ACG2071 Managerial Accounting
ACG2071 Managerial Accounting
b. Increases and the current ratio remains unchanged. a. Cash flow control c. Maximizing sales
c. Increases and the current ratio decreases. b. Cash surplus investment d. Obtaining financing services RPCPA 0590
d. Increases and the current ratio increases. CMA 1294 1-30
2. Firms would need to hold zero cash when:
13
. The following transactions occurred during a company's first year of operations: A. Transaction-related needs are greater than cash inflows
I. Purchased a delivery van for cash B. Transaction-related needs are less than cash inflows
I. Borrowed money by issuance of short-term debt C. Transaction-related needs are not perfectly synchronized with cash inflows
III. Purchased treasury stock D. Transaction-related needs are perfectly synchronized with cash inflows B&M
Which of the items above caused a change in the amount of working capital?
16
A. I only. C. II and III only. . Which of the following statements is most correct? (E)
B. I and II only. D. I and III only. CIA 0593 IV-28 a. A good cash management system would minimize disbursement float and maximize
collections float.
Comprehensive b. If a firm begins to use a well-designed lockbox system, this will reduce its customers’ net
14
. All of the following statements in regard to working capital are correct except (M) float.
a. Current liabilities are an important source of financing for many small firms. c. In the early 1980s, the prime interest rate hit a high of 21 percent. In 2000 the prime rate
b. Profitability varies inversely wit liquidity. was considerably lower. That sharp interest rate decline has increased firms’ concerns
c. The hedging approach to financing involves matching maturities of debt with specific about the efficiency of their cash management programs.
d. If a firm can get its customers to permit it to pay by wire transfers rather than having to
financing needs.
write checks, this will increase its net float and thus reduce its required cash balances.
d. Financing permanent inventory buildup with long-term debt is an example of an
e. A firm that has such an efficient cash management system that it has positive net float can
aggressive working capital policy. CMA 0696 1-29
have a negative checkbook balance at most times and still not have its checks bounce.
Brigham
CASH MANAGEMENT
Function
15 Motives for Holding Cash
. When managing cash and short-term investments, a corporate treasurer is primarily 17
. According to John Maynard Keynes, the three major motives for holding cash are for
concerned with (E) A. Transactional, psychological, and social purposes.
a. Maximizing rate of return. B. Speculative, fiduciary, and transactional purposes.
b. Minimizing taxes. C. Speculative, social, and precautionary purposes.
c. Investing in Treasury bonds since they have no default risk. D. Transactional, precautionary, and speculative purposes. CMA 1286 1-32
d. Investing in common stock due to the dividend exclusion for federal income tax purposes.
e. Liquidity and safety. CMA 1295 I-12 *. A precautionary motive for holding excess cash is (E)
a. To enable a company to meet the cash demands from the normal flow of business activity.
1. Determining the appropriate target cash balance involves assessing the trade-off between: b. To enable a company to avail itself of a special inventory purchase before prices rise to
A. Income and diversification higher levels.
B. The benefit and cost of liquidity c. To enable a company to have cash to meet emergencies that may arise periodically.
C. Balance sheet strength and transaction needs d. To avoid having to use the various types of lending arrangements available to cover
D. All of the above B&M projected cash deficits. RPCPA 0595
*. Which of the following is not a major function in cash management? (E)
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. The amount of cash that a firm keeps on hand in order to take advantage of any bargain
purchases that may arise is referred to as its 13. Most large firms hold a cash balance greater than most models imply because:
A. Transactions balance. C. Precautionary balance. A. It is too difficult to estimate the costs of security transactions
B. Compensating balance. D. Speculative balance. CIA 1194 IV-15 B. Banks are compensated by account balances for payment of services
C. Corporations have few bank accounts and it is difficult to manage their cash
25. Which of the following statements concerning zero balance accounts is not correct? D. Cash is costless and need not be managed closely B&M
A. They are set up to handle disbursement activity
B. The account has a minimum amount at all times 14. We should expect cash balances to increase when:
C. Checks are automatically transferred into the account as checks presented for payment A. The transaction costs of buying or selling interest-bearing securities increase
D. The transfer is automatic and involves an accounting entry only B. Interest rates increase
E. The master and the zero balance account locate at the same bank B&M C. Sales volume falls
D. Uncertainty about day-to-day or week-to-week cash flows decreases B&M
26. Which of the following is used to control disbursements?
A. Concentration banking C. Lock-box system Methods of Accelerating Cash Collections
B. Zero-balance account D. Fedwire B&M 32. Banks generally offer the following cash management services:
A. Processing checks C. Running lock-boxes
19
. All of the following are valid reasons for a business to hold cash and marketable securities B. Transferring funds D. All of the above B&M
except to
A. Satisfy compensating balance requirements. 33. Banks generally offer the following services:
B. Maintain adequate cash needed for transactions. A. Processing checks C. Providing advice and references
C. Meet future needs. B. Running lock-boxes D. All of the above B&M
D. Earn maximum returns on investment assets. CMA 0694 1-22
Disbursement Float
. Which of the following statements is most correct? (M) 15. Checks written by the firm are said to generate:
a. The cash balances of most firms consist of transactions, compensating, precautionary, A. Availability float C. Disbursement float
and speculative balances. The total desired cash balance can be determined by B. Ledger float D. Book float B&M
calculating the amount needed for each purpose and then summing them together.
