Multiple choice questions on inventory carrying, sales.

1. Which of the following statements is most correct?

a. Compensating balance requirements apply only to businesses, not to individuals.

b. Compensating balances are essentially costless to most firms, because those firms would normally have such funds on hand to meet transactions needs anyway.

c. If the required compensating balance is larger than the transactions balance the firm would ordinarily hold, then the effective cost of any loan requiring such a balance is increased.

d. Banks are prohibited from earning interest on the funds they force businesses to keep as compensating balances.

e. All of the statements above are false.

2. Which of the following statements is most correct?

a. If credit sales as a percentage of a firm's total sales increases and the volume of credit sales also increase, then the firm's accounts receivable will automatically increase.

b. It is possible for a firm to overstate profits by offering very lenient credit terms which encourage additional sales to financially "weak" firms. A major disadvantage of such a policy is that it is likely to increase uncollectible accounts.

c. A firm with excess production capacity and relatively low variable costs would not be inclined to extend more liberal credit terms to its customers than a firm with similar costs that is operating close to capacity.

d. Firms use seasonal dating primarily to decrease their DSO.

e. Seasonal dating with terms 2/15, net 30 days, with April 1 dating, means that if the original sale took place on February 1st, the customer can take the discount up until March 15th, but must pay the net invoice amount by April 1st.

3. Which of the following statements is incorrect about working capital policy?

a. A company may hold a relatively large amount of cash if it anticipates uncertain sales levels in the coming year.

b. Credit policy has an impact on working capital since it has the potential to influence sales levels and the speed with which cash is collected.

c.  The cash budget is useful in determining future financing needs.

d. Holding minimal levels of inventory can reduce inventory carrying costs and cannot lead to any adverse effects on profitability.

e. Managing working capital levels is important to the financial staff since it influences financing decisions and overall profitability of the firm