CHAPTER 15
MANAGING CURRENT ASSETS
(Difficulty: E = Easy, M = Medium, and T = Tough)
Multiple Choice: Conceptual
Easy:
Working capital Answer: c Diff: E
1. Other things held constant, which of the following will cause an increase
in working capital?
a. Cash is used to buy marketable securities.
b. A cash dividend is declared and paid.
c. Merchandise is sold at a profit, but the sale is on credit.
d. Long-term bonds are retired with the proceeds of a preferred stock
issue.
e. Missing inventory is written off against retained earnings.
Working capital Answer: d Diff: E N
2. Which of the following statements is most correct?
a. The current ratio is calculated as net working capital divided by
current liabilities.
b. Gross working capital represents current assets used in operations.
c. Net working capital is defined as current assets minus current
liabilities.
d. Statements b and c are correct.
e. Statements a, b, and c are correct.
Cash conversion cycle Answer: b Diff: E
3. Helena Furnishings wants to sharply reduce its cash conversion cycle.
Which of the following steps would reduce its cash conversion cycle?
a. The company increases its average inventory without increasing its
sales.
b. The company reduces its DSO.
c. The company starts paying its bills sooner, which reduces its average
accounts payable without reducing its sales.
d. Statements a and b are correct.
e. All of the statements above are correct.
Cash budget Answer: e Diff: E
4. Which of the following is typically part of the cash budget?
a. Payments lag.
b. Payment for plant construction.
c. Cumulative cash.
d. Statements a and c are correct.
e. All of the above statements are correct.
Chapter 15 - Page 1
Cash budget Answer: a Diff: E
5. Which of the following statements concerning the cash budget is correct?
a. Depreciation expense is not explicitly included, but depreciation
effects are implicitly included in estimated tax payments.
b. Cash budgets do not include financial expenses such as interest and
dividend payments.
c. Cash budgets do not include cash inflows from long-term sources such as
bond issues.
d. Statements a and b are correct.
e. Statements a and c are correct.
Cash budget Answer: d Diff: E
6. Which of the following items should a company explicitly include in its
monthly cash budget?
a. Its monthly depreciation expense.
b. Its cash proceeds from selling one of its divisions.
c. Interest paid on its bank loans.
d. Statements b and c are correct.
e. All of the statements above are correct.
Cash management Answer: a Diff: E
7. Which of the following statements is most correct?
a. A cash management system that minimizes collections float and maximizes
disbursement float is better than one with higher collections float and
lower disbursement float.
b. A cash management system that maximizes collections float and minimizes
disbursement float is better than one with lower collections float and
higher disbursement float.
c. The use of a lockbox is designed to minimize cash theft losses. If the
cost of the lockbox is less than theft losses saved, then the lockbox
should be installed.
d. Other things held constant, a firm will need a smaller line of credit
if it can arrange to pay its bills by the 5th of each month than if its
bills come due uniformly during the month.
e. None of the statements above is correct.
Cash management Answer: d Diff: E
8. Which of the following statements about current asset management is most
correct?
a. A positive net float means that a company has more cash available for
its use than the amount shown in the company’s books.
b. Use of a lockbox reduces the possibility that petty cash will be lost.
c. Depreciation has an impact on the cash budget.
d. Statements a and c are correct.
e. All of the statements above are correct.
Chapter 15 - Page 2
