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Question;[i]. The;calculated cost of trade credit for a firm that buys on terms of 2/10, net 30;is lower (other things held constant) if the firm pays in 40 days than if it;pays in 30 days.;a. True;b. False;[ii]. One;of the disadvantages of not taking trade credit discounts when offered is that;the firm's investment in accounts payable rises.;a. True;b. False;[iii]. A;firm is said to be extending net trade credit when its accounts receivable are;less than its accounts payable.;a. True;b. False;[iv]. When;a firm has accounts payable that are greater than the level of its receivables;the firm is actually receiving;net trade credit.;a. True;b. False;[v]. "Stretching;accounts payable is a widely accepted and costless financing technique.;a. True;b. False;[vi]. 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 working;capital financing strategy because of the inherent risks of using short-term;financing.;a. True;b. False;[vii]. Short-term;financing may be riskier than long-term financing since, during periods of;tight credit, the firm may not be able to rollover (renew) its debt.;a. True;b. False;[viii]. One;of the advantages of short-term debt financing is that firms can expand or;contract their short-term credit more easily than their long-term credit.;a. True;b. False;[ix]. Short-term;loans generally are obtained faster than long-term loans because when lenders;consider long-term loans they insist on a more thorough evaluation of the;borrower's financial health and because the loan agreement is more complex.;a. True;b. False;[x]. A;line of credit and a revolving credit agreement are similar except that a line;of credit creates a legal obligation for the bank.;a. True;b. False;[xi]. The;maturity of most bank loans is short-term.;Bank to business loans are frequently 90-day notes which are often;rolled over, or renewed, at the end of their maturity.;a. True;b. False;[xii]. A;promissory note is the document signed when a bank loan is executed and it;specifies financial aspects of the loan.;The separate indenture note will specify items such as collateral and;other terms and conditions.;a. True;b. False;[xiii]. A;line of credit can be either a formal or informal agreement between borrower;and bank regarding the maximum amount of credit the bank will extend to the;borrower subject to certain conditions.;a. True;b. False;[xiv]. Under;a revolving credit agreement the risk to the firm of being unable to obtain;funds when needed is lower than with a line of credit.;a. True;b. False;Medium;[xv]. 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.;a. True;b. False;[xvi]. Since;depreciation is a non-cash charge it does not appear nor have an effect on the;cash budget.;a. True;b. False;[xvii]. The;target cash balance is set optimally such that it need not be adjusted for;seasonal patterns and unanticipated fluctuations although it is changed to;reflect long-term changes in the firm's operations.;a. True;b. False;[xviii]. Synchronization;of cash flows is an important cash management technique and effective;synchronization can actually increase a firm's profitability.;a. True;b. False;[xix]. Collections;float offsets disbursement float. If a;firm's collections float is greater than its disbursement float then a firm is said;to operate with positive net float.;a. True;b. False;[xx]. A;lockbox plan is one method of speeding up the check-clearing process for;customer payments and decreasing the firm's net float position.;a. True;b. False;[xxi]. A;firm has a daily average collection of checks equal to $250,000. 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 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 $23,000 annually.;a. True;b. False;[xxii]. A;firm which makes 90 percent of its sales on credit and 10 percent for cash is;currently 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.;a. True;b. False;[xxiii]. In;managing a firm's 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.;a. True;b. False;[xxiv]. 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.;a. True;b. False;[xxv]. Changes;in a firm's collection policy can affect sales, working capital and even;additional funds needed.;a. True;b. False;[xxvi]. In;part because money has time value, cash sales are always more profitable and;more valuable than credit sales.;a. True;b. False;[xxvii]. If;a firm's sales and those of its customers are closely correlated with economic;conditions, it is certainly possible for a firm's total investment in accounts;receivable to decrease while its days sales outstanding increases.;a. True;b. False;[xxviii]. Generally;the longer the normal inventory holding period of a customer the longer the;credit period. One effect of extending;the credit period to match the customer's merchandise holding period is to;increase the deferrables period which actually serves to shorten the customer's;cash conversion cycle.;a. True;b. False;[xxix]. If a;firm's terms are 2/10, net 30 days, and its DSO is 28 days, we can be certain;that the credit department is functioning efficiently and the percentage of;past due accounts is minimal.;a. True;b. False;[xxx]. If;your firm's DSO or aging schedule deteriorates from the first quarter of the;year to the second quarter, this is a clear indication that your firm's credit;policy has weakened.;a. True;b. False


Paper#48800 | Written in 18-Jul-2015

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