b. The easier a firm’s access to borrowed funds the higher its precautionary balances will be, 16. The difference between bank cash and book cash is called:
in order to protect against sudden increases in interest rates. A. Disbursement float C. Availability float
c. For some firms, holding highly liquid marketable securities is a substitute for holding cash B. Net float D. None of the above B&M
because the marketable securities accomplish the same objective as cash. Brigham
d. Firms today are more likely to rely on cash than on reserve borrowing power or
Maximizing Net Float
marketable securities for speculative purposes because of the need to move quickly. 20
. Which of the following statements is most correct? (E)
a. A cash management system that minimizes collections float and maximizes disbursement
12. A large firm may hold substantial cash balances because: float is better than one with higher collections float and lower disbursement float.
A. These balances are required by the bank b. A cash management system that maximizes collections float and minimizes disbursement
B. The company may have accounts in many different banks float is better than one with lower collections float and higher disbursement float.
C. The company may have a very decentralized organization c. The use of a lockbox is designed to minimize cash theft losses. If the cost of the lockbox
D. All of the above B&M is less than theft losses saved, then the lockbox should be installed. Brigham
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d. Other things held constant, a firm will need a smaller line of credit if it can arrange to pay Draft
its bills by the 5th of each month than if its bills come due uniformly during the month. 22
. A working capital technique that delays the outflow of cash is (E)
A. Factoring. C. A lock-box system.
. Which of the following statements is most correct? (M) B. A draft. D. Electronic funds transfer. CMA 1293 1-21
a. Poor synchronization of cash flows that results in high cash management costs can be
partially offset by increasing disbursement float and decreasing collections float. 23
. A working capital technique that increases the payable float and therefore delays the outflow of
b. The size of a firm’s net float is primarily a function of its natural cash flow synchronization cash is (E)
and how it clears its checks. A. Concentration banking. C. Electronic Data Interchange (EDI).
c. Lockbox systems are used mainly for security purposes as well as to decrease the firm’s
B. A draft. D. A lockbox system. CMA 1296 1-5
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. Automated Clearing House (ACH) Electronic Transfer
e. A firm practicing good cash management and making use of positive net float will bring its 27. Electronic cash transfers offer several advantages, including:
check book balance as close to zero as possible, but must never generate a negative A. A low marginal transactions cost C. Easy automation of record-keeping
book balance. Brigham B. A reduced float D. All of the above B&M
Lock-Box System 31. A check processed through ACH (Automated Clearing House):
21. The most common cash management technique used to speed up collections is: A. Will clear immediately C. Will take two or three days to clear
A. Concentration banking C. Lock-boxes B. Will clear the same day D. None of the above B&M
B. Wire transfers D. In-house processing B&M 24
. An automated clearing house (ACH) electronic transfer is a(n)
23. By getting closer to the source of payment, lock-boxes can be used to reduce: a. Electronic payment to a company’s account at a concentration bank.
A. Availability or clearing float C. In-house processing float b. Check that must be immediately cleared by the Federal Reserve Bank.
B. Mail float D. Disbursement float B&M c. Computer-generated deposit ticket verifying deposit of funds. CMA 0694 1-23)
d. Check-like instrument drawn against the payor and not against the bank.
21
. A lock-box system
A. Reduces the need for compensating balances.
B. Provides security for late night deposits.
C. Reduces the risk of having checks lost in the mail.
D. Accelerates the inflow of funds. CMA 1293 1-20
*. The following practices will impact the cash flow of the company: (E)
26
a. Sales personnel are unequivocally responsible for collecting their credit sales. . A typical firm doing business nationally cannot expect to accelerate its cash inflow by
b. Sales commissions are based on collected invoices. A. Establishing multiple collection centers throughout the country.
c. Statement of accounts receivable are reconciled with customers and regularly sent for B. Employing a lockbox arrangement.
confirmation. RPCPA 0594 C. Initiating controls to accelerate the deposit and collection of large checks. CMA 1283 1-23
d. Automatic transfer of funds is arranged with banks regarding deposits of branches. D. Maintaining compensating balances rather than paying cash for bank services.
