Increase the time you allow the firm‘s customers to pay for goods.
89. The Danser Company expects to have sales of $30,000 in January, $33,000 in February, and $38,000 in March. If
20 percent of sales are for cash, 40 percent are credit sales paid in the month following the sale, and 40 percent are
credit sales paid 2 months following the sale, what are the cash receipts from sales in March?
a. $55,000
b. $47,400
c. $38,000
d. $32,800
e. $30,000
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90. Jumpdisk Company writes checks averaging $15,000 a day, and it takes 5 days for these checks to clear. The firm
also receives checks in the amount of $17,000 per day, but the firm loses three days while its receipts are being
deposited and cleared. What is the firm’s net float in dollars?
a. $126,000
b. $75,000
c. $32,000
d. $24,000
e. $16,000
91. Chadmark Corporation‘s budgeted monthly sales are $3,000. Forty percent of its customers pay in the first month
and take the 2 percent discount. The remaining 60 percent pay in the month following the sale and don’t receive a
discount. Chadmark’s bad debts are very small and are excluded from this analysis. Purchases for next month’s
sales are constant each month at $1,500. Other payments for wages, rent, and taxes are constant at $700 per
month. Construct a single month‘s cash budget with the information given and determine the average cash gain or
(loss) during a typical month for Chadmark Corporation.
a. $2,600
b. $800
c. $776
d. $740
e. $728
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92. For the Prince Company, the average age of accounts receivable is 60 days, the average age of accounts payable
is 45 days, and the average age of inventory is 72 days. Assume a 360-day year. If Prince’s annual sales are
$936,000, what is the firm’s average accounts receivable balance?
a. $104,000
b. $118,000
c. $156,000
d. $212,000
e. $260,000
93. Calculate the economic ordering quantity for Nashville Records Inc., given the following information:
Sales = 15,000 units per year
Sales price = $10 per unit
Purchase price = $5
Carrying cost = 0.25 times inventory value
Fixed cost per order = $1,000
a. 3,464 units
b. 4,899 units
c. 346 units
d. 490 units
e. 1,549 units
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94. Ace Hardware‘s EOQ is 100 widgets, and it maintains a 50 unit safety stock. Which of the following is Ace’s
average inventory?
a. 100 units
b. 60 units
c. 57.07 units
d. 12.25 units
e. 75 units
95. Cross Collectibles currently fills mail orders from all over the U.S. and receipts come in to headquarters in Little
Rock, Arkansas. The firm’s average accounts receivable (A/R) is $2.5 million and is financed by an 11 percent
annual, simple interest bank loan. Cross is considering a regional lockbox system to speed up collections which it
believes will reduce A/R by 20 percent. The annual cost of the system is $15,000. What is the estimated net annual
savings to the firm from implementing the lockbox system?
a. $500,000
b. $30,000
c. $60,000
d. $55,000
e. $40,000
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96. Fullerton Wine Company is a retailer which sells vintage wines. The company has established a policy of reordering
inventory every 30 days. A recently employed MBA has considered Fullerton’s inventory problem from the EOQ
model viewpoint. If the following constitute the relevant data, how does the current policy compare with the optimal
policy?
Ordering cost = $10 per order
Carrying cost = 20% of purchase price
Purchase price = $10 per unit
Total sales for year = 1,000 units
Safety stock = 0
a. Total costs will be the same, since the current policy is optimal.
b. Total costs under the current policy will be less than total costs under the EOQ by $10.
c. Total costs under the current policy exceed those under the EOQ by $3.
d. Total costs under the current policy exceed those under the EOQ by $10.
e. Cannot be determined due to insufficient information.
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97. Bass Boats Inc. currently has sales of $1,000,000, and its days sales outstanding is 30 days. The financial manager
estimates that offering longer credit terms would (1) increase the days sales outstanding to 50 days and (2) increase
sales to $1,200,000. However, bad debt losses, which were 2 percent on the old sales, would amount to 5 percent
on the incremental sales only (bad debts on the old sales would stay at 2 percent). Variable costs are 80 percent
of sales, and Bass has a 15 percent receivables financing cost. What would the annual incremental pre–tax profit be
if Bass extended its credit period?
a. −$20,000
b. −$10,000
c. $0
d. $10,000
e. $20,000
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98. Reston Inc. has expected sales of $17,000,000. While 10 percent of its customers pay cash, the remaining 90
percent pay on credit with 40 percent paying on Day 10, 30 percent paying on Day 20, 15 percent paying on Day
25, and 15 percent paying on Day 30. Assume that the cost of funds invested in receivables is 10 percent. Suppose
that the firm‘s customers begin paying later, such that the new DSO increases to 24 days, that the firm uses a 360-
day year, and that the firm’s variable cost ratio is 80 percent. What is the additional interest cost to Reston of the
additional investment in A/R caused by the delay in payment by its customers?
