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Midterm Exam 2
Terms in this set (61)
A ________________ source of financing provides funds automatically as a company's operations expand.
Which of the following constitute(s) a spontaneous financing source?
(I) accounts receivable
(II) accounts payable
(III) deferred expenses
(V) accrued expenses
II and V
The advantage of consignment to the retailer is
not having to pay for the goods unless they are sold
A payables manager is debating which guideline to adopt for his payables practices. Regardless of the NPV effect of doing so, a best ethical rule to follow in determining when to pay invoices is to
stretch payables only when the company is financially unable to pay them
A very important cost of paying an invoice late which is difficult to estimate accurately is:
lost supplier goodwill
The decision rules a payables manager should follow when considering how best to apply NPV analysis to payables decisions is to _______________, so long as payment is not made late.
delay payment for an additional day as long as NPV continues to fall
Cleveland Megatron, Inc. is short on cash and finds itself in a "net borrowed position." It has $2 million of its $5 million credit line available at present, however. If the annualized cost of credit line borrowing is less than the annualized cash discount rate, the NPV-maximizing decision is to
borrow the necessary funds and take the cash discount
The highest tier of ethical decisions, which entails a greater ethical commitment on the part of the decision-maker, is to
consider whether the well-being of affected parties would be enhanced even if it requires a sacrifice by the decision-maker
The most reliable measure of a firm's payment practices is
payables balance fractions
The XYZ Company has annual average purchases of $200,000 and an ending accounts payable balance of $36,000. How long, on average, does XYZ take to pay for its purchases?
($36,000)/($200,000/365) = 65.70 days
Accruals provide an attractive and accessible financing source but affected parties may object to their use as a financing source
their availability can change based on the level of business activity
Credit terms of "2/10, net 30" implies that if payments are made in _____ days a cash discount of _____ % may be taken.
A gas station is likely to receive ________ term credit for gasoline purchases; a grocery store is likely to receive _________ term credit for vegetables purchases; and a manufacturer is likely to receive _________ term credit for purchase of plant and equipment.
Short, short, long
Which of the following is a payment option for the financial manager purchasing on credit
all of the above
Trade credit terms of 3/15 net 60 are offered. What is the annualized cost of missing the trade credit discount?
Suppose your firm's re-investment rate is 8%, and trade credit terms of 1/5 net 10 are offered by a supplier. When should you repay the trade credit obligation?
on day 10
Which of the following is NOT one of the primary ways a company can reduce its inventory investment?
Inventory management is often viewed as the need to keep enough product on hand to avoid stock-outs, however the financial manager is concerned about:
earning a reasonable rate of return on invested capital
A company's marketing manager is worried about ____________ stock-outs while production manger is concerned with _____________ stock-outs.
finished goods, raw material and work-in-process
What is the financial manager's main concern with inventory management?
the total cost of capital tied up in inventory
The Farmingham Company faces very uncertain demand. A simple way of altering its EOQ-based inventory system to account for this uncertainty is to:
include a safety stock
The ________________ motive for holding inventory links the level of inventory to ongoing anticipated demand.
Holding extra inventory to cushion against an unexpected increase in demand illustrates the _____________ motive.
The general manager of a steel mill is pretty sure that the demand for and price of steel will be increasing sharply within the next six months due to a sudden boom in the housing market. If he increases current production and inventories corresponding to his belief, his action would be indicative of the _____________ motive for holding inventory.
Given the demand for a company's inventoried items, the company typically experiences a trade-off between the ________________ and the _________________.
holding costs, ordering costs
A larger inventory order quantity _____________ ordering costs but _____________ holding costs, assuming both are measured over a specific period of time.
