MANAGING CURRENT ASSETS
(Difficulty: E = Easy, M = Medium, and T = Tough)
Multiple Choice: Conceptual
Working capitalAnswer: c Diff: E
[i].Other things held constant, which of the following will cause an increase in working capital?
a.Cash is used to buy marketable securities.
b.A cash dividend is declared and paid.
c.Merchandise is sold at a profit, but the sale is on credit. d.Long-term bonds are retired with the proceeds of a preferred stock issue. e.Missing inventory is written off against retained earnings.
Working capitalAnswer: d Diff: E N
[ii].Which of the following statements is most correct?
a.The current ratio is calculated as net working capital divided by current liabilities. b.Gross working capital represents current assets used in operations. c.Net working capital is defined as current assets minus current liabilities. d.Statements b and c are correct.
e.Statements a, b, and c are correct.
Cash conversion cycleAnswer: b Diff: E
[iii].Helena Furnishings wants to sharply reduce its cash conversion cycle. Which of the following steps would reduce its cash conversion cycle?
a.The company increases its average inventory without increasing its sales. b.The company reduces its DSO.
c.The company starts paying its bills sooner, which reduces its average accounts payable without reducing its sales. d.Statements a and b are correct.
e.All of the statements above are correct.
Cash budgetAnswer: e Diff: E
[iv].Which of the following is typically part of the cash budget?
b.Payment for plant construction.
d.Statements a and c are correct.
e.All of the above statements are correct.
Cash budgetAnswer: a Diff: E
[v].Which of the following statements concerning the cash budget is correct?
a.Depreciation expense is not explicitly included, but depreciation effects are implicitly included in estimated tax payments. b.Cash budgets do not include financial expenses such as interest and dividend payments. c.Cash budgets do not include cash inflows from long-term sources such as bond issues. d.Statements a and b are correct.
e.Statements a and c are correct.
Cash budgetAnswer: d Diff: E
[vi].Which of the following items should a company explicitly include in its monthly cash budget?
a. Its monthly depreciation expense.
b. Its cash proceeds from selling one of its divisions. c. Interest paid on its bank loans.
d. Statements b and c are correct.
e. All of the statements above are correct.
Cash managementAnswer: a Diff: E
[vii].Which of the following statements is most correct?
a.A cash management system that minimizes collections float and maximizes disbursement float is better than one with higher collections float and lower disbursement float. b.A cash management system that maximizes collections float and minimizes disbursement float is better than one with lower collections float and higher disbursement float. c.The use of a lockbox is designed to minimize cash theft losses. If the cost of the lockbox is less than theft losses saved, then the lockbox should be installed. d.Other things held constant, a firm will need a smaller line of credit if it can arrange to pay its bills by the 5th of each month than if its bills come due uniformly during the month. e.None of the statements above is correct.
Cash managementAnswer: d Diff: E
[viii].Which of the following statements about current asset management is most correct?
a.A positive net float means that a company has more cash available for its use than the amount shown in the company’s books. b.Use of a lockbox reduces the possibility that petty cash will be lost....