Test Bank: Chapter 1 Page 1

Multiple Choice Test Item Bank

Short-Term Financial Management: Text, and Cases
Terry S. Maness and John T. Zietlow
Chapter 1
Chapter 1:
1.

Profit and cash flow for a given business in a particular time period typically
diverge because of depreciation and other non-cash charges, and, because:
a.
of working capital changes *
b.
one includes the effect of income taxes, the other does not
c.
I.R.S. reporting standards require them to be different
d.
one includes the effect of interest expenses, the other does not
Ref: pages 8-9.

2.

Profitable and growing firms may run short on cash because:

a.
of rapid decrease in accounts receivables
b.
of rapid growth in accruals
c.
of rapid growth in accounts payable
d.
of spontaneous increases in receivables and inventories *
Ref: page 6-8.

3.

The necessary adjustment to the sales amount shown on the income statement to
arrive at cash collections from customers is:
a.
subtract the change in accounts receivable *
b.
add all the change in purchases
c.
add the total amount of orders not yet shipped
d.
none of the above
Ref: page 9 and Exhibit 1-2.

4.

The necessary adjustment(s) to the cost of goods sold amount shown on the income
statement to arrive at cash paid to suppliers is(are):
a.
subtract the change in accounts payables
b.
add the change in inventories
c.
subtract the change in inventories
d.
a and b *
e.
a and c
Ref: page 9 and Exhibit 1-2.

Test Bank: Chapter 1 Page 2

5.

The necessary adjustment(s) to the operating expenses amount shown on the income
statement to arrive at cash paid for operating expenses is(are):
a.
subtract the change in operating accruals
b.
subtract depreciation expense
c.
subtract the change in operating accruals and subtract depreciation expense *
d.
subtract the change in accounts payable and add the change in inventories
e.
add the change in accounts payable and subtract the change in inventories
Ref: page 9 and Exhibit 1-2.

6.

In adjusting a company's income statement to arrive at cash flow from operations,

the proper treatment of the period's change in interest payable is:
a.
to ignore it, in that it represents a non-operating item
b.
to add it to interest expense
c.
to subtract it from interest expense *
d.
none of the above
Ref: page 9 and Exhibit 1-2.

7.

Proper operational management involves managing so as to make a profit and

managing working capital accounts so as to:
a.
minimize interest income
b.
maintain adequate liquidity and cash flow *
c.
maximize interest expense
d.
maximize the investment in those accounts
Ref: pages 5 and 19.

8.

The cash flow timeline indicates the amount of time over which monies are tied up
in inventory and accounts receivable. It also indicates that an increase in the delay
of payment for payables owed _____________ the cash conversion period,
______________ to the value of the firm.
a.
decreases, decreasing
b.
decreases, increasing *
c.
increases, decreasing
d.
increases, increasing
Ref: page 6.

9.

Having a liquid reserve of short-term investments reduces bankruptcy risk. Having a

larger pool of money available for discretionary investment also is perceived by
managers
a.
to enhance their power and prestige *
b.
as a marketing tool
c.
for strategic decisions such as disinvestments
d.
none of the above

Test Bank: Chapter 1 Page 3

Ref: page 19.

10. A successful firm manages its operations from:
a.
A profit perspective
b.
A cash flow perspective
c.
A supply of finished goods perspective
d.
Both a and b *
e.
Both a and c
Ref: pages 5 and 19.
11. If a firm has a target inventory of $40,000, a starting inventory of $25,000 and the
cost of goods sold is $35000, what is the dollar amount of its purchases?
a.
$15,000
b.
$20,000
c.
$50,000 *
d.
not enough information is provided.
Ref: page 12.
Solution: PUR = EI BI + COGS (1-2)
PUR = $40,000 - $25,000 + $35,000 = $50,000
12. If a firm has purchases of $50,000, a starting inventory of $35,000 and the cost of
goods sold is $45000, what is the dollar amount of its ending inventory?
a.
$40,000 *
b.
$80,000
c.
$85,000
d.
$130,000
Ref: page 12.
Solution: EI = BI + PUR - COGS (1-1)
EI = $35,000 + $50,000 - $45,000 = $40,000