*. A company’s management is concerned about the large bank overdraft, which it wishes to 11. The Baumol cash balance model is limited by:
reduce over the budget period of one year. Which one of the four items below will not A. Assuming the cash flows are variable across the period
necessarily result in a lower bank overdraft? (E) B. A smooth disbursement rate and now cash inflows over the period
a. Reducing bad debts. C. Having a safety stock set to zero
b. Taking longer credit from suppliers without any loss of discounts. D. Both B and C B&M
c. Reducing wastage and loss through damage of regularly-used stock items.
d. Reducing unit costs of production. RPCPA 0592 Cash Conversion Cycle
27
. An enterprise plans to produce a new product, which will typically be sold to other firms on
25
. Methods of accelerating cash collections include all of the following except (E) credit. The cash conversion cycle resulting from this new product can be measured as the
A. Decentralized collections. C. Compensating balances. length of time from
B. Electronic funds transfers. D. Lockbox systems. CMA 0689 1-12 A. Cash purchases of raw materials to the collection of accounts receivable.
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B. Cash purchases of raw materials to the time the final product is completed. C. Risk-profitability trade-off considerations.
C. Cash purchases of raw materials to the sale of the product. D. Flotation cost considerations. CMA 0684 1-5
D. When the product is completed to the sale of the product. CIA 1193 IV-52
32
. Some managers express the opinion that “cash management problems are nothing more than
28
. Helena Furnishings wants to sharply reduce its cash conversion cycle. Which of the following inventory problems.” They then proceed to use cash management module, such as the EOQ
steps would reduce its cash conversion cycle? (E) model to determine the
a. The company increases its average inventory without increasing its sales. a. Credit and collection policies.
b. The company reduces its DSO. b. Marketable securities level.
c. The company starts paying its bills sooner, which reduces its average accounts payable c. Proper relationship between current assets and current liabilities.
without reducing its sales. d. Proper blend of marketable securities and cash. CMA 1286 1-33
d. Statements a and b are correct. Brigham
33
. Determining the amount and timing of conversions of marketable securities to cash is a critical
. Ignoring cost and other effects on the firm, which of the following measures would tend to
element of a financial manager's performance. In terms of the rate of return forgone on
reduce the cash conversion cycle? (M)
a. Maintain the level of receivables as sales decrease. converted securities and the cost of such transactions, the optimal amount of cash to be raised
b. Buy more raw materials to take advantage of price breaks. by selling securities is
c. Take discounts when offered. A. Inversely related to the rate of return forgone and directly related to the cost of the
d. Forgo discounts that are currently being taken. transaction.
e. Offer a longer deferral period to customers. Brigham B. Directly related to the rate of return forgone and directly related to the cost of the
transaction.
29
. Which of the following actions are likely to reduce the length of a company’s cash conversion C. Directly related to the rate of return forgone and inversely related to the cost of the
cycle? (M) transaction.
a. Adopting a just-in-time inventory system that reduces the inventory conversion period. D. Inversely related to the rate of return forgone and inversely related to the cost of the
b. Reducing the average days sales outstanding (DSO) on its accounts receivable. transaction. CIA 0593 IV-52
c. Reducing the amount of time the company takes to pay its suppliers.
34
d. Statements a and b are correct. Brigham . The economic order quantity (EOQ) formula can be adapted in order for a firm to determine
the optimal mix between cash and marketable securities. The EOQ model assumes all of the
Optimal Mix Between Cash and Short-term Investments following except
30
. When managing cash and short-term investments, a corporate treasurer is primarily a. The cost of a transaction is independent of the dollar amount of the transaction and
concerned with (E) interest rates are constant over the short run.
A. Maximizing rate of return. b. An opportunity cost is associated with holding cash, beginning with the first dollar.
B. Minimizing taxes. c. The total demand for cash is known with certainty.
C. Investing in Treasury bonds since they have no default risk. d. Cash flow requirements are random. CMA 0689 1-15
D. Liquidity and safety. CMA 1295 1-12
Comprehensive
31
. When a company is evaluating whether the ratio of cash and marketable securities to total *. The following are desirable in cash management except: (E)
assets should be high or low, its decision will be based upon a. Cash is collected at the earliest time possible.
A. Financial leverage considerations. b. Most sales are on cash basis and receivables are aged “current”
B. Operating leverage considerations. c. Post-dated checks are not deposited on time upon maturity.
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d. All sales are properly receipted and promptly deposited intact. RPCPA 0593 . Which of the following are criteria for selection among securities available for a marketable
securities portfolio? (M)
*. In cash management, which of the following statements is false? (M) A. Default risk, taxability, and relative yields.
a. Capital costs, delinquency costs, and default costs are costs associated with cash B. Planning, major investment decisions, and interaction with capital markets.
management. C. The operating, payment, and cash conversion cycles. CIA 0589 IV-52
b. Short costs, long costs, and procurement costs are costs associated with optimal cash D. Inventory conversion, receivables conversion, and payable deferral periods.
balance model approach
c. Obtaining financing services and controlling cash flow are some of the major functions of . Which of the following is not a situation that might lead a firm to hold marketable securities?
cash management. (M)
d. Funds sourcing and custodianship must be done at the lowest possible cost, where a. The firm has purchased a fixed asset that will require a large write-off of depreciable
excess funds must be invested for a return that is best in the market. RPCPA 1090 expense.
b. The firm must meet a known financial commitment, such as financing an ongoing
MARKETABLE SECURITIES construction project.
