Mid-Term Exam Sample

Question #

Question

True

False

1

Cash = long-term debt + equity - current liabilities – current assets other than cash – fixed assets

2

The trade-off between opportunity costs of holding cash relative to the transaction cost of converting marketable securities to cash for transactions affects the amount of cash to be held.

3

Disbursement float is generated when a firm writes cheques and the available balance at the bank – book balance > 0

4

The management of accounts receivable calls for determining credit standards and the forms of credit to be offered as well as the development of an effective collection policy. The collection policy drives the amount of inventory on the balance sheet.

5

Certain assets and current liabilities are spontaneous to increases in sales volumes. Higher net working capital and fixed assets are required to support more sales. Retained earnings may also be used to support these needs. External debt or equity is not needed to balance the funding needs of working capital growth.  

6

Working Capital represents the proportion of capital assets that circulates from one form to cash in the normal course of business.

7

Liquidity is largely determined by the cash flow cycle.

8

Sales, receivables, and inventory form the basis for cash flow, but the firm’s other activities can also affect cash inflows and outflows.

9

Operating Cycle (OC) consists of that period of time measured by the Average Age of Inventory (AAI) and the Average Collection Period (ACP) of accounts receivable after subtracting the Average Payment Period (APP) of accounts payable.

Question #

Question

True

False

10

Firms need to distinguish between permanent funding requirements, and seasonal funding requirements to manage working capital funding.

11

The hedged approach to working capital management matches the maturities of assets with long-term capital to reduce funding costs.

12

Short-term financing is expensive when compared to long term funding for current assets.

13

Sales are the first step in any forecast process and are used to develop the forecast for accounts receivable based on a policy for collection days.

14

The sustainable growth rate (SGR) tells us how much the firm can grow by using internally generated funds and issuing debt to maintain a constant current ratio.

15

As a firm’s sales grow, spontaneous assets and liabilities also grow to offset the need for new working capital funding.

16

Working capital management includes both establishing working capital policies and then the day-to-day control of cash, inventories, receivables, accruals, and accounts payable.

17

Retained earnings growth supports the internal opportunities of the firm but pressure for dividend payments by stakeholders means they feel they can do better externally.

18

Working capital policies are reflected in a firm’s current ratio, quick ratio, turnover of cash, and inventory turnover. These policies override the actual transactions of the firm.

19

The cash budget uses forecasts of cash inflows, outflows, and ending cash balances to predict loan needs and funds available for temporary investment.

20

Depreciation is a noncash charge.  Only cash payments and receipts appear on cash budget.

However, accounting depreciation does affect taxes, which do appear in the cash budget.