Intacc 2 Module-based Syllabus PDF

Preview

Summary

Multiple Choice Questions Net working capital is defined as (a) a ratio measure of liquidity best used in cross-sectional analysis. (b) the portion of the firm’s assets financed with short-term funds. (c) current liabilities minus current assets. (d) current assets minus current liabilities. Answer:...

Description

Multiple Choice Questions 1. Net working capital is defined as (a) a ratio measure of liquidity best used in cross-sectional analysis. (b) the portion of the firm’s assets financed with short-term funds. (c) current liabilities minus current assets. (d) current assets minus current liabilities. Answer: D 2.The portion of a firm’s current assets financed with long-term funds may be called (a) working capital. (b) accounts receivable. (c) net working capital. Answer: C

(d) inventory.

3.In working capital management, risk is measured by the probability that a firm will become (a) liquid. (c) unable to meet long-term obligations.

(a) current assets. Answer: A

(b) current liabilities.

(c) fixed assets.

(d) long-term debt.

8.Current liabilities are (a )easy to obtain. (b) lower in cost than long-term liabilities. Answer: B

(c) tied to the level of fixed assets. (d) a function of collection policy.

9. In general, the more working capital a firm has, (a) the greater its risk. (b) the lower its risk. Answer: B

(c) the less likely are creditors to lend to the firm. (d) the lower its level of long-term funds.

10. A(n) ______in current assets ________net working capital, thereby ________the risk of technical insolvency. (a) decrease; increases; increasing (b) increase; decreases; increasing

(c) increase; increases; reducing Answer: C

(d) decrease; decreases; reducing

11. A(n) ______ in current liabilities ________ net working capital, thereby ________ the risk of technical insolvency. (a) decrease; increases; increasing (c) increase; increases; reducing (b) increase; decreases; increasing (d) decrease; decreases; reducing Answer: B 12. When a portion of the firm’s fixed assets are financed with current liabilities, the firm (a) has positive net working capital. (c) has excessive amounts of current assets. (b) has negative net working capital. (d) is in a low-risk position. Answer: B 13. The purpose of managing current assets and current liabilities is to (a) achieve as low a level of current assets as possible.

17. The firm’s financing requirements can be separated into (a) current liabilities and long-term funds. (b) current assets and fixed assets. Answer: D

(c) current liabilities and long-term debt. (d) seasonal and permanent.

18. The basic strategies for determining the appropriate financing mix are (a) seasonal and permanent. (c) aggressive and conservative. (b) short-term and long-term. (d) current and fixed. Answer: C 19. If a firm uses an aggressive financing strategy, (a) it increases return and increases risk. (b) it increases return and decreases risk. Answer: A

(c) it decreases return and increases risk. (d) it decreases return and decreases risk.

20. One major risk a firm assumes in an aggressive financing strategy is (a) the possibility that collections will be slower than expected. (b) the possibility that long-term funds may not be available when needed. (c) the possibility that short-term funds may not be available when needed. (d) the possibility that it will run out of cash. Answer: C 21. The _________ is the time period that elapses from the point when the firm makes the outlay to purchase raw materials on account to the point when payment is made to the supplier of the goods. (a) cash conversion cycle (c) average age of inventory (b) average payment period (d) average collection period Answer: B 22. When managing inventories, a good strategy is to increase inventory turnover by doing the following EXCEPT (a) increase raw materials turnover. (c) produce low-cost short cycle goods.

