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1. The _____ current asset investment policy calls for relatively large amounts of current assets to be carried by a
company.
a. relaxed
b. restricted
c. moderate
d. lean-and-mean
e. speculative
2. Which of the following current asset investment policies emphasizes holding minimal current assets?
a. Relaxed current asset investment policy
b. Restricted current asset investment policy
c. Moderate current asset investment policy
d. Fat cat current asset investment policy
e. Precautionary current asset investment policy
3. A firm that follows a restricted current asset investment policy generally has:
a. uncertain sales.
b. relatively low levels of accounts receivable.
c. a lower return on investment, especially on current assets, than a firm that follows a relaxed current investment
policy.
d. a cash conversion cycle greater than the average firm in the industry.
e. the highest inventory conversion period in the industry.
4. The lower the level of current assets that is required to support its operations, the more closely a firm can adhere to a
_____ current asset investment policy.
a. relaxed
b. restricted
c. moderate
d. lean-and-mean
e. precautionary
5. Which of the following situations would most likely exist if a firm adheres to a moderate current asset investment
policy?
a. The firm’s level of accounts receivable is greater than its level of accounts payable.
b. Once equilibrium is attained, the amount of current assets will equal the amount of current liabilities.
c. The firm maintains relatively large amounts of current assets.
d. The firm holds minimum amounts of cash and marketable securities, inventories, and receivables.
e. The firm maintains a level of working capital that falls between the levels prescribed by the relaxed current asset
investment policy and the restrictive current asset investment policy.
6. The primary purpose of a lockbox arrangement is to:
a. provide for the safe-keeping of the firm’s marketable securities.
b. identify inventory safety stocks.
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c. slow down (delay) cash disbursements to the firm’s customers.
d. speed up a firm’s collections on checks received from customers.
e. speed up a firm’s disbursement of checks to its suppliers.
7. Which of the following statements about cash management systems is correct?
a. A lockbox system generally is used to effectively manage a firm’s collections through concentration banking
arrangements.
b. A firm that has many divisions that are widely dispersed geographically will find that centralizing customers’
payments is of little benefit.
c. Disbursement float refers to the frequency with which a firm writes checks to pay its creditors.
d. There are few actions a firm can take to improve its synchronization of cash flows.
e. Zero-balance accounts are used to help a firm to manage its cash receipts.
8. A ______ balance is a minimum checking account balance that a firm must maintain with a bank to help offset the costs
and services, such as check clearing and cash management advice, that the bank offers with a loan.
a. transactions
b. compensating
c. precautionary
d. speculative
e. lockbox
9. A ______ balance is cash that a firm holds in reserve for unforeseen fluctuations in its cash flows.
a. transactions
b. compensating
c. precautionary
d. speculative
e. lockbox
10. Having synchronized cash flows enables a firm to:
a. speed up collections on checks written.
b. increase its bank loans.
c. increase its interest expenses.
d. increase its profits.
e. increase its cash balances.
11. ______ float represents the value of checks that have been written and disbursed but have not been deducted from the
account on which they were written.
a. Disbursement
b. Net
c. Collections
d. Payables
e. Deposit
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12. ______ float represents the value of checks that have been received and deposited in the bank but have not yet been
made available to the account in which they were deposited.
a. Disbursement
b. Net
c. Collections
d. Receivables
e. Deposit
13. A(n) ______ system is an arrangement that permits a customer’s bank to periodically transfer funds from its account to
a selling firm’s bank account to pay an amount owed to the selling firm.
a. disbursement
b. preauthorized debit
c. lockbox
d. concentration banking
e. accounts payable
14. Which of the following arrangements helps a firm both to accelerate the collection of its customers’ payments and to
convert those payments into cash?
a. Lockbox arrangement
b. Controlled disbursement accounts
c. Economic ordering quantity
d. Payables concentration
e. Zero-balance accounts
15. Which of the following is a common method that is used to manage/control cash disbursements?
a. Lockbox arrangement
b. Zero-balance account
c. Concentration banking
d. Preauthorized sales
e. Net float agreement
16. Which of the following statements regarding cash budgets is correct?
a. Payments for credit purchases should not be included in a cash budget.
b. Only inflows from cash sales should be included in cash budgets.
c. Once a firm sets a target cash balance, the amount should remain constant (fixed) as long as the firm continues
operations.
d. Cash budgets should not include cash invested in capital budgeting projects.
e. Cash budgets should include the firm’s tax expenses (liabilities).
