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Chapter 07 - Current Asset Management

Chapter 07 Current Asset Management

Multiple Choice Questions 1. In managing cash and marketable securities, what should be the manager's primary concern? A. Maximization of profit B. Maximization of liquid assets C. Acceptable return on investment D. Liquidity and safety

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-02 Cash Management

2. One of the first considerations in cash management is: A. to have as much cash as possible on hand. B. synchronization of cash inflows and cash outflows. C. profitability. D. to put any excess cash into accounts receivable.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-02 Cash Management

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Chapter 07 - Current Asset Management

3. The difference between the amount of cash on the firm's books and the amount credited to it by the bank is: A. an overdraft. B. interest revenue. C. extended disbursement. D. float.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-05 Float

4. "Float" takes place because: A. a firm is early in paying its bills. B. the level of cash on the firm's books is equal to the level of cash in the bank. C. a lag exists between writing a cheque and it being debited to the bank account. D. a customer writes "hot" cheques.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-05 Float

5. The system whereby funds are moved between computer terminals without use of cheques is: A. electronic funds transfer. B. float. C. a lock-box system. D. magnetic character recognition.

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Chapter 07 - Current Asset Management Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-07 Electronic Funds Transfer

6. How would electronic funds transfer affect the use of "float"? A. Increase its use somewhat B. Decrease its use somewhat C. Virtually eliminate its use D. Have no effect on its use

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-07 Electronic Funds Transfer

7. Which of the following is not a method of speeding up collections? A. Lock-box system B. Use of local bank branches to deposit funds C. Extended disbursement float D. Electronic fund transfer

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-05 Float

8. Deposited cheques may be cleared through: A. Stock exchange. B. trusted employees. C. a local dealer network. D. chartered banks.

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Chapter 07 - Current Asset Management Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-06 Improving Collections and Extending Disbursements

9. Average daily remittances are $5 million, and "extended disbursement float" adds 3 days to the disbursement schedule, how much should the firm be willing to pay for a cash management system if the firm earns 10% on excess funds. A. $500,000 B. $1,500,000 C. $1,000,000 D. $0

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-08 Cash Management Analysis

10. Probably the safest and most marketable instrument for short-term investment is: A. Commercial paper. B. Large denomination certificates. C. Bankers' acceptances. D. Treasury bills.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-11 The Rates and Securities

11. A firm that wishes to minimize risk when investing idle cash would be least likely to buy: A. commercial paper. B. long-term corporate bonds. C. negotiable certificates of deposit. D. Treasury bills of the Canadian government.

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Chapter 07 - Current Asset Management Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-11 The Rates and Securities

12. Which of the following securities regularly trades on a discount basis? A. Government bonds B. Treasury bills C. Swap deposits D. Certificates of deposit

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-11 The Rates and Securities

13. Which of the following securities represents an unsecured promissory note issued by a corporation? A. Certificates of deposit B. Savings accounts C. Commercial paper D. Money market fund

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-11 The Rates and Securities

14. The problem in stretching out the maturity of marketable securities is that: A. you are legally locked in until the maturity date. B. longer term securities are often not available. C. there is greater possibility of loss. D. interest rates are generally lower.

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Chapter 07 - Current Asset Management Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-10 Marketable Securities

15. The costs of carrying inventory do not include: A. the interest on funds tied up in inventory. B. the cost of warehouse space. C. ordering costs. D. insurance and handling costs.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-20 The Inventory Decision Model

16. For a given firm, holding other factors constant, ordering costs per unit generally: A. decline as average inventory increases. B. increase in proportion to increases in inventory. C. are considered fixed costs. D. are negotiated.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-20 The Inventory Decision Model

17. Characteristics of a money market mutual fund include: A. the purchase of shares by investors, the proceeds of which are reinvested into liquid shortterm securities. B. a required minimum balance of $2,500. C. these funds cannot be easily marketable. D. secured by a promissory note.

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Chapter 07 - Current Asset Management Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-11 The Rates and Securities

18. The economic order quantity: A. determines the reorder point. B. is the lowest cost amount to order considering all costs. C. determines the safety stock. D. requires the number of days to maturity.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-20 The Inventory Decision Model

19. A multinational company may prefer to hold sizeable cash balances in one currency rather than another because: A. of low interest rates existing in one country. B. one country's currency may be weaker relative to the dollar. C. of interest rate differentials on short term investments. D. both currencies are at parity.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-09 International Cash Management

20. A bankers' acceptance: A. is a draft drawn on a corporation. B. may be accepted by the corporation for future payment. C. is a long term investment accepted by the bank. D. is traded in a relatively liquid market until maturity.