Criteria c. The firm must finance seasonal operations.
*. The criteria that should be considered in investing surplus cash (E) d. The firm has just sold long-term securities and has not yet invested the proceeds in
a. Safety of the company’s funds c. Yield on the principal earning assets. Brigham
b. Liquidity of the principal d. All of the above RPCPA 0588
Money Market Instruments
7. The following are money market instruments except:
A. T-bills C. Commercial paper
B. Federal agency discount notes D. Preferred stocks B&M
8. The three money market securities with the greatest volume of business are:
A. Treasury bills, commercial paper, repurchase agreements
B. Negotiable CDs, federal agency discount notes, T-bills
C. Commercial paper, bankers' acceptances, tax-exempt municipal notes
D. Federal agency discount notes, repurchase agreements, medium-term notes B&M
Treasury Bills
36
. Which security is most often held as a substitute for cash? (E) 10. Negotiable CDs are issued by:
A. Treasury bills. C. Gold. A. US Government C. Banks
B. Common stock. D. Aaa corporate bonds. CMA 1289 1-14 B. Federal agencies D. Corporations B&M
9. For which of the following investments is there a very active secondary market? Commercial Paper
41
A. Medium-term notes C. US Treasury bills . The best example of a marketable security with minimal risk would be (D)
B. Commercial paper D. Repurchase agreements B&M A. Municipal bonds.
B. The common stock of a Aaa rated company.
37
. The marketable securities with the least amount of default risk are C. The commercial paper of a Aaa rated company.
A. Federal government agency securities. C. Repurchase agreements. D. Stock options of a Aaa rated company. CMA 0688 1-15
B. U.S. Treasury securities. D. Commercial paper. CMA 0691 1-11
EuroCommercial Paper
38
Of the following four investments, is considered to be the safest. (E) 14. Commercial papers sold in the international markets are called:
a. commercial paper d. Treasury bonds A. Negotiable commercial papers C. MTNs
b. corporate bonds e. U. S. Agency issues B. EuroCommercial papers D. None of the above B&M
c. Treasury bills
Floating Rate Preferred Stock
39
. Which of the following financial instruments can be traded in international money markets? 16. Floating-rate preferred stock offers competitive rates of return with traditional money-market
A. Mortgages. C. U.S. Treasury bills. instruments but:
B. Preferred shares. D. U.S. Treasury bonds. CIA 1195 IV-65 A. Is not rated by Moody's or Standard & Poor's
B. Still provides the corporate investor with the tax exclusion on dividend income
Repurchase Agreement C. Has a fixed rate of dividend income
15. A repurchase agreement occurs when: D. Offers a highly competitive trading market B&M
A. A company agrees to buy back its commercial paper before maturity
B. A bank depositor agrees, in advance, to re-invest money in a negotiable certificate of 17. A tax-paying corporation would prefer to invest short-term money in:
deposit A. Preferred stock C. Common stock
C. An investor buys part of a government security dealer's inventory and simultaneously B. Floating-rate preferred stock D. Long-term bonds B&M
agrees to sell it back
D. The federal government agrees to buy T-bills B&M 21. Even though the dividend rate on a floating-rate preferred stock is floating to keep in line with
interest rates, the instrument still suffers from risk such as:
Negotiable Certificates of Deposit A. A thin market causing potential principal risk and liquidity concerns
40
. Which one of the following is not a characteristic of a negotiable certificate of deposit? B. The risk of downgrades from the narrow range of issuers
Negotiable certificates of deposit (D) C. The impact of tax law changes, which may reduce the after-tax value of the instrument
