Test Prep Test Prep Certifications BUSINESS-ENVIRONMENT-AND-CONCEPTS Questions & Answers

• Question 71:

  An increase in sales collections resulting from an increased cash discount for prompt payment would be expected to cause a (n):

  A. Increase in the operating cycle.

  B. Increase in the average collection period.

  C. Decrease in the cash conversion cycle.

  D. Increase in bad debt losses.

  Correct Answer: C

  Choice "c" is correct. An increase in sales collections would decrease the cash conversion cycle.

  Choice "a" is incorrect because the operating cycle (as well as the cash conversion cycle) would decrease.

  Choice "b" is incorrect, as the average collection period would decrease.

  Choice "d" is incorrect. Bad debt losses would decrease from an increase in sales collections.

• Question 72:

  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 common stock due to the dividend exclusion for federal income tax purposes.

  D. Liquidity and safety.

  Correct Answer: D

  Choice "d" is correct. When managing cash and short-term investments, a corporate treasurer is primarily concerned with liquidity and safety. Choice "a" is incorrect. The board of directors and general management would be interested in maximizing rate of return on company operations. Choices "b" and "c" are incorrect. The tax manager would be interested in minimizing taxes, and investing in common stock due to the dividend exclusion for federal income tax purposes.

• Question 73:

  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.

  Correct Answer: C

  Choice "c" is correct. The working capital financing policy that finances permanent current assets with short-term debt subjects the firm to the greatest risk of being unable to meet the firm's maturing obligations. Choices "a" and "b" are incorrect because the use of long-term debt financing produces the smallest risk of being unable to meet maturing obligations. Choice "d" is incorrect because, although financing fluctuating current assets with short-term debt exposes the firm to some risk, it is not the greatest or the smallest.

• Question 74:

  Which of the following transactions does not change the current ratio and does not change the total current assets?

  A. A cash advance is made to a divisional office.

  B. A cash dividend is declared.

  C. Short-term notes payable are retired with cash.

  D. Equipment is purchased with a three-year note and a 10 percent cash down payment.

  Correct Answer: A

  Choice "a" is correct. This does not change the current ratio because the reduction of cash is offset by an increase in accounts receivable. Choice "b" is incorrect. A cash dividend increases current liabilities without increasing current assets. Although current assets remain unchanged (until the payment happens), the current ratio will change. Choice "c" is incorrect. Cash is reduced and current liabilities are reduced. Total current assets will change (they will be reduced). Choice "d" is incorrect. The payment of cash reduces current assets. Long-term assets are increased, as well as long-term and short-term liabilities. The current ratio is reduced.

• Question 75:

  As a company becomes more conservative in its working capital policy, it would tend to have a (n):

  A. Decrease in its acid-test ratio.

  B. Increase in the ratio of current assets to units of output.

  C. Increase in funds invested in common stock and a decrease in funds invested in marketable securities.

  D. Decrease in its level of permanent working capital.

  Correct Answer: B

  Choice "b" is correct. As a company becomes more conservative in its working capital policy, it would tend

  to have an increase in the ratio of current assets to units of output.

  Choice "a" is incorrect. Acid-test ratio would tend to increase with conservatism.

  Choice "c" is incorrect. Marketable securities investments would tend to increase while common stock

  investments would tend to decrease.

  Choice "d" is incorrect. Permanent working capital would tend to increase.

• Question 76:

  Determining the appropriate level of working capital for a firm requires:

  A. Changing the capital structure and dividend policy of the firm.

  B. Maintaining short-term debt at the lowest possible level because it is generally more expensive than long-term debt.

  C. Offsetting the benefit of current assets and current liabilities against the probability of technical insolvency.

  D. Maintaining a high proportion of liquid assets to total assets in order to maximize the return on total investments.

  Correct Answer: C

  Choice "c" is correct. Determining the appropriate level of working capital for a firm requires offsetting the benefit of current assets and current liabilities against the probability of technical insolvency. Choice "a" is incorrect. Changing the capital structure (common stock vs. preferred stock vs. long-term debt) and dividend policy has nothing to do with the level of working capital required for day-to-day operations of the business. Choice "b" is incorrect. The relative interest cost of short-term vs. long-term debt does not determine the appropriate level of working capital. Choice "d" is incorrect. Because profitability varies inversely with liquidity, maximizing the return on total investments would require a low (not high) level of liquid assets and a high level of liquid assets does nothing to determine the required level of working capital.

• Question 77:

  A firm has daily cash receipts of $100,000. A bank has offered to reduce the collection time on the firm's deposits by two days for a monthly fee of $500. If money market rates are expected to average 6 percent during the year, the net annual benefit (loss) from having this service is:

  A. $3,000

  B. $12,000

  C. $6,000

  D. $(6,000)

  Correct Answer: C

  Choice "c" is correct. $6,000 net annual benefit from using a lockbox system.

  

• Question 78:

  If a firm increases its cash balance by issuing additional shares of common stock, working capital:

  A. Remains unchanged and the current ratio remains unchanged.

  B. Increases and the current ratio remains unchanged.

  C. Increases and the current ratio decreases.

  D. Increases and the current ratio increases.

  Correct Answer: D

  Choice "d" is correct. If a firm increases its cash balance by issuing additional shares of common stock, working capital increases and the current ratio increases.

  

• Question 79:

  Which one of the following would increase the working capital of a firm?

  A. Purchase of a new plant financed by a 20-year mortgage.

  B. Cash collection of accounts receivable.

  C. Payment of a 20-year mortgage payable with cash.

  D. Refinancing a short-term note payable with a two-year note payable.

  Correct Answer: D

  Choice "d" is correct. Refinancing a short-term note payable with a two-year note payable would increase the working capital of a firm.

  

  Choice "a" is incorrect. The purchase of a new plant (fixed asset) financed by a 20-year mortgage (longterm debt with a one-year current portion) would reduce working capital because current liabilities would be increased. Choice "b" is incorrect. The cash collection of accounts receivable has no effect on working capital-cash increases by the amount that A/R decreases. Choice "c" is incorrect. The payment of a 20-year mortgage payable (long-term debt) would reduce cash and have no effect on current liabilities, thereby reducing working capital.

• Question 80:

  Net working capital is the difference between:

  A. Current assets and current liabilities.

  B. Fixed assets and fixed liabilities.

  C. Total assets and total liabilities.

  D. Total assets and current liabilities.

  Correct Answer: A

  Choice "a" is correct. Current assets minus current liabilities equals net working capital. Choices "b", "c", and "d" are incorrect, per the above Explanation.