Management Advisory Services

MANAGEMENT ADVISORY SERVICES
WORKING CAPITAL FINANCE
THEORY
1. Compared to other firms in the industry, a company that maintains a conservative
working capital policy will tend to have a
a. Greater percentage of short-term financing.
b. Greater risk of needing to sell current assets to repay debt.
c. Higher ratio of current assets to fixed assets.
d. Higher total asset turnover.
2. A firm following an aggressive working capital strategy would

a. Hold substantial amount of fixed assets.
b. Minimize the amount of short-term borrowing.
c. Finance fluctuating assets with long-term financing.
d. Minimize the amount of funds held in very liquid assets.
3. The working capital financing policy that subjects the firm to the greatest risk of
being unable to meet the firm’s maturing obligations is the policy that finances
a. Fluctuating current assets with long-term debt.
b. Permanent current assets with long-term debt.
c. Permanent current assets with short-term debt.
d. Fluctuating current assets with short-term debt.
4. Determining the appropriate level of working capital for a firm requires

a. Evaluating the risks associated with various levels of fixed assets and the types
of debt used to finance these assets.
b. Changing the capital structure and dividend policy for the firm.
c. Maintaining short-term debt at the lowest possible level because it is
ordinarily more expensive than long term debt.
d. Offsetting the profitability of current assets and current liabilities against the
probability of technical insolvency.
e. Maintaining a high proportion of liquid assets to total assets in order to
maximize the return on total investments.
5. Starrs Company has current assets of $300,000 and current liabilities of $200,000.
Starrs could increase its working capital by the
A. Prepayment of $50,000 of next year's rent.
B. Refinancing of $50,000 of short-term debt with long-term debt.
C. Purchase of $50,000 of temporary investments for cash.
D. Collection of $50,000 of accounts receivable.
6. 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.
7. Ignoring cost and other effects on the firm, which of the following measures
would tend to reduce the cash conversion cycle?
a. Maintain the level of receivables as sales decrease.
b. Buy more raw materials to take advantage of price breaks.
c. Take discounts when offered.
d. Forgo discounts that are currently being taken.
8. Which of the following is not a major function in cash management?
a. Cash flow control c. Maximizing sales
b. Cash surplus investment d. Obtaining financing services
9. A precautionary motive for holding excess cash is

a. To enable a company to meet the cash demands from the normal flow of
business activity.
b. To enable a company to avail itself of a special inventory purchase before
prices rise to higher levels.
c. To enable a company to have cash to meet emergencies that may arise
periodically.
d. To avoid having to use the various types of lending arrangements available to
cover projected cash deficits.
10. 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
A. Transactions balance. C. Precautionary balance.
B. Compensating balance. D. Speculative balance.
11. All of the following are valid reasons for a business to hold cash and marketable
securities except to
A. Satisfy compensating balance requirements.
B. Maintain adequate cash needed for transactions.
C. Meet future needs.
D. Earn maximum returns on investment assets.
12. Which of the following actions would not be consistent with good management?
a. Increased synchronization of cash flows.
b. Minimize the use of float.
c. Maintaining an average cash balance equal to that required as a compensating
balance or that which minimizes total cost.
d. Use of checks and drafts in disbursing funds.
13. When managing cash and short-term investments, a corporate treasurer is

primarily concerned with
A. Maximizing rate of return.
B. Minimizing taxes.
C. Investing in Treasury bonds since they have no default risk.
D. Liquidity and safety.
14. 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 following except
a. The cost of a transaction is independent of the dollar amount of the transaction
and interest rates are constant over the short run.
b. An opportunity cost is associated with holding cash, beginning with the first
dollar.
c. The total demand for cash is known with certainty.
d. Cash flow requirements are random.
15. The following are desirable in cash management except:
a. Cash is collected at the earliest time possible.
b. Most sales are on cash basis and receivables are aged “current”
c. Post-dated checks are not deposited on time upon maturity.
d. All sales are properly receipted and promptly deposited intact.
16. The one item listed below that would warrant the least amount of consideration in
credit and collection policy decisions is the
A. Quality of accounts accepted. C. Cash discount given.
B. Quantity discount given. D. Level of collection expenditures.
17. Which of the following investments is not likely to be a proper investment for
temporary idle cash?
a. Initial public offering of an established profitable conglomerate.
b. Commercial paper.
c. Treasury bills.
d. Treasury bonds due within one year.
18. The goal of credit policy is to

a. Extend credit to the point where marginal profits equal marginal costs.
b. Minimize bad debt losses.
c. Minimize collection expenses.
d. Maximize sales.
19. It is held that the level of accounts receivable that the firm has or holds reflects
both the volume of a firm’s sales on account and a firm’s credit policies. Which
one of the following items is not considered as part of the firm’s credit policies?
a. The minimum risk group to which credit should be extended.
b. The extent (in terms of money) to which a firm will go to collect an account.
c. The length of time for which credit is extended.
d. The size of the discount that will be offered.
20. In assessing the loan value of inventory, a banker will normally be concerned
about the portion of inventory that is work-in-process because
a. WIP inventory is relatively easy to sell because it does not represent a raw
material or a finished product.
b. WIP inventory usually has the highest loan value of the different inventory
types.
c. WIP generally has the lowest marketability of the various types of inventories.
d. WIP represents a lower investment by a corporation as opposed to other types
of inventories.

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MANAGEMENT ADVISORY SERVICES

WORKING CAPITAL FINANCE

2. A firm following an aggressive working capital strategy would

4. Determining the appropriate level of working capital for a firm requires

9. A precautionary motive for holding excess cash is

13. When managing cash and short-term investments, a corporate treasurer is

18. The goal of credit policy is to

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