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17. 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 Jumpdisk’s net float?
a. $126,000
b. $75,000
c. $4,000
d. $24,000
e. $51,000
18. Chadmark Corporation’s budgeted monthly sales are $3,000. The company sells on credit with terms of 2/10 net 45.
Forty (40) percent of Chadmark’s customers pay on Day 10 and take the 2 percent discount; the remaining 60 percent pay
in the month following the sale (on Day 45), so they pay the full invoice price. What is Chadmark’s total cash receipts for
a typical month?
a. $1,543
b. $2,976
c. $3,200
d. $1,652
e. $2,408
19. Chovita Marbles purchases $1,500 in raw material each month to support sales of $2,500 that occur in the following
month. In addition, Chovita pays wages, rent, and taxes that total $700 each month. What is Chovita’s total monthly cash
disbursements?
a. $300
b. $4,700
c. $700
d. $1,000
e. $2,200
20. Zinc Corporation is developing its cash budget for this month. Each month, the firm manufactures and sells $15,000 of
products, and it pays $10,000 for wages, taxes, cost of goods sold, and other operating expenses. Zinc has nothing in its
checking account even though its target cash balance is $8,000. What amount will Zinc show on the “bottom line” of its
cash budget for this month? That is, what will be Zinc’s cash position?
a. Zinc has surplus cash of $8,000.
b. Zinc has a cash shortfall of $3,000.
c. Zinc has surplus cash of $6,000.
d. Zinc has a cash shortfall of $23,000.
e. Zinc has surplus cash of $20,000.
21. Which of the following securities is an appropriate investment to include in the marketable securities account?
a. Common stock
b. Long-term corporate bonds
c. Preferred stock
d. Mortgages
e. Treasury bills
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22. Which of the following statements concerning marketable securities is correct?
a. Marketable securities are extremely liquid investments.
b. Marketable securities generally are long-term investments.
c. Marketable securities provide higher yields than the firm’s other investments.
d. The primary purpose for holding marketable securities is to support long-term operations.
e. Marketable securities are held by a firm that normally has cash deficiencies.
23. The primary reason a firm holds marketable securities is because they:
a. substitute for its long-term debt.
b. offer a place to temporarily invest cash balances to earn high rates of return.
c. are useful for managing credit sales.
d. can be used to help speed up collections of its accounts payable.
e. permit the firm to earn positive returns on cash that is not needed to pay bills in the current period.
24. A(n) ______ is a report that shows how long accounts receivable have been outstanding; it divides receivables into
specified periods that provide information regarding the proportions of receivables that are due for specific periods of
time.
a. payables time line
b. collection float schedule
c. aging schedule
d. accounts payable tracker
e. credit indenture
25. The Danser Corporation expects to generate sales equal to $30,000 in January, $33,000 in February, and $38,000 in
March. Twenty (20) percent of all sales are for cash, 50 percent are credit sales that are paid in the month following the
sale, and 30 percent are credit sales that are paid two months following the sale. What are Danser’s total cash collections
in March?
a. $35,800
b. $40,400
c. $33,667
d. $33,100
e. $33,900
26. Reston Inc.’s annual sales normally equal $17,000,000. Ten (10) percent of Reston’s sales are cash payments; the
remaining 90 percent of sales are on credit, with 40 percent outstanding for 10 days, 30 percent outstanding for 20 days,
20 percent outstanding for 25 days, and 10 percent outstanding for 30 days. What is Reston’s days sales outstanding
(DSO)?
a. 19.00 days
b. 18.00 days
c. 21.25 days
d. 17.00 days
e. 23.75 days
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27. Rainbow Inc.’s sales equal $200,000 each month. Rainbow generally permits credit purchases with terms of 3/10 net
30. Ten (10) percent of total sales are for cash, and the remaining 90 percent pay on credit. Of the credit sales, 20 percent
are paid on Day 10 of the billing cycle, and the rest pay on Day 30 (in the following month). What is the amount of the
discounts that Rainbow’s customers normally take?
