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Exam 15: Managing Short-Term Assets

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Question 1

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Which of the following is not a situation which might lead a firm to hold marketable securities:

A) The firm has purchased a fixed asset which 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 above (all of the situations might lead the firm to hold marketable securities) .

F) A) and B)
G) A) and C)

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A

Question 2

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The ABC method of inventory classification helps management concentrate resources on those inventory items that are most critical to the firm's operations.

A) True
B) False

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Question 3

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Fashion Clothiers Inc. Assume that Fashion Clothiers Inc.uses 1,440,000 yards of material each year.Further, assume that Fashion can order the material at a cost of R2 per yard, plus fixed ordering costs of R100 per order.The firm's carrying cost is 20 percent of the inventory value, at cost. -Refer to Fashion Clothiers Inc.Now, suppose the manufacturer offers a discount of 0.5 percent for orders of at least 40,000 yards.Should Fashion Clothiers increase its ordering quantity to take the discount?

Inventory management is largely self-contained; that is, only minimum coordination among other departments such as sales, purchasing, and production is required for successful inventory management.

Fullerton Wine Company is a retailer which sells vintage wines.The company has established a policy of reordering inventory every 30 days.A recently employed MBA has considered Fullerton's inventory problem from the EOQ model viewpoint.If the following constitute the relevant data, how does the current policy compare with the optimal policy? Ordering cost = R10 per order Carrying cost = 20% of purchase price Purchase price = R10 per unit Total sales for year = 1,000 units Safety stock = 0

Which of the following statements about cash management is false?

What type of system allows a customer's bank to periodically transfer funds from its account to a selling firm's bank account for payment of bills?

A firm's collection policy and the procedures it follows to collect accounts receivable play an important role in keeping its deferrables period short, although too strict a collection policy can result in outright losses due to non-payment.

Target cash balances are generally not affected by compensating balance requirements except during periods of high interest rates and tight money.

The target cash balance is the minimum cash balance a firm desires to maintain in order to conduct business.

Borrowing and holding marketable securities are substitute financing alternatives, although the two strategies may have different costs.

A just-in-time system of inventory control requires that manufacturers coordinate production with suppliers so that raw materials or components arrive just as they are needed in the production process.The main objective of such a system is to reduce carrying costs.

The net float is the difference between the disbursement float and the collections float.

Aberwald Corporation Aberwald Corporation expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate.Fixed ordering costs are R200 per order; the purchase price per chip is R25; and the firm's inventory carrying cost is equal to 20 percent of the purchase price.(Assume a 360-day year.) -Refer to Aberwald Corporation.Assume that Aberwald holds a safety stock equal to a 30-day supply of chips.What is the maximum amount of inventory that Aberwald will have on hand at any time; that is, what will be the inventory level right after a delivery is made?

A Eurodollar is a U.S.dollar?Based on section in textbook deposited in a bank outside the United States. Based on section in textbook

A minimum checking account balance that a firm must maintain with bank to help offset the costs and services such as check clearing and cash management advice is called a __________ balance.

A firm's target cash balance should be set as the smaller of (1) its transaction balance plus a precautionary (safety stock) balance or (2) its required compensating balance.

The average accounts receivables balance is determined jointly by the volume of credit sales and the days sales outstanding.

A firm has a daily average collection of checks equal to R250,000.It takes the firm approximately 4 days to convert the funds into usable cash.Assume (1) a lockbox system could be employed which would reduce the cash conversion procedure to 21/2 days, and (2) the firm could invest any additional cash received at 6 percent after taxes.The lockbox system would be a good buy if it costs only R23,000 annually.

Which of the following statements is correct?