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Chapter 07 - Current Asset Management Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-11 The Rates and Securities

21. Which of the following is not a valid quantitative measure of accounts receivable collection policies? A. Average collection period B. Aging of accounts receivables C. Ratio of debt to equity D. Ratio of bad debts to credit sales

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 07-04 Characterize accounts receivable as an investment resulting from the firm's credit policies; outline the considerations in granting credit; and evaluate a credit decision that changes credit terms to stimulate sales. Topic: 07-14 Credit Policy Administration

22. Characteristics of money market securities include: A. a greater risk than money market funds. B. the rates offered for currency deposits in the London international banking market. C. the society for worldwide interbank financial telecommunication. D. bought and sold on the basis of their promissory yield (price).

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-10 Marketable Securities

23. The economic order quantity: A. assumes that inventory usage is seasonal. B. assumes that delivery times of each order are consistent. C. considers stock-outs. D. assumes that inventory needs are constant.

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Chapter 07 - Current Asset Management Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-20 The Inventory Decision Model

24. Which of the following are characteristics of money market investments? A. Money market funds are quite risky. B. Money market funds are insured up to $60,000 by CDIC. C. The minimum balance for money market accounts is $5,000. D. Short term and most commonly issued for periods of up to one year.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-11 The Rates and Securities

25. Money market funds: A. are modelled after money market accounts. B. are insured up to $60,000. C. have a minimum balance of $2,500. D. earn competitive market rates of return.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-10 Marketable Securities

26. Eurodollar (Canadian) certificates of deposits: A. are not marketable investments. B. are Canadian dollars held on deposit by foreign banks. C. pay interest rates usually lower than the rates on treasury bills. D. are European currencies deposited into international Canadian branch banks.

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Chapter 07 - Current Asset Management Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-09 International Cash Management

27. When using the economic order quantity model: A. ordering costs increase as the level of inventory increases. B. carrying costs decrease as the level of inventory increases. C. costs are minimized when total carrying costs and total ordering costs are equal. D. discounted prices are calculated.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-20 The Inventory Decision Model

28. Hedging: A. is a way to reduce your accounts receivable collection period. B. increases risk. C. is a non-binding agreement to buy or sell a financial futures contract. D. can be carried out with a futures contract.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-19 Inventory Policy in Inflation (and Deflation)

29. Price Corp. is considering selling to a group of new customers and creating new annual sales of $70,000. 5% will be uncollectible. The collection cost on these accounts is 3.5%, the cost of producing and selling is 80% of sales and the firm is in the 31% tax bracket. What is the profit on new sales? A. $5,554.50 B. $9,660.00 C. $7,245.00 D. $5,959.50

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Chapter 07 - Current Asset Management Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 07-04 Characterize accounts receivable as an investment resulting from the firm's credit policies; outline the considerations in granting credit; and evaluate a credit decision that changes credit terms to stimulate sales. Topic: 07-15 An Actual Credit Decision

30. Waldron Inc. is considering selling to a group of new customers that will bring in sales of $15,000 with a return on sales of 5%. The only new investment will be in accounts receivable. Waldron has a turnover ratio of 5 to 1 between sales and accounts receivable. What is the return on investment? A. 3% B. 25% C. 5% D. 40%

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-19 Inventory Policy in Inflation (and Deflation)

31. Modos Company has deposited $2,000 in cheques received from customers. It has written $1,400 in cheques to its suppliers. The initial balance was $400. If $1,600 of its customers cheques have been cleared but only $600 of its own has been deposited, calculate its float. A. $200 B. $400 C. $300 D. $700

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Chapter 07 - Current Asset Management Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-05 Float

32. Massa Machine Tool expects total sales of $10,000. The price per unit is $5. The firm estimates an ordering cost of $7.50 per order, with an inventory carrying cost of $0.70 per unit. What is the optimum order size? A. 146 units B. 207 units C. 373 units D. 2,000 units

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 07-05 Assess inventory as an investment and apply techniques to reduce the costs of this investment. Topic: 07-20 The Inventory Decision Model

33. In comparison to securities issued by the federal government, securities issued by provincial governments: A. are significantly riskier. B. are much less liquid. C. yield slightly more than federal securities. D. usually require the payment of higher commissions when purchased than federal securities.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-10 Marketable Securities

34. Eurodollar (Canadian) certificates of deposit: A. may be borrowed by anyone who wishes to hold dollars. B. are Canadian dollars which have been converted into several European currencies. C. can only be redeemed at Canadian banks or their branches in European countries. D. can only be redeemed at Canadian banks or their branches in any foreign country.

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Chapter 07 - Current Asset Management Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 07-02 Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity; and compare techniques to make cash management more efficient. Topic: 07-09 International Cash Management

35. Money market funds are: A. accounts that allow small investors to participate in buying large-denomination securities. B. extremely risky but high-yielding accounts used by large corporations to finance operations. C. accounts that allow small investors to buy shares in companies that then buy shares of common stock. D. pools of bonds held by large utility companies.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 07-03 Define the various marketable securities available for investment by the firm; and calculate the yield on these instruments. Topic: 07-10 Marketable Securities

36. Assuming that we can earn a 13.5% return on accounts receivable, which of the following ac...