Multiple choice

1. Which of the following statements concerning the cash budget is CORRECT?

Depreciation expense is not explicitly included, but depreciation's effects are reflected in the estimated tax payments.

Cash budgets do not include financial items such as interest and dividend payments.

Cash budgets do not include cash inflows from long-term sources such as the issuance of bonds.

Changes that affect the DSO do not affect the cash budget.

Capital budgeting decisions have no effect on the cash budget until projects go into operation and start producing revenues.

2. Which of the following statements is NOT CORRECT?

Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate.

Accruals are "free" in the sense that no explicit interest is paid on these funds.

A conservative approach to working capital management will result in most if not all permanent current operating assets being financed with long-term capital.

The risk to a firm that borrows with short-term credit is usually greater than if it borrowed using long-term debt.  This added risk stems from the greater variability of interest costs on short-term debt and possible difficulties with rolling over short-term debt.

Bank loans generally carry a higher interest rate than commercial paper.

3. Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable securities?

The firm must make a known future payment, such as paying for a new plant that is under construction.

The firm is going from its peak sales season to its slack season, so its receivables and inventories will experience a seasonal decline.

The firm is going from its slack season to its peak sales season, so its receivables and inventories will experience seasonal increases.

The firm has just sold long-term securities and has not yet invested the proceeds in operating assets.

The firm just won a product liability suit one of its customers had brought against it.

4. Which of the following statements is most consistent with efficient inventory management?  The firm has a

below average inventory turnover ratio.

low incidence of production schedule disruptions.

below average total assets turnover ratio.

relatively high current ratio.

relatively low DSO.