A. Have a secondary market for investors. D. All of the above B&M
B. Are regulated by the Federal Reserve System.
C. Are usually sold in denominations of a minimum of $100,000. CMA 0691 1-12
D. Have yields considerably greater than bankers' acceptances and commercial paper.
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Money Market Mutual Funds D. The Eurodollar market is outside the direct control of the U.S. monetary authorities and
42
. In smaller businesses in which the management of cash is but one of numerous functions has lower costs. CIA 0595 IV-59
performed by the treasurer, various cost incentives and diversification arguments suggest that
surplus cash should be invested in 3. There is a difference between "Eurodollar" or "international dollar" rate and short-term interest
A. Commercial paper. C. Money market mutual funds. rate in the US because:
B. Bankers' acceptances. D. Corporate bonds. CMA 1280 1-1 A. Banks are not subject to reserve requirements on international dollars
B. Banks need not insure international dollar deposits with the FDIC
Eurodollar Deposit C. Both A and B
2. "Eurodollars" or "international dollars" are: D. None of the above B&M
A. Dollar deposits in banks outside the US
B. Dollars deposited in the US by foreigners Variable Rate Demand Bond
C. Dollars held by foreign governments 11. A variable rate demand bond (VRDB):
D. None of the above B&M A. Is a long-term security
B. Has interest payments linked to the level of short-term interest rates
44. US dollars deposited in a German bank are called: C. May periodically be sold back to the issuer at face value
A. Deutsche dollars C. Eurodollars D. Is tax-exempt
B. American depositing receipts D. None of the above B&M E. All of the above B&M
43
. Of the following, a characteristic of Eurobonds is that they are Not a Proper Investment for Idle Cash
46
A. Always denominated in Eurodollars. . All of the following are alternative marketable securities suitable for investment except
B. Always sold in some country other than the one in whose currency the bond is A. U.S. Treasury bills. C. Commercial paper.
denominated. B. Eurodollars. D. Convertible bonds. CMA 0694 1-25
C. Sold outside the country of the borrower but are denominated in the currency of the
country in which the issue is sold. *. Which of the following investments is not likely to be a proper investment for temporary idle
D. Generally issued as registered bonds. CIA 1195 IV-66 cash? (E)
a. Initial public offering of an established profitable conglomerate.
44
. Which of the following statements does not properly describe a Eurodollar deposit? b. Commercial paper.
A. Eurodollar deposits are U.S. dollar deposits in banks outside of the U.S. c. Treasury bills.
B. Eurodollar deposits are outside the direct control of the U.S. monetary authorities. d. Treasury bonds due within one year. RPCPA 0595
C. Eurodollar deposit rates tend to be lower than domestic U.S. rates on equivalent
instruments. CIA 0594 IV-58 Short Selling
47
D. Interest rates on Eurodollar deposits are tied to the London Interbank Offer Rate (LIBOR). . The term “short selling” is the
a. Selling of a security that was purchased by borrowing money from a broker.
45
. Interest rates received by depositors on Eurodollar deposits tend to be higher than domestic b. Selling of a security that is not owned by the seller.
U.S. rates on equivalent instruments because c. Selling of all the shares you own in a company in anticipation that the price will decline
A. Borrowers pay higher rates than domestic U.S. rates on equivalent instruments. dramatically. CMA 1294 1-16
B. The deposits involve different currencies. d. Betting that a stock will increase by a certain amount within a given period of time.
C. Eurodollar deposits are for smaller amounts.
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Riding the Yield Curve . The average collection period for a firm measures the number of days (E)
*. In the process of investing of surplus cash, the term “riding the yield curve” refers to (E) a. After a typical credit sale is made until the firm receives the payment.
a. Diversifying securities portfolio so that the firm has an equal balance of long-term versus b. It takes a typical check to “clear” through the banking system.
short-term securities. c. Beyond the end of the credit period before a typical customer payment is received.
b. Swapping different maturities of similar quality debt securities in order to obtain higher d. Before a typical account becomes delinquent. CMA 1295 1-4
yield.
c. Purchasing only the longest maturities for given rates of return. . Which of the following statements is most correct? (M)
d. Adherence to the liquidity preference theory of securities investment. RPCPA 0596 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 60 days, the impact
RECEIVABLES MANAGEMENT on sales can’t be determined because the increase in the discount is offset by the longer
. Which of the following statements is most correct? (M) net terms, which tends to reduce sales.
a. A firm that makes 90 percent of its sales on credit and 10 percent for cash is growing at a c. The DSO of a firm with seasonal sales can vary. While the sales per day figure is usually
rate of 10 percent annually. If the firm maintains stable growth it will also be able to based on the total annual sales, the accounts receivable balance will be high or low
maintain its accounts receivable at its current level, since the 10 percent cash sales can depending on the season.
be used to manage the 10 percent growth rate. d. An aging schedule is used to determine what portion of customers pay cash and what
b. In managing a firm’s accounts receivable it is possible to increase credit sales per day yet portion buy on credit.
still keep accounts receivable fairly steady if the firm can shorten the length of its e. Aging schedules can be constructed from the summary data provided in the firm’s
collection period. financial statements. Brigham
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. Aging of Accounts Receivable
d. Since receivables and payables both result from sales transactions, a firm with a high 50
. An aging of accounts receivable measures the
receivables-to-sales ratio should also have a high payables-to-sales ratio. Brigham a. Ability of the firm to meet short-term obligations.
b. Average length of time that receivables have been outstanding. CMA 1290 1-22
Monitoring Receivables c. Percentage of sales that have been collected after a given period of time.
