UNIVERSITY OF THE EAST

REVIEWER FOR FINALS

FINANCIAL MANAGEMENT, PART I
1st semester, SY 2015-2016
THEORIES
1. 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.
2. 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.
3. 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.
4. Which of the following is typically part of the cash budget?
a. Payments lag.
b. Payment for plant construction.
c. Cumulative cash.
d. Statements a and c are correct.
e. All of the above statements are correct.
5. 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.

6.

6. 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.
7. Which of the following is not a situation that might lead a firm to hold marketable securities?
a. The firm has purchased a fixed asset that will require a large write-off of depreciable expense.
b. The firm must meet a known financial commitment, such as financing an ongoing construction
project.
c. The firm must finance seasonal operations.
d. The firm has just sold long-term securities and has not yet invested the proceeds in earning
assets.
e. None of the statements above is correct. (All of the situations might lead the firm to hold
marketable securities.)
8. 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.
e. Offer a longer deferral period to customers.
9. Which of the following actions are likely to reduce the length of a companys cash conversion cycle?
a. Adopting a new inventory system that reduces the inventory conversion period.
b. Reducing the average days sales outstanding (DSO) on its accounts receivable.
c. Reducing the amount of time the company takes to pay its suppliers.
d. Statements a and b are correct.
e. All of the statements above are correct.
10. Which of the following statements is most correct?
a. The cash balances of most firms consist of transactions, compensating, precautionary, and
speculative balances. The total desired cash balance can be determined by calculating the amount
needed for each purpose and then summing them together.
b. The easier a firms access to borrowed funds the higher its precautionary balances will be, in
order to protect against sudden increases in interest rates.
c. For some firms, holding highly liquid marketable securities is a substitute for holding cash
because the marketable securities accomplish the same objective as cash.
d. Firms today are more likely to rely on cash than on reserve borrowing power or marketable
securities for speculative purposes because of the need to move quickly.
e. None of the statements above is correct.
11. Which of the following statements is most correct?
a. Shorter-term cash budgets, in general, are used primarily for planning purposes, while longerterm budgets are used for actual cash control.
b. The cash budget and the capital budget are planned separately and although they are both
important to the firm, they are independent of each other.
c.
Since depreciation is a

non-cash charge, it does not appear on nor have an effect on the cash budget.

d. The target cash balance is set optimally such that it need not be adjusted for seasonal patterns
and unanticipated fluctuations in receipts, although it is changed to reflect long-term changes in the
firms operations.
e. The typical actual cash budget will reflect interest on loans and income from investment of
surplus cash. These numbers are expected values and actual results might turn out different.
12. Which of the following statement completions is most correct? If the yield curve is upward sloping,
then a firms marketable securities portfolio, assumed to be held for liquidity purposes, should be
a. Weighted toward long-term securities because they pay higher rates.
b. Weighted toward short-term securities because they pay higher rates.
c. Weighted toward U. S. Treasury securities to avoid interest rate risk.
d. Weighted toward short-term securities to avoid interest rate risk.
e. Balanced between long- and short-term securities to minimize the effects of either an upward or
a downward trend in interest rates.
13. Which of the following statements is most correct?
a. A firm that makes 90 percent of its sales on credit and 10 percent for cash is growing at a rate of
10 percent annually. If the firm maintains stable growth it will also be able to maintain its accounts
receivable at its current level, since the 10 percent cash sales can be used to manage the 10
percent growth rate.
b. In managing a firms accounts receivable it is possible to increase credit sales per day yet still
keep accounts receivable fairly steady if the firm can shorten the length of its collection period.
c. If a firm has a large percentage of accounts over 30 days old, it is a sign that the firms
receivables management needs to be reviewed and improved.
d. Since receivables and payables both result from sales transactions, a firm with a high
receivables-to-sales ratio should also have a high payables-to-sales ratio.
e. None of the statements above is correct.
14. Which of the following statements is most correct?
a. If credit sales as a percentage of a firms total sales increases, and the volume of credit sales
also increases, then the firms accounts receivable will automatically increase.
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 policy is that it is likely to
increase uncollectible accounts.
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 that is operating close
to capacity.
d. Firms use seasonal dating primarily to decrease their DSO.
e. Seasonal dating with terms 2/15, net 30 days, with April 1 dating, means that if the original sale
took place on February 1st, the customer can take the discount up until March 15th, but must pay
the net invoice amount by April 1st.
15. Which of the following statements is most correct?
a. Other things held constant, the higher a firms days sales outstanding (DSO), the better its credit
department.
b. If a firm that sells on terms of net 30 changes its policy and begins offering all customers terms
of 2/10, net 30, and if no change in sales volume occurs, then the firms DSO will probably increase.
c. If a firm sells on terms of 2/10, net 30, and its DSO is 30 days, then its aging schedule would
probably show some past due accounts.
d. Statements a and c are correct.
e.
None of the statements

above is correct.