Answer: C 26. A firm has an average age of inventory of 90 days, an average collection period of 40 days, and an average payment period of 30 days. The firm’s operating cycle is _________ days. (a) 110 (b) 130 (c) 120 (d) 70 Answer: B 27. A firm has an operating cycle of 120 days, an average collection period of 40 days, and an average payment period of 30 days. The firm’s average age of inventory is _________ days. (a) 80 (b) 50 (c) 90 (d) 70 Answer: A 28. A firm has a cash conversion cycle of 80 days, an average collection period of 25 days, and an average age of inventory of 70 days. Its operating cycle is _________ days. (a) 95 (b) 105 (c) 60 (d) 130

Answer: A 29. A firm has an average age of inventory of 60 days, an average collection period of 45 days, and an average payment period of 30 days. The firm’s cash conversion cycle is _________ days. (a) 15 (b) 45 (c) 75 (d) 135 Answer: C 30. A firm has a cash conversion cycle of 120 days, an average collection period of 25 days, and an average payment period of 50 days. The firm’s average age of inventory is _________ days. (a) 45 (b) 95 (c) 125 (d) 145 Answer: D 31. A firm purchased raw materials on account and paid for them within 30 days. The raw materials were used in manufacturing a finished good sold on account 100 days after the raw materials were purchased. The customer paid for the finished good 60 days later. The firm’s cash conversion cycle is _________ days.

Answer: D 36. A firm with a cash conversion cycle of 175 days can stretch its average payment period from 30 days to 45 days. This will result in a/an (a) decrease of 15 days in the cash conversion cycle. (c) decrease of 30 days in the cash conversion cycle. (b) increase of 15 days in the cash conversion cycle. (d) increase of 30 days in the cash conversion cycle. Answer: A 37. A firm has an average age of inventory of 20 days, an average collection period of 30 days, and an average payment period of 60 days. The firm’s cash conversion cycle is _________ days. (a) 70 (b) 50 (c) –10 (d) 110 Answer: C 38. An increase in the average collection period will result in _________ in the operating cycle.

(a) an increase (b) a decrease Answer: A

(c) an undetermined change (d) no change

39. An increase in the average payment period will result in _________ in the operating cycle. (a) an increase (c) an undetermined change (b) a decrease (d) no change Answer :D 40. A decrease in the average age of inventory will result in _________ in the cash conversion cycle. (a) an increase (c) an undetermined change (b) a decrease (d) no change Answer: B 41. An increase in the average payment period will result in _________ in the cash conversion cycle.

Answer:D 46.The goal of a firm’s cash management is to (a)increase the cash conversion cycle. (b)increase the payment period. Answer:C

(c)minimize cash requirement. (d)maximize cash outflows.

47.One way to improve the cash conversion cycle is to (a)speed up collections. (b)slow down credit approvals. Answer:A

(c)reduce inventory turnover. (d)borrow funds.

48.If a firm increases its current assets relative to total assets, (a)it increases return and reduces risk.

(b)it increases return and increases risk.

(c)it reduces return and reduces risk. Answer: C

(d)it reduces return and increases risk.

49.A firm with highly unpredictable sales revenue would best choose _________ financing strategy to minimize risk. (a)the aggressive (c)the trade-off (b)the conservative (d)a seasonal Answer: B 50.Certain financing plans are termed conservative when (a)short-term financing is used frequently. (b)working capital is relatively high. Answer:B

(c)working capital is relatively low. (d)risk is increased.

51.An increase in the current asset to total asset ratio has the effects of _________ on profits and _________ on risk. (a)an increase; an increase (c)a decrease; a decrease

Irish Air Services has determined several factors relative to its asset and financing mix. (a)The firm earns 10 percent annually on its current assets. (b)The firm earns 20 percent annually on its fixed assets. (c)The firm pays 13 percent annually on current liabilities. (d)The firm pays 17 percent annually on long-term funds. (e)The firm’s monthly current, fixed and total asset requirements for the previous year are summarized in the table below: Table 14.1

Table 14.1 Month January February March April May June July August September October November

Current Assets $45,000 40,000 50,000 55,000 60,000 75,000 75,000 75,000 60,000 55,000 50,000

Table 14.1) (a)$140,000. Answer:C

Fixed Assets $100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000

(b)$60,000.

Total Assets $145,000 140,000 150,000 155,000 160,000 175,000 175,000 175,000 160,000 155,000 150,000

(c)$10,000.

(d)–$10,000.