a. $850
b. $720
c. $560
d. $485
e. $900
28. Which of the following conditions must exist for a firm to make a change in its existing credit policy?
a. Days sales outstanding (DSO) must decline if the new policy is implemented.
b. Bad debts must decrease if the new policy is implemented.
c. The new policy’s net present value (NPV) must be both positive and greater than the existing policy’s NPV.
d. Sales must increase if the new policy is implemented.
e. The firm’s variable costs should decrease if the new policy is implemented.
29. Sunshine Inc. recently tightened its credit policy. The credit policy change resulted in an increase of $10 per day on a
net present value (NPV) basis. Sunshine’s required rate of return is 8 percent. What was the effect of the credit policy
change on the firm’s value? In your computations, assume a 360-day year.
a. $288
b. $12,500
c. $36,000
d. $45,000
e. $3,600
30. A firm that offers credit with terms of 2/10 net 30 gives its customers a:
a. 2 percent discount from the full invoice price if the bill is paid on or before Day 30; otherwise an additional cost
of 10 percent of invoice price must be paid.
b. 20 percent discount from the full invoice price if the bill is paid on or before Day 10; otherwise the entire bill is
due by Day 30.
c. 30 percent discount from the full invoice price if the bill is paid on or before Day 10; otherwise the entire bill is
due by Day 2 of the month following the sale.
d. 10 percent discount from the full invoice price if the bill is paid on or before Day 2; otherwise the entire bill is due
by Day 30.
e. 2 percent discount from the full invoice price if the bill is paid on or before Day 10; otherwise the entire bill is due
by Day 30.
31. The aging schedule of a firm shows that 40 percent of the receivables are collected in 18 days and the remaining 60
percent of the receivables are collected in 50 days. As a result, the firm’s days sales outstanding (DSO) is _____.
a. 34.0 days
b. 30.8 days
c. 40.8 days
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d. 42.0 days
e. 37.2 days
32. Suppose that two firms are identical in all aspects except for their credit policies. The days sales outstanding (DSO) of
Firm A is 20 days and the days sales outstanding (DSO) of Firm B is 30 days. Which of the following statements about
the firms is correct?
a. Firm A takes more time to collect its receivables than Firm B.
b. Firm A has tighter credit terms than Firm B.
c. Firm A has a weaker collection team than Firm B.
d. Firm A provides less discount to its customers to pay its bills early than Firm B.
e. Firm A has weaker receivables monitoring system than Firm B.
33. Tungsten Chemicals is considering changing its credit policy, so it conducted a net present value (NPV) analysis to
compare the proposed credit policy with the existing credit policy. The results of the analysis shows that NPVProposed
Policy – NPVExisting Policy = $20 per day. If Tungsten’s required rate of return is 10 percent, what will be the change in the
firm’s value if the proposed credit policy is implemented? In you computations, use a 360-day year.
a. $200
b. $72,000
c. $25,920
d. $259,200
e. $7,200
34. ______ is the process of evaluating a firm’s credit policy to determine whether a shift in its customers’ payment
patterns has occurred.
a. Receivables monitoring
b. Accounts payables monitoring
c. Concentration banking
d. Customer maintenance
e. Purchasing subsidization
35. The “redline method” that is used in inventory management is a:
a. policy of drawing a red line around the firm’s location to determine from which suppliers it should purchase raw
materials.
b. restriction imposed on the amount of inventory a company that uses a just-in-time inventory system can order.
c. minimum credit score (hurdle) that a customer must possess to purchase inventory on credit from the selling
firm.c
d. method of controlling inventories by drawing a red line around the inside of a bin.
e. method of controlling receivables by drawing a red line on invoices of companies that normally pay late.