16. Which of the following statements is incorrect about working capital policy?
a. A company may hold a relatively large amount of cash if it anticipates uncertain sales levels in
the coming year.
b. Credit policy has an impact on working capital since it has the potential to influence sales levels
and the speed with which cash is collected.
c. The cash budget is useful in determining future financing needs.
d. Holding minimal levels of inventory can reduce inventory carrying costs and cannot lead to any
adverse effects on profitability.
e. Managing working capital levels is important to the financial staff since it influences financing
decisions and overall profitability of the firm.
17. Which of the following statements is most correct?
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.
b. The size of a firms net float is primarily a function of its natural cash flow synchronization and
how it clears its checks.
c. Lockbox systems are used mainly for security purposes as well as to decrease the firms 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.
e. A firm practicing good cash management and making use of positive net float will bring its check
book balance as close to zero as possible, but must never generate a negative book balance.
18. Which of the following might be attributed to efficient inventory management?
a. High inventory turnover ratio.
b. Low incidence of production schedule disruptions.
c. High total assets turnover.
d. Statements a and c are correct.
e. All of the statements above are correct.
19. If easing a firms credit policy lengthens the collection period and results in a worsening of the aging
schedule, then why do firms take such actions?
a. It normally stimulates sales.
b. To meet competitive pressures.
c. To increase the firms deferral period for payables.
d. Statements a and b are correct.
e. All of the statements above are correct.
20. Which of the following is not commonly regarded as being a credit policy variable?
a. Credit period.
b. Collection policy.
c. Credit standards.
d. Cash discounts.
e. All of the statements above are credit policy variables.

PROBLEMS
1. The Danser Company expects to have sales of $30,000 in January, $33,000 in February, and
$38,000 in March. If 20 percent of sales are for cash, 40 percent are credit sales paid in the month
following the sale, and 40 percent are credit sales paid 2 months following the sale, what are the
cash receipts from sales in March?
a. $55,000
b. $47,400
c. $38,000
d. $32,800
e. $30,000
2. If Hot Tubs Inc. had sales of $2,027,773 per year (all credit) and its days sales outstanding was
equal to 35 days, what was its average amount of accounts receivable outstanding? (Assume a
365-day year.)
a. $194,444
b. $ 57,143
c. $ 5,556
d. $ 97,222
e. $212,541
3. A firm has $5,000,000 of inventory on average and annual sales of $30,000,000. Assume there are
365 days per year. What is the firms inventory conversion period?
a. 30.25 days
b. 60.83 days
c. 45.00 days
d. 72.44 days
e. 55.25 days
4. For the Cook County Company, the average age of accounts receivable is 60 days, the average
age of accounts payable is 45 days, and the average age of inventory is 72 days. Assuming a 365day year, what is the length of the firms cash conversion cycle?
a. 87 days
b. 90 days
c. 65 days
d. 48 days
e. 66 days
5. Spartan Sporting Goods has $5 million in inventory and $2 million in accounts receivable. Its
average daily sales are $100,000. The companys payables deferral period (accounts payable
divided by daily purchases) is 30 days. What is the length of the companys cash conversion cycle?
a. 100 days
b. 60 days
c. 50 days
d. 40 days
e. 33 days

6. You have recently been hired to improve the performance of Multiplex Corporation, which has been
experiencing a severe cash shortage. As one part of your analysis, you want to determine the
firms cash conversion cycle. Using the following information and a 365-day year, what is your
estimate of the firms current cash conversion cycle?

Current inventory = $120,000.

Annual sales = $600,000.
Accounts receivable = $157,808.
Accounts payable = $25,000.
Total annual purchases = $365,000.
Purchases credit terms: net 30 days.
Receivables credit terms: net 50 days.

a.
b.
c.
d.
e.

49 days
193 days
100 days
168 days
144 days

7. Kolan Inc. has annual sales of $36,500,000 ($100,000 a day on a 365-day basis). On average, the
company has $12,000,000 in inventory and $8,000,000 in accounts receivable. The company is
looking for ways to shorten its cash conversion cycle, which is calculated on a 365-day basis. Its
CFO has proposed new policies that would result in a 20 percent reduction in both average
inventories and accounts receivables. The company anticipates that these policies will also reduce
sales by 10 percent. Accounts payable will remain unchanged. What effect would these policies
have on the companys cash conversion cycle?
a. -40 days
b. -22 days
c. -13 days
d. +22 days
e. +40 days
8. Biondi Manufacturing Company (BMC) has an average accounts receivable balance of $1,250,000,
an average inventory balance of $1,750,000, and an average accounts payable balance of
$800,000. Its annual sales are $12,000,000 and its cost of goods sold represents 80 percent of
annual sales. Assume there are 365 days in a year. What is BMCs cash conversion cycle?
a. 84.15 days
b. 53.23 days
c. 72.28 days
d. 100.55 days
e. 60.83 days
9. Jordan Air Inc. has average inventory of $1,000,000. Its estimated annual sales are $10 million and
the firm estimates its receivables conversion period to be twice as long as its inventory conversion
period. The firm pays its trade credit on time; its terms are net 30 days. The firm wants to decrease
its cash conversion cycle by 10 days. It believes that it can reduce its average inventory to
$863,000. Assume a 365-day year and that sales will not change. By how much must the firm also
reduce its accounts receivable to meet its goal of a 10-day reduction in its cash conversion cycle?
a.
$ 101,900

b. $1,000,000

c. $ 136,986
d. $ 333,520
e. $
0
10. Callison Airlines is deciding whether to pursue a restricted or relaxed current asset investment
policy. Callisons annual sales are expected to total $3.6 million, its fixed assets turnover ratio
equals 4.0, and its debt and common equity are each 50 percent of total assets. EBIT is $150,000,
the interest rate on the firms debt is 10 percent, and the firms tax rate is 40 percent. If the
company follows a restricted policy, its total assets turnover will be 2.5.
Under a relaxed policy, its total assets turnover will be 2.2.
If the firm adopts a restricted policy, how much will it save in interest expense (relative to what it
would be if Callison were to adopt a relaxed policy)?
a. $ 3,233
b. $ 6,175
c. $ 9,818
d. $ 7,200
e. $10,136

ANSWER KEY

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

C
D
B
E
A
D
A
D
D
C

THEORIES
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.

E
D
B
B
C
D
A
E
D
E

PROBLEMS
1. D
2. A
3. B
4. A
5. D
6. E
7. B
8. E
9. C
10. C