Part 9 Working Capital Management
CHAPTER 24
WORKING CAPITAL MANAGEMENT: CURRENT ASSETS AND
CURRENT LIABILITIES
CHAPTER LEARNING OBJECTIVES
24.1 Explain the motivation for holding cash, and the methods used to implement
24.2 Describe how accounts receivable are managed.
24.3 Describe how inventory is managed.
24.4 Describe the major sources of short-term financing.
Working Capital Management: Current Assets and Current Liabilities 24 – 2
MULTIPLE CHOICE QUESTIONS
1. Which is NOT one of the reasons why firms hold cash?
a) In case good deals arise
b) To finance major outlays
c) To enjoy returns on investment
d) To handle emergencies
2. Which of the following pairs does not include a motive for holding cash?
a) Transactions motive and speculative motive
b) Precautionary motive and transactions motive
c) Speculative motive and finance motive
d) Transactions motive and operating motive
3. The transactions motive refers to:
a) the motive to hold cash that is required for a firm’s normal operations.
b) the motive to hold cash that is required for purchases.
c) the motive to hold cash that is required for a firm’s long-term purchases.
d) the motive to hold cash that is required for emergencies.
24 – 3 Test Bank for Introduction to Corporate Finance, Fourth Canadian Edition
4. The precautionary motive refers to:
a) a firm’s motive to hold securities in case of emergencies.
b) a firm’s motive to hold cash in case of emergencies.
c) a firm’s motive to hold cash for insurance purposes.
d) a firm’s motive to hold cash to pay for damages.
5. Which of the four motives for holding cash do firms cite when planning for major outlays?
a) Speculative motive
b) Precautionary motive
c) Transactions motive
d) Finance motive
6. The term “cash on hand” refers to:
a) cash in the current account.
b) cash in short-term marketable securities.
c) none of the above.
d) a and b
7. To be included in “cash on hand” cash must be:
Working Capital Management: Current Assets and Current Liabilities 24 – 4
a) available instantaneously.
b) available almost instantaneously.
c) next day available.
d) available for borrowing immediately.
8. Investments in short-term marketable securities are categorized as:
a) operational investments.
b) speculative investments.
c) strategic investments.
d) near-cash investments.
9. Which of the following is not an example of a near-cash item?
a) Treasury bonds
b) Commercial paper
c) Treasury bills
d) Bankers’ acceptances
10. What is the optimal amount of cash a firm should hold?
a) As much as possible
b) Just enough to pay for purchases
c) Enough to be liquid
24 – 5 Test Bank for Introduction to Corporate Finance, Fourth Canadian Edition
d) None
11. What determines the optimum amount of cash a firm should hold?
a) The motives for the use of the cash
b) The firm’s borrowing capacity
c) a and b
d) None of the above determines the optimum amount of cash a firm should hold
12. Why might firms prefer to hold more liquidity in borrowing facilities rather than raising capital
from shareholders?
a) Firms can obtain more capital from borrowing
b) Obtaining the money is faster via borrowing
c) Borrowing is often cheaper
d) Firms would like to avoid paying dividends to investors
13. Which of the following scenarios is an example of the transactions motive to hold cash?
a) An oil company saves abnormally high earnings as cash on its balance sheet which it will use
to buy another oil company.
b) A manufacturing company holds cash to pay its suppliers for raw materials.
c) An airline keeps a reserve of cash during the winter months in case it has to pay customers a
refund because bad weather results in a cancellation of flights.
Working Capital Management: Current Assets and Current Liabilities 24 – 6
d) A firm holds cash to pay its annual dividend.
14. Which of the following is considered as a main source of cash in a business cycle?
a) Inventory
b) Accounts receivable
c) Accounts payable
d) All of the above
15. Which of the following scenarios is an example of the speculative motive to hold cash?
a) An oil refining company holds cash to make special purchases of petroleum if the price
temporarily drops below a predetermined level.
b) A government holds cash to make interest payments on its bonds.
c) A small business holds cash that it will use to purchase equipment at the end of the year.
d) A firm holds cash to pay its employee wages.
16. Which of the following scenarios is an example of the precautionary motive to hold cash?
a) A retailer holds a reserve of cash in case customers return products for a cash refund.
b) A bank holds cash on deposit for its customers.
c) A car dealership holds cash to pay its utility bill.
d) A small business pays a cash dividend to its owner because she’s not sure she will have
enough funds to pay for Christmas gifts for her family.
24 – 7 Test Bank for Introduction to Corporate Finance, Fourth Canadian Edition
17. Cash on hand provides:
a) low return, high liquidity, and low default risk.
b) high return, high liquidity, and low default risk.
c) high return, high liquidity, and high default risk.
d) low return, high liquidity, and high default risk.
18. A firm may hold a large amount of cash balances because:
a) these balances are required by the bank.
b) the company has few bank accounts and it is difficult to manage their cash.
c) the company is aggressive in cash management.
d) a and b
19. A firm taking a conservative approach with respect to its cash balance is most likely to be:
a) holding as much credit as possible.
b) holding as much cash as possible.
c) holding as much borrowing ability as possible.
d) holding as much long-term debt as possible.