. Analyzing days sales outstanding (DSO) and the aging schedule are two common methods for d. Amount of receivables that have been outstanding for given lengths of time.
monitoring receivables. However, they can provide erroneous signals to credit managers when
(E) . Which of the following statements is most correct? (M)
a. Customers’ payments patterns are changing. a. Other things held constant, the higher a firm’s days sales outstanding (DSO), the better its
b. Sales fluctuate seasonally. credit department.
c. Some customers take the discount and others do not. b. If a firm that sells on terms of net 30 changes its policy and begins offering all customers
d. Sales are relatively constant, either seasonally or cyclically. Brigham terms of 2/10, net 30, and if no change in sales volume occurs, then the firm’s DSO will
probably increase.
Days Sales Outstanding c. If a firm sells on terms of 2/10, net 30, and its DSO is 30 days, then its aging schedule
48
. An enterprise's receivables collection period is equal to would probably show some past due accounts.
A. The inventory conversion period. d. Statements a and c are correct. Brigham
B. The cash conversion cycle.
C. The day's sales outstanding. Credit & Collection Policy
D. The inventory divided by average daily sales. CIA 0597 IV-27 *. The goal of credit policy is to (E)
a. Extend credit to the point where marginal profits equal marginal costs.
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b. Minimize bad debt losses. e. Seasonal dating with terms 2/15, net 30 days, with April 1 dating, means that if the original
c. Minimize collection expenses. sale took place on February 1st, the customer can take the discount up until March 15th,
d. Maximize sales. RPCPA 0597 but must pay the net invoice amount by April 1st. Brigham
*. It is held that the level of accounts receivable that the firm has or holds reflects both the Average Gross Receivables Balance
53
volume of a firm’s sales on account and a firm’s credit policies. Which one of the following . Which of the following represents a firm’s average gross receivables balances?
items is not considered as part of the firm’s credit policies? (M) I. Days’ sales in receivables x accounts receivable turnover.
a. The minimum risk group to which credit should be extended. II. Average daily sales x average collection period.
b. The extent (in terms of money) to which a firm will go to collect an account. III. Net sales ÷average gross receivables. (E)
c. The length of time for which credit is extended. a. I only. c. II only.
d. The size of the discount that will be offered. RPCPA 1095 b. I and II only. d. II and III only. CMA 1296 1-18
51
. The one item listed below that would warrant the least amount of consideration in credit and Receivable Turnover
54
collection policy decisions is the . A high turnover of accounts receivable, which implies a very short days-sales outstanding,
A. Quality of accounts accepted. C. Cash discount given. CMA 0684 1-3 could indicate that the firm
B. Quantity discount given. D. Level of collection expenditures. A. Has a relaxed (lenient) credit policy.
B. Offers small discounts.
52
. When a company analyzes credit applicants and increases the quality of the accounts C. Uses a lockbox system, synchronizes cash flows, and has short credit terms.
rejected, the company is attempting to (M) D. Has an inefficient credit and collection department. Gleim
A. Maximize sales. C. Increase the average collection period.
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B. Increase bad-debt losses. D. Maximize profits. CMA 1286 1-34 . A decrease in the firm's receivable turnover ratio means that (D)
A. It is collecting credit sales more quickly than before.
. If easing a firm’s credit policy lengthens the collection period and results in a worsening of the B. It is collecting credit sales more slowly than before.
aging schedule, then why do firms take such actions? (E) C. Sales have gone up.
a. It normally stimulates sales. D. Inventories have gone up. Gleim
b. To meet competitive pressures.
c. To increase the firm’s deferral period for payables. 56
. Accounts receivable turnover will normally decrease as a result of (E)
d. Statements a and b are correct. Brigham a. The write-off of an uncollectible account (assume the use of the allowance for doubtful
accounts method).
. Which of the following statements is most correct? (M) b. A significant sales volume decrease near the end of the accounting period.
a. If credit sales as a percentage of a firm’s total sales increases, and the volume of credit c. An increase in cash sales in proportion to credit sales.
sales also increases, then the firm’s accounts receivable will automatically increase. d. A change in credit policy to lengthen the period for cash discounts. CMA 0690 4-14
b. It is possible for a firm to overstate profits by offering very lenient credit terms that
encourage additional sales to financially “weak” firms. A major disadvantage of such a Credit Terms
policy is that it is likely to increase uncollectible accounts. 57
. An organization would usually offer credit terms of 2/10, net 30 when
c. A firm with excess production capacity and relatively low variable costs would not be
inclined to extend more liberal credit terms to its customers than a firm with similar costs a. The organization can borrow funds at a rate exceeding the annual interest cost.
that is operating close to capacity. b. The orgnization can borrow funds at a rate less than the annual interest cost.
d. Firms use seasonal dating primarily to decrease their DSO. c. The cost of capital approaches the prime rate.
d. Most competitors are offering the same terms and the organization has a shortage of *. The level of accounts receivable will most likely increase as (M)
cash. CMA 0691 1-7 a. Cash sales increase and number of says sales.
b. Credit limits are expanded, credit sales increase, and credit terms remain the same.