a. $19,550
b. $24,438
c. $42,500
d. $78,625
e. $102,000
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East Lansing Appliances
East Lansing Appliances (ELA) expects to have sales this year of $15 million under its current credit policy. The
present terms are net 30; the days sales outstanding (DSO) is 60 days; and the bad debt loss percentage is 5
percent. Since ELA wants to improve its profitability, the treasurer has proposed that the credit period be shortened
to 15 days. This change would reduce expected sales by $500,000, but it would also shorten the DSO on the
remaining sales to 30 days. Expected bad debt losses on the remaining sales would fall to 3 percent. The variable
cost percentage is 60 percent, and the cost of capital is 15 percent.
99. Refer to East Lansing Appliances. What would be the incremental bad debt losses if the change were made?
a. $315,000
b. $260,500
c. −$260,500 (bad debt losses would decline)
d. −$315,000 (bad debt losses would decline)
e. $0 (no change would occur)
100. Refer to East Lansing Appliances. What would be the incremental cost of carrying receivables if this change
were made?
a. $108,750
b. −$116,250 (carrying costs would decline)
c. $157,900
d. −$225,000 (carrying costs would decline)
e. $260,500
101. Refer to East Lansing Appliances. What are the incremental pre–tax profits from this proposal?
a. $181,250
b. $271,750
c. $256,250
d. $206,500
e. $231,250
Aberwald Corporation
Aberwald Corporation expects to order 126,000 memory chips for inventory during the coming year, and it will use
this inventory at a constant rate. Fixed ordering costs are $200 per order; the purchase price per chip is $25; and
the firm‘s inventory carrying cost is equal to 20 percent of the purchase price. (Assume a 360–day year.)
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102. Refer to Aberwald Corporation. What is the economic ordering quantity for chips?
a. 12,088
b. 3,175
c. 6,243
d. 13,675
e. 8,124
103. Refer to Aberwald Corporation. If Aberwald holds a safety stock equal to a 30–day supply of chips, what is its
average inventory level?
a. 12,088
b. 3,175
c. 15,750
d. 13,675
e. 8,124
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104. Refer to Aberwald Corporation. Assume that Aberwald holds a safety stock equal to a 30–day supply of chips.
What is the maximum amount of inventory that Aberwald will have on hand at any time; that is, what will be the
inventory level right after a delivery is made?
a. 9,216
b. 3,175
c. 6,243
d. 13,675
e. 8,124
105. Refer to Aberwald Corporation. How many orders should Aberwald place during the year?
a. 12
b. 25
c. 30
d. 40
e. 60
106. Refer to Aberwald Corporation. If the lead time for placing an order is 5 days, and Aberwald holds a safety stock
equal to a 30–day supply of chips, then at what inventory level should an order be placed?
a. 15,570
b. 3,175
c. 12,250
d. 13,675
e. 8,124
107. Refer to Aberwald Corporation. If Aberwald holds a safety stock equal to a 30–day supply of chips, what is
Aberwald’s minimum cost of ordering and carrying inventory?
a. $28,500
b. $15,950
c. $68,440
d. $34,220
e. $47,693
Fashion Clothiers Inc.
Assume that Fashion Clothiers Inc. uses 1,440,000 yards of material each year. Further, assume that Fashion can
order the material at a cost of $2 per yard, plus fixed ordering costs of $100 per order. The firm’s carrying cost is
20 percent of the inventory value, at cost.
108. Refer to Fashion Clothiers Inc. What is the firm’s EOQ?
a. 26,833
b. 30,040
c. 43,987
d. 15,218
e. 21,456
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109. Refer to Fashion Clothiers Inc. What is Fashion Clothiers’ minimum cost of ordering and holding inventory?
a. $6,254
b. $10,733
c. $11,560
d. $13,563
e. $19,825
110. Refer to Fashion Clothiers Inc. Now, suppose the manufacturer offers a discount of 0.5 percent for orders of at
least 40,000 yards. Should Fashion Clothiers increase its ordering quantity to take the discount?
a. Yes; it will save $827 if it takes the discount.
b. No; it will lose $827 if it takes the discount.
c. Yes; it will save $14,400 if it takes the discount.
d. Yes; it will save $13,573 if it takes the discount.
e. No; it will lose $13,573 if it takes the discount.