20. A firm taking an aggressive approach with respect to their cash balance is most likely to be:
a) holding as little cash as possible.
b) holding as much cash as possible.
c) holding as much credit as possible.
d) holding as little borrowing power as possible.
21. Which of the following scenarios is an example of the finance motive to hold cash?
a) A government holds cash to pay for its operating expenses.
b) A taxi company holds cash in reserve in case some of its vehicles require repairs.
c) A company that makes motion pictures holds cash to pay for special effects for a new film.
d) A bank holds cash to pay its shareholders their annual dividend.
22. Which of the following firms will have the highest cash balance?
a) A firm with low cash requirements but unpredictable cash needs
b) A firm with high cash requirements but unpredictable cash needs
c) A firm with high cash requirements but predictable cash needs
d) A firm with low cash requirements but predictable cash needs
23. One way to alleviate the problem of the low returns associated with cash, but still maintain
high liquidity is to
a) keep no cash on hand.
b) invest in more bonds.
c) borrow funds at a lower interest rate.
d) invest in marketable securities.
24. The level of a firm’s investment in marketable securities is dictated by its:
a) liquidity requirements.
b) accuracy of cash requirement needs.
c) accuracy of cash requirement needs and level of returns.
d) liquidity requirements and accuracy of cash requirement needs.
25. Which firms can maintain a higher portion of their liquidity in marketable securities and less in
cash?
a) Firms that have well-developed cash management systems and more predictable cash flows.
b) Firms that have more cash than they need.
c) Firms that have expertise in securities trading.
d) Firms that have volatile cash flows.
26. The main premise to good cash management is:
a) to sell at the highest profit possible.
b) to collect sales as quickly as possible and sell at the highest price.
c) to sell at the highest profit and pay expenses as late as possible.
d) to delay payables as much as possible and collect receivables as soon as possible.
27. The drawbacks to delaying making payments may include all of the following, except
a) alienating suppliers.
b) losing out on valuable trade credit.
c) loss of business.
d) reduced liquidity.
28. The float is defined as:
a) the time between when payables are accrued and when they are paid.
b) the time between when the sale is made and when the money is available for use by the
receiving firm.
c) the time between when payment is initiated and the time the money is available for use by the
receiving firm.
d) the time between when sale is made and the time the payment cheque is issued to the
receiving firm.
29. All of the following are components of float except:
a) the time it takes the receiving firm to make a sale on credit and receive payment from the
purchasing firm.
b) the time it takes the cheque to clear through the banking system so that the funds are
available to the firm.
c) the time it takes the receiving firm to process the cheque and deposit it in an account.
d) the time it takes the cheque to reach the firm after it is mailed by the customer.
30. When a cheque is written by the firm, it is said to generate:
a) a float.
b) an account receivable.
c) an account payable.
d) none of the above.
31. Which of the following is/are alternatives to paying with a cheque?
a) Electronic funds transfer
b) Debit cards
c) Electronic data interchange
d) All of the above
32. Firms implement centralized systems with respect to receivables and payables in order to:
a) monitor collections.
b) ensure payments are made on time.
c) monitor payments.
d) all the above.
33. When credit is granted to a firm, it is called:
a) consumer credit.
b) trade credit.
c) accounts receivable.
d) all of the above.
e) b and c
34. Which of the following is/ are part of the credit granting decision?
a) The credit terms
b) Whether to grant credit
c) Details of the collection process
d) All of the above
35. A company’s trade credit decision is largely set by all of the following criteria except
a) the nature of the product sold.
b) the industry the firm operates in.
c) the company’s profitability.
d) competitors’ credit policies.
36. An open account credit occurs when a firm grants:
a) trade credit to customers who have an account with the firm.
b) trade credit to customers who have depository accounts.
c) trade credit to customers by collateralizing the assets sold to the customer.
d) credit to customers who have an open bank account.
37. The credit terms offered to a customer include all the following except:
a) due date.
b) discount date.
c) discount amount.
d) product on discount.
38. If the current credit policy is 3/30 net 60, which of the following tightens the credit policy?
a) 3/30 net 90
b) 3/35 net 75
c) 2/30 net 60
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d) 3/20 net 45
39. The net credit period for a company with terms of 3/15 net 40 is:
a) 55 days
b) 40 days
c) 15 days
d) 25 days
40. If the current credit policy is 3/30 net 60, which of the following loosens the credit policy?
a) 3/20 net 60
b) 3/35 net 75
c) 2/30 net 60
d) 3/30 net 45
41. Use the following statements to answer this question:
I. A high receivables turnover is a good credit strategy that allows firms to lower working capital
requirements
II. Trade credit terms are financing tools to the supplier
a) I and II are correct.
b) I and II are incorrect.
c) I is correct and II is incorrect.
d) I is incorrect and II is correct.
42. You are offered the following terms: 5/25 net 50. What is the effective annual interest rate for
not paying on time, approximately?
a) 111.5%
b) 103.9%
c) 76.8%
d) 45.4%
43. Your supplier offers you 6/20 net 60 terms. What is the effective annual interest rate for not
paying on time, approximately?
a) 45.7%
b) 58.2%
c) 75.9%
d) 209.3%
44. A factoring company is:
a) a financial firm that buys receivables at a discount
b) a financial firm to which a company out-sources its collection process.
c) a and b
d) None of the above