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. Which one of the following statements is most correct if a seller extends credit to a purchaser c. Credit limits are expanded, cash sales increase, and aging of the receivables is improving.
for a period of time longer than the purchaser’s operating cycle? The seller (E) d. Cash sales increase, current receivables ratio to past due increases, credit limits remain
a. Will have a lower level of accounts receivable than those companies whose credit period the same. RPCPA 0594
is shorter than the purchaser’s operating cycle.
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b. Is, in effect, financing more than just the purchaser’s inventory needs. . A change in credit policy has caused an increase in sales, an increase in discounts taken, a
c. Can be certain that the purchaser will be able to convert the inventory into cash before decrease in the amount of bad debts, and a decrease in the investment in accounts
payment is due. receivable. Based upon this information, the company’s (E)
d. Has no need for a stated discount rate or credit period. CMA 1296 1-13 A. Average collection period has decreased.
B. Percentage discount offered has decreased.
Change in Credit Policy C. Accounts receivable turnover has decreased.
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. An increase in sales resulting from an increased cash discount for prompt payment would be D. Working capital has increased. CMA 1296 1-6
expected to cause (M)
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A. An increase in the operating cycle. . A change in credit policy has caused an increase in sales, an increase in discounts taken, a
B. An increase in the average collection period. reduction of the investment in accounts receivable, and a reduction in the number of doubtful
C. A decrease in the cash conversion cycle. accounts. Based on this information, we know that: (E)
D. A decrease in purchase discounts taken. CMA 1285 1-6 a. Net profit has increased.
b. The average collection period has decreased.
*. If a firm had been extending trade credit on a 2/10, net/30 basis, what change would be c. Gross profit has declined.
expected on the balance sheet of its customer if the firm went to a net cash 30 policy? (M) d. The size of the discount offered has decreased.
a. Increased payables and increased bank loan. e. The bad debt loss percentage has increased. RPCPA 1095, CMA 1289 1-15
b. Increased receivables.
c. Decreased receivables. *. The credit and collection policy of Amargo Co. provides for the imposition of credit block when
d. Decrease in cash. RPCPA 0596 the credit line is exceeded and/or the account is past due. During the month, because of the
campaign to achieve volume targets, the general manager has waived the credit block policy
in a number of instances involving big volume accounts. The likely effect of this move is (M)
a. Deterioration of aging of receivables only.
b. Increase in the level of receivables only.
c. Deterioration of aging and increase in the level of receivables.
d. Decrease in collections during the month the move was done. RPCPA 1094
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. The sales manager at Ryan Company feels confident that, if the credit policy at Ryan’s were
changed, sales would increase and, consequently, the company would utilize excess capacity.
The two credit proposals being considered are as follows:
Proposal A Proposal B
Increase in sales $500,000 $600,000
RPCPA, AICPA, CMA & CIA EXAMINATION QUESTIONS Page 14 of 40
MANAGEMENT ADVISORY SERVICES WORKING CAPITAL FINANCE
a. Under normal conditions, a firm’s expected ROE would probably be higher if it financed A. Installment loans. C. Trade credit.
with short-term rather than with long-term debt, but the use of short-term debt would B. Commercial paper. D. Mortgage bonds. CMA 1295 1-9
probably increase the firm’s risk.
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b. Conservative firms generally use no short-term debt and thus have zero current liabilities. . Which one of the following statements about trade credit is correct?
c. A short-term loan can usually be obtained more quickly than a long-term loan, but the cost a. Not an important source of financing for small firms.
of short-term debt is likely to be higher than that of long-term debt. b. A source of long-term financing to the seller.
d. If a firm that can borrow from its bank buys on terms of 2/10, net 30, and if it must pay by c. Subject to risk of buyer default.
Day 30 or else be cut off, then we would expect to see zero accounts payable on its d. Usually an inexpensive source of external financing. CMA 1296 1-12
balance sheet.
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e. If one of your firm’s customers is “stretching” its accounts payable, this may be a nuisance . The correct equation for calculating the approximate percentage cost, on an annual basis, of
but does not represent a real financial cost to your firm as long as the firm periodically not taking trade discounts is CIA 1195 IV-53
pays off its entire balance. Brigham A. Discount % 360
x
100 - Discount % Days credit is outstanding - Discount period
. Which of the following statements is most correct? (M) B. Discount % 360
a. Under normal conditions the shape of the yield curve implies that the interest cost of x
100 Days credit is outstanding - Discount period
short-term debt is greater than that of long-term debt, although short-term debt has other
C. 100 Discount % 360
advantages that make it desirable as a financing source. x
Discount % Days credit is outstanding - Discount period
b. Flexibility is an advantage of short-term credit but this is somewhat offset by the higher
flotation costs associated with the need to repeatedly renew short-term credit. D. Discount % Days credit is outstanding - Discount period
x
c. A short-term loan can usually be obtained more quickly than a long-term loan but the 100 - Discount % 360
penalty for early repayment of a short-term loan is significantly higher than for a long-term
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loan. . A company obtaining short-term financing with trade credit will pay a higher percentage
d. Statements about the flexibility, cost, and riskiness of short-term versus long-term credit financing cost, everything else being equal, when (D)
are dependent on the type of credit that is actually used. Brigham A. The discount percentage is lower.