Table 14.2 Flum Packages, Inc. Liabilities & Equity $10,000 Current Liabilities $ 5,000 20,000 Long-term debt 12,000 Equity 13,000 Total $30,000 Total $30,000 The company earns 5 percent on current assets and 15 percent on fixed assets. The firm’s current liabilities cost 7 percent to maintain and the average annual cost of long-term funds is 20 percent. Assets Current assets Fixed assets

62.The firm’s initial ratio of current to total asset is _________. (See Table 14.2) (a)1:3 (b)3:1 (c)2:3 Answer:A

(d)3:2

63.The firm’s initial net working capital is (See Table 14.2) (a)–$ 5,000. (b)$13,000. Answer:C

(d)$10,000.

(c)$ 5,000.

64.The firm’s initial annual profits on total assets are (See Table 14.2) (a)$2,500. (b)$3,500. (c)$3,000. Answer:B

(d)$4,500.

65.If the firm was to shift $3,000 of current assets to fixed assets, the firm’s net working capital would _________, the annual profits on total assets would _________, and the risk of technical insolvency would _________, respectively. (See Table 14.2)

69.In the aggressive financing strategy, a firm anticipating a large increase in sales should finance the increase in working capital with (a)the sale of common stock. (c) a line of credit. (b)the sale of a bond issue. (d) a long-term note from the bank. Answer: C 70.The aggressive financing strategy is risky in two respects: the firm operates with a low level of _________, and the firm has only a limited amount of _________ capacity. (a)current liabilities; short-term borrowing (c)current assets; long-term borrowing (b)net working capital; short-term borrowing (d)net working capital; long-term borrowing Answer:B 71.The conservative financing strategy results in financing all projected funds requirements with _________ funds and use of _________ funds in the event of an unexpected cash outflow.

(a)long-term; short-term (b)short-term; long-term Answer:A 72.In theory, the conservative financing strategy ignores (a)all current liabilities. (b)the spontaneous forms of short-term financing. Answer:B

(c)permanent; seasonal (d)seasonal; permanent

(c)current assets. (d)the high risk associated with this strategy.

73.In economic conditions characterized by a scarcity of short-term funds, a firm would best choose the _________ financing strategy. (a)aggressive (b)conservative (c)permanent (d)seasonal Answer: B 74.A risk of the _________ financing strategy is unpredictable interest expense.

(b)a decrease; a decrease Answer:D

(d)no change; a decrease

79. The difference between the number of days resources are tied up in the operating cycle and the number of days the firm can use spontaneous financing before payment is made is the (a)cash conversion cycle. (c)average collection period. (b)average payment period. (d)average age of inventory. Answer:A 80.A decrease in the production time to manufacture a finished good will result in ________ in the cash conversion cycle. (a)an increase (c)an undetermined change (b)a decrease (d)no change Answer:B

81.A firm has annual operating outlays of $1,800,000 and a cash conversion cycle of 60 days. If the firm currently pays 12 percent for negotiated financing and reduces its cash conversion cycle to 50 days, the annual savings is (a)$50,000 (b)$200,000 (c)$ 6,000. (d)$216,000. Answer:C 82.A firm has a cash conversion cycle of 60 days. Annual outlays are $12 million and the cost of negotiated financing is 12 percent. If the firm reduces its average age of inventory by 10 days, the annual savings is _________. (a)$104,000 (b)$144,000 (c) $ 28,800 (d)$40,000 Answer:D 83.Ideally a firm would like to have a (a)negative operating cycle. (b)positive operating cycle. Answer:C

Answer:

(c)negative cash conversion cycle. (d)positive cash conversion cycle.

B

88.A firm with a very low current ratio in comparison to the industry standard could lower the risk of unavailable shortterm funds by moving toward _________ financing strategy. (a)the aggressive (c)a permanent (b)the conservative (d)a seasonal Answer:B 89.A firm which uses the aggressive financing strategy plans to purchase a major fixed asset financed with a loan. The most likely consequence of this action is (a)a decrease in the current ratio. (c)a decrease in the risk of technical insolvency. (b)an increase in net working capital. (d)an increase in long-term debt. Answer:D...