36. Given the following information, what is the economic ordering quantity (EOQ) for Nashville Records Inc.?
Total demand (sales) = 15,625 units per year
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Purchase price (cost) = $5
Carrying costs = 25 percent of inventory value
Fixed cost per order = $1,000
a. 3,536 units
b. 5,000 units
c. 3,953 units
d. 1,581 units
e. 2,500 units
37. Ace Hardware’s economic ordering quantity (EOQ) is 1,000 widgets, its total demand is 20,000 units per period, its
carrying costs per unit are 20 percent of the inventory value, each inventory item costs $4 to purchase, and it costs $20
each time inventory is order. What is Ace’s total inventory costs if it orders the EOQ amount?
a. $1,200
b. $1,000
c. $16,400
d. $8,400
e. $800
38. New Markets’ economic ordering quantity (EOQ) is 30,000 widgets. New Markets’ EOQ will decrease if the ______
increases.
a. selling price of the widgets
b. fixed costs to make each order of raw materials
c. demand for its widgets.
d. cost of carrying each widget
e. cash discount offered to credit customers
39. Given the following information, what is the economic ordering quantity (EOQ) for Shinebird Textiles?
Ordering costs = $40 per order
Carrying costs = 20% of purchase price
Purchase price (cost) = $10 per unit
Total sales for year = 1,000 units
a. 142 units
b. 200 units
c. 50 units
d. 90 units
e. 283 units
40. Orangetree Pharma’s demand for test tubes is 72,000 units per year. If the lead time for placing an order is five (5)
days, at what level of inventory should Orangetree place an order for raw materials? In your computations, assume a 360-
day year.
a. 0 units.
b. 40 units.
c. 20 units.
d. 1,000 units.
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e. 200 units.
41. Aberwald Corporation expects to sell 120,000 memory chips this year. Aberwald has determined that it costs $3 to
carry each chip in inventory and $50 each time an order for raw materials is placed. Assuming Aberwald always orders
the EOQ amount, what will be its total ordering cost this year?
a. $7,2000
b. $260,000
c. $3,000
d. $800
e. $6,000
42. Fashion Clothier’s economic ordering quantity (EOQ) for its dyes is 2,000 units. If the total demand is 100,000 units
per period, the carrying cost per unit is 15 percent of the inventory value, the dyes purchase price is $10, and the fixed
cost per order is $30, then Fashion’s total inventory cost is_____.
a. $1,500
b. $4,500
c. $6,000
d. $11,500
e. $3,000
43. ______ is a model that a firm’s management can use to determine the amount of inventory that should be ordered and
carried to minimize its total inventory costs.
a. Economic ordering quantity model
b. Lockbox system algorithm
c. Receivables monitoring model
d. Inventory optimization model
e. Quantity discount model
44. Which of the following statements about inventory management is correct?
a. The economic ordering quantity is the quantity at which the total cost of carrying (holding) inventory is
minimized.
b. A firm should always order inventory in amounts sufficient to take advantage of quantity discounts.
c. Safety stock is additional inventory that a firm carries to guard against unexpected changes in sales.
d. To most efficiently manage its inventory, a firm should not reorder raw materials until it has no products
remaining in inventory.
e. Outsourcing is the practice of arranging for a supplier to deliver raw materials at the time they are needed in the
production process.
45. The ______ is minimized when a company uses the economic ordering quantity (EOQ) model for its inventory
management.
a. cost of carrying inventory
b. total inventory cost
c. total cost of purchasing inventory
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d. total cost of ordering inventory
e. amount of quantity discounts taken
46. Which of the following types of inventory has completed the production process and is ready for sale?
a. Just-in-time inventory
b. Materials in transit
c. Raw materials
d. Work-in-process
e. Finished goods
47. Inventory carrying costs:
a. include the costs of generating memos, fax transmissions, etc. associated with placing an order with a supplier.
b. generally increase in proportion to the average amount of inventory held.
c. are fixed regardless of the average size of the inventory.
d. are equal to the sum of total inventory costs and total ordering costs.
e. are at maximum when a firm’s order is equal to optimal quantity.