e. Short-term debt is often less costly than long-term debt and the major reason for this is B. The items purchased have a higher price.
that short-term debt exposes the borrowing firm to much less risk than long-term debt. C. The items purchased have a lower price.
D. The supplier offers a longer discount period. CIA 0597 IV-51
Trade Credit
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68
. Which one of the following provides a spontaneous source of financing. (E) . Which one of the following statements concerning cash discount is correct? (E)
a. Accounts payable. c. Accounts receivable. A. The cost of not taking a 2/10, net 30 cash discount is usually less than the prime rate.
b. Mortgage bonds. d. Debentures. CMA 1295 1-15 B. With trade terms of 2/15, net 60, if the discount is not taken, the buyer receives 45 days of
free credit. CMA 1295 1-7
69
. Which one of the following is a spontaneous source of financing? C. The cost of not taking the discount is higher for terms of 2/10, net 60 than for 2/10, net 30.
A. Notes payable. C. Prepaid interest. D. The cost of not taking a cash discount is generally higher than the cost of a bank loan.
B. Long-term debt. D. Trade credit. CMA 1289 1-20
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. A small retail business would most likely finance its merchandise inventory with
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. Which one of the following financial instruments generally provides the largest source of short- A. Commercial paper. C. A line of credit.
term credit for small firms? B. A terminal warehouse receipt loan. D. A chattel mortgage. CMA 0689 1-17
C. The imposition of a compensating balance with an absolute minimum that cannot be met Effective Rate
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by current transaction balances. . Discounted interest is based on the borrowed amount but is paid in advance. The formula for
D. The absence of a charge for any unused portion in the line of credit. CMA 1280 1-3 calculating the discounted interest rate for a 1-year loan is (E) Gleim
Interest Interest
Nominal Interest Rate A. C.
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Borrowed amount Borrowed amount - Interest
. A one year, $20,000 loan with a 10% nominal interest rate provides the borrower with the use Interest
of <List A> if interest is charged on a <List B> basis. (E) B. D. None of the answers are correct.
Average borrowed amount
CIA 0595 IV-50 A. B. C. D.
List A $18,000 $20,000 $20,000 $22,000 Collateral
List B Simple Simple Discount Discount *. In assessing the loan value of inventory, a banker will normally be concerned about the portion
of inventory that is work-in-process because (E)
Compensating Balance a. WIP inventory is relatively easy to sell because it does not represent a raw material or a
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. A minimum checking account balance that a firm must maintain with a commercial bank is a finished product.
A. Transactions balance. C. Precautionary balance. b. WIP inventory usually has the highest loan value of the different inventory types.
B. Compensating balance. D. Speculative balance. CIA 1190 IV-49 c. WIP generally has the lowest marketability of the various types of inventories.
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d. WIP represents a lower investment by a corporation as opposed to other types of
. A compensating balance inventories. RPCPA 0596
A. Compensates a financial institution for services rendered by providing it with deposits of
funds. CMA 0688 1-13 34. Firms provide the following as security for short-term loans:
B. Is used to compensate for possible losses on a marketable securities portfolio. A. Accounts receivables C. Securities
C. Is a level of inventory held to compensate for variations in usage rate and lead time. B. Inventories D. All of the above B&M
D. Is an amount paid by financial institutions to compensate large depositors.
Syndicated Loan
. Which of the following statements is most correct? (M) 30. When banks have to make large loans, they form a group of banks for the purpose of making
a. Compensating balance requirements apply only to businesses, not to individuals. the loan. The group is called a:
b. Compensating balances are essentially costless to most firms, because those firms would A. Bank holding company C. Golden umbrella
normally have such funds on hand to meet transactions needs anyway.
B. Syndicate D. Conglomerate B&M
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. Loan Sales by Commercial Banks
d. Banks are prohibited from earning interest on the funds they force businesses to keep as 32. Loan sales by commercial banks may take the form of:
compensating balances. Brigham A. Loan assignments D. All of the above
B. Loan participations E. A and B
C. Loan syndications B&M
D. Accepting the guaranteed line of credit at 17% with the fee required on the average
amount of unused funds. CIA 1186 IV-43
ANSWER EXPALANATIONS