According to the assumptions upon which the EOQ model is based, total inventory costs _______________ with increases in the number of units ordered in each order.
first decrease, then increase
Torque Manufacturing forecasts that its production will require 500,000 tons of bauxite over its planning period. Demand for Torque's products is stable over time. Ordering costs amount to an average of $20.00 per order. Holding costs are estimated at $1.25per ton of bauxite. EOQ for Torque is
= square root of [(2x500000x$20)/$1.25]
= square root of  = 4,000*
Restrictive assumptions used to develop and use the basic EOQ model include all of the following except:
a non constant order cost per order
In the EOQ model, the inventory level at which an order should be placed is called
the reorder point
The financial manager is trying to minimize the period's total inventory purchase costs. All other things held constant, the existence of quantity discounts on inputs would generally cause the company to order _________ quantity of those inputs, relative to the EOQ quantity.
Implementing a just-in-time inventory management system necessitates eliminating delays, waste and bottlenecks in
the ordering process & the production process
Implementing a supply chain management system necessitates eliminating delays, waste and bottlenecks in
the ordering process, the production process, & the storage of finished goods
The balance fraction technique is a(n) ______ method to gauge inventory efficiency, relative to days inventory outstanding.
equivalent; both methods lead to the same conclusion
Recent evidence suggests that checks written in the U.S. are _________ in importance, relative to electronic payment mechanisms.
From the payor's perspective, float adds value because of the delay between the point in time when a check _______________ and the point in time when the check ________________________.
is written, is debited from the payor's account
The growing similarity of products and services offered by savings and loan associations, mutual savings banks, credit unions, and commercial banks is primarily the result of
the Depository Institutions Deregulation and Monetary Control Act
Interstate banking on an unlimited scale would make short-term financial management
less costly and more efficient
Recently enacted international bank capital standards (the Basel standards) require banks to hold the most capital for ______________, less capital for ______________, and the least capital for ______________ due to the different risk weightings.
business loans, home mortgages, Treasury bonds
Check clearing in the Federal Reserve System is handled by
the Federal Reserve (district) Banks and Regional Check Processing Centers
A central location where representatives of area banks meet and settle balances with only one institution is termed a (an)
The numbers on the bottom area of a check which shows the bank identification number is also known as a
transit routing number
The bank of first deposit will select the clearing mechanism to use based on all of the following except:
the desires of the party that wrote the check
Checks drawn on banks that do not participate in a bank's local clearing house or exchange are called
The three basic components to collection or disbursement float for mailed checks are:
mail float, processing float, clearing float
The major paper-based payment (or funds transfer) mechanisms are
Fed float occurs because the Fed
grants check availability to the clearing bank before debiting the pay bank
Drafts are very similar to checks; the main difference is that
the payee must authorize payment when drafts are presented
A ___________ draft is initiated by the payee, who has been approved to draw against the payor's account.
_______________ is NOT an electronic means to transfer payments.
Advantages of wire transfers include all of the following EXCEPT:
inexpensive relative to automated clearing house transactions
Some corporations have been reluctant to use the ACH system more than they do because
the payor loses some disbursement float and control
The most popular corporate ACH payment application to date has been
direct deposit of payroll
An insurance company has recently begun collecting its premiums electronically instead of by mailed checks. A predictable effect of this on the insurance company would be
more accurate cash forecasts
CHIPS refers to the payment system that
handles interbank transactions needed to settle international transactions
Cross-border check processing typically involves clearing delays of
several days to several weeks
Why is the availability schedule so important to a cash manager?
it shows the difference between ledger and available balances on a given deposit
Out of the following, which cash management activity was altered the most as the U.S. allowed nationwide bank branching?
In September, the Johnson Company utilizes direct sends for which its bank charges fees of $100. The bank's earned credit ratio and reserve requirement are 5% and 12%, respectively. What is the minimum balance required to compensate the bank for the September fees?
Required compensating balance = service charges for month/ [(1-required reserve ratio)(earnings credit rate/365)(number of days in a month)]
= ($100)/[(1-0.12)(0.05)(30)] = $27651.52
Location, service quality and breadth, bank specialties, _____________, and _______________ are the major factors companies evaluate banks on when first establishing a banking relationship.
bank/company fit, price
Compensating balances have the following advantages EXCEPT:
Are directly comparable between banks
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