48. Many foreign governments attempt to restrict the ability of foreign companies to compete with domestic companies by
imposing ______, which often substantially increase the prices of products that are imported by multinational companies
compared to domestic products.
a. stockout limitations
b. tariffs
c. foreign tax refunds
d. quantity discounts
e. inventory expropriations
49. Which of the following statements about multinational working capital management is correct?
a. Exchange rate changes can greatly influence the credit policies of multinational companies.
b. Foreign governments generally do not restrict the amount of cash multinational corporations can return to their
home countries.
c. Multinational companies hold larger-than-normal amounts of inventory in countries where the chances of
expropriation are high.
d. Most multinational corporations prefer banking with the local banks where they operate rather than with mega
international banks.
e. The political and legal environments of many foreign countries are more helpful to multinational corporations in
the collection of credit sales than in the United States.
50. Which of the following statements about the cash management in multinational companies is correct?
a. Most multinational companies prefer to operate in countries that enact quotas on imported goods, because such
quotas normally limit the amount of money the firms can lose in those countries.
b. Multinational companies do not use lock box systems, because most countries do not permit such banking
arrangements.
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c. Multinational companies always prefer holding more cash in their foreign operations than in their domestic
operations.
d. Multinational companies often try to slow down collections and speed up disbursements where possible.
e. Most multinational companies face restrictions imposed by foreign governments when transferring funds from
their foreign operations to their home countries.
51. Which of the following statements about working capital management in multinational corporations is correct?
a. Multinational corporations can take advantage of the best interest rates available in the international financial
markets by using global concentration banks.
b. The primary reason foreign governments impose import or export quotas and tariffs is to ensure that multinational
corporations are able to compete with domestic companies.
c. The political and legal environments in most foreign countries make it easier for multinational corporations than
for domestic companies to collect defaulted credit accounts.
d. Many foreign governments provide multinational corporations that operate in their countries with subsidies to
offset exchange rate changes that harm the foreign companies’ profits.
e. Generally, a multinational company faces a lower threat of government expropriation than do domestic
companies.
52. Governments often impose _____ to restrict the quantities of foreign products that multinational firms can bring into
their countries.
a. stockout rules
b. negative tariffs
c. quotas
d. custom exclusions
e. expropriation restrictions
53. All else equal, firms that hold greater proportions of their total assets as short-term assets are considered riskier than
firms that hold greater proportions of their total assets as long-term assets.
a. True
b. False
54. Compared to other current asset investment policies, a restricted current asset investment policy prescribes that a firm
should hold maximum levels of safety stocks for cash and inventories and should have a liberal credit policy.
a. True
b. False
55. Concentration banking is a cash management arrangement that is used to mobilize funds from decentralized receiving
locations, whether they are lockboxes or decentralized company locations, into one or more central cash pools.
a. True
b. False
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56. A firm’s target cash balance is the difference between its total cash receipts and its total cash disbursements over a
particular time period.
a. True
b. False
57. Generally, the marketable securities account includes securities that are traded in the money markets.
a. True
b. False
58. If a firm’s credit terms are 2/10 net 30 days, then customers settling their bills within 30 days of the beginning of the
billing cycle will receive a 2 percent discount from the total invoice price.
a. True
b. False
59. If a firm discovers that the days sales outstanding (DSO) of its credit customers is increasing, management should
consider tightening the firm’s credit policy.
a. True
b. False
60. A firm should change its credit policy if the net present value (NPV) of the proposed credit policy is both positive and
less than the NPV of its existing credit policy.
a. True
b. False
61. A firm’s credit policy includes procedures that it follows to collect its accounts receivable.
a. True
b. False
62. The primary reason that companies provide cash discounts to customers who pay for their credit purchases on or
before a specified date is to speed up the collection period.
a. True
b. False
63. A just-in-time system of inventory control requires that manufacturers coordinate production with suppliers so that the
raw materials or components arrive just as they are needed in the production process.
a. True
b. False
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64. Outsourcing is an inventory control procedure where a red line is drawn around the inside of an inventory-stocked bin
to indicate the level of inventory at which an order for new raw materials should be initiated.
a. True
b. False
65. The threat of expropriation creates an incentive for a multinational firm to minimize inventory holdings and to bring
goods into a foreign country only as needed.
a. True
b. False