1. Which of the following statements concerning the cash budget is CORRECT? Depreciation expense is not explicitly included, but depreciation's effects are reflected in the estimated tax payments. Cash budgets do not include financial items such as interest and dividend payments. Cash budgets do not include cash inflows from long-term sources such as the issuance of bonds. Changes that affect the DSO do not affect the cash budget. Capital budgeting decisions have no effect on the cash budget until projects go into operation and start producing revenues. 2. A lockbox plan is used to protect cash, i.e., to keep it from being stolen. used to identify inventory safety stocks. used to slow down the collection of checks our firm writes. used to speed up the collection of checks received. used primarily by firms where currency is used frequently in transactions, such as fast food restaurants, and less frequently by firms that receive payments as checks. 3. Which of the following statements is CORRECT? Depreciation is included in the estimate of cash flows (Cash flow = Net income + Depreciation), hence depreciation is set forth on a separate line in the cash budget. If cash inflows from collections occur in equal daily amounts but most payments must be made on the 10th of each month, then a regular monthly cash budget will be misleading. The problem can be corrected by using a daily cash budget. Sound working capital policy is designed to maximize the time between cash expenditures on materials and the collection of cash on sales. If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10 net 30 to net 60. If a firm sells on terms of net 90, and if its sales are highly seasonal, with 80% of its sales in September, then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be lower in October than in August. 4. Which of the following statements is NOT CORRECT? Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate. Accruals are "free" in the sense that no explicit interest is paid on these funds. A conservative approach to working capital management will result in most if not all permanent current operating assets being financed with long-term capital. The risk to a firm that borrows with short-term credit is usually greater than if it borrowed using long-term debt. This added risk stems from the greater variability of interest costs on short-term debt and possible difficulties with rolling over short-term debt. Bank loans generally carry a higher interest rate than commercial paper. 5. Helena Furnishings wants to reduce its cash conversion cycle. Which of the following actions should it take? Increase average inventory without increasing sales. Take steps to reduce the DSO. Start paying its bills sooner, which would reduce the average accounts payable but not affect sales. Sell common stock to retire long-term bonds. Sell an issue of long-term bonds and use the proceeds to buy back some of its common stock. 6. Which of the following is NOT commonly regarded as being a credit policy variable? Credit period. Collection policy. Credit standards. Cash discounts. Payments deferral period. 7. Which of the following statements is CORRECT? Shorter-term cash budgets, in general, are used primarily for planning purposes, while longer-term budgets are used for actual cash control. The cash budget and the capital budget are developed separately, and although they are both important to the firm, one does not affect the other. Since depreciation is a non-cash charge, it neither appears on nor has any effect on the cash budget. The target cash balance should be set such that it need not be adjusted for seasonal patterns and unanticipated fluctuations in receipts, although it should be changed to reflect long-term changes in the firm's operations. The typical cash budget reflects interest paid on loans as well as income from the investment of surplus cash. These numbers, as well as other items on the cash budget, are expected values; hence, actual results might vary from the budgeted amounts. 8. Which of the following statements is most consistent with efficient inventory management? The firm has a below average inventory turnover ratio. low incidence of production schedule disruptions. below average total assets turnover ratio. relatively high current ratio. relatively low DSO. 9. Which of the following items should a company report directly in its monthly cash budget? Its monthly depreciation expense. Cash proceeds from selling one of its divisions. Accrued interest on zero coupon bonds that it issued. New shares issued in a stock split. New shares issued in a stock dividend. 10. Which of the following statements is CORRECT? Net working capital is defined as current assets minus the sum of payables and accruals, and any increase in the current ratio automatically indicates that net working capital has increased. Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks associated with using short-term financing. If a company follows a policy of "matching maturities," this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt. Net working capital is defined as current assets minus the sum of payables and accruals, and any decrease in the current ratio automatically indicates that net working capital has decreased. If a company follows a policy of "matching maturities," this means that it matches its use of short-term debt with its use of long-term debt. 11. Which of the following statements is CORRECT? Trade credit is provided only to relatively large, strong firms. Commercial paper is a form of short-term financing that is primarily used by large, strong, financially stable companies. Short-term debt is favored by firms because, while it is generally more expensive than long-term debt, it exposes the borrowing firm to less risk than long-term debt. Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate. Commercial paper is typically offered at a long-term maturity of at least five years. 12. Other things held constant, which of the following will cause an increase in net working capital? Cash is used to buy marketable securities. A cash dividend is declared and paid. Merchandise is sold at a profit, but the sale is on credit. Long-term bonds are retired with the proceeds of a preferred stock issue. Missing inventory is written off against retained earnings. 13. Which of the following statements is CORRECT? Accruals are an expensive but commonly used way to finance working capital. A conservative financing policy is one where the firm finances part of its fixed assets with short-term capital and all of its net working capital with short-term funds. If a company receives trade credit under terms of 2/10 net 30, this implies that the company has 10 days of free trade credit. One cannot tell if a firm has a conservative, aggressive, or moderate current asset financing policy without an examination of its cash budget. If a firm has a relatively aggressive current asset financing policy vis-à-vis other firms in its industry, then its current ratio will probably be relatively high. 14. Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable securities? The firm must make a known future payment, such as paying for a new plant that is under construction. The firm is going from its peak sales season to its slack season, so its receivables and inventories will experience a seasonal decline. The firm is going from its slack season to its peak sales season, so its receivables and inventories will experience seasonal increases. The firm has just sold long-term securities and has not yet invested the proceeds in operating assets. The firm just won a product liability suit one of its customers had brought against it. 15. Which of the following statements is NOT CORRECT? A company may hold a relatively large amount of cash and marketable securities if it is uncertain about its volume of sales, profits, and cash flows during the coming year. Credit policy has an impact on working capital because it influences both sales and the time before receivables are collected. The cash budget is useful to help estimate future financing needs, especially the need for short-term working capital loans. If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10 net 30 to net 60. Managing working capital is important because it influences financing decisions and the firm's profitability.