Q&A Hero

Q: Which of the following statements is CORRECT?a. One of the disadvantages of incorporating a business is that the owners then become subject to liabilities in the event the firm goes bankrupt.b. Sole proprietorships are subject to more regulations than corporations.c. In any type of partnership, every partner has the same rights, privileges, and liability exposure as every other partner.d. Sole proprietorships and partnerships generally have a tax advantage over many corporations, especially large ones.e. Corporations of all types are subject to the corporate income tax.

Q: The facts that a proprietorship, as a business, pays no corporate income tax, and that it is easily and inexpensively formed, are two key advantages to that form of business. a. True b. False

Q: The disadvantages associated with a proprietorship are similar to those under a partnership. One exception relates to the more formal nature of the partnership agreement and the commitment of all partners' personal assets. As a result, partnerships do not have difficulty raising large amounts of capital. a. True b. False

Q: One key value of limited liability is that it lowers owners' risks and thereby enhances a firm's value. a. True b. False

Q: Two disadvantages of a proprietorship are (1) the relative difficulty of raising new capital and (2) the owner's unlimited personal liability for the business' debts. a. True b. False

Q: There are three primary disadvantages of a regular partnership: (1) unlimited liability, (2) limited life of the organization, and (3) difficulty of transferring ownership. These combine to make it difficult for partnerships to attract large amounts of capital and thus to grow to a very large size. a. True b. False

Q: The major advantage of a regular partnership or a corporation as a form of business organization is the fact that both offer their owners limited liability, whereas proprietorships do not. a. True b. False

Q: The form of organization for a business is not an important issue, as this decision has very little effect on the income and wealth of the firm's owners. a. True b. False

Q: Commercial paper is a short-term, unsecured, promissory note.

Q: A negotiable certificate of deposit is a marketable receipt for funds deposited in a bank for a period of one to 18 months.

Q: If current interest rates are low, and therefore expected to increase in the future, a firm wanting to reduce its interest rate risk would hold debt with longer maturities.

Q: Zero balance accounts permit centralized control over cash outflows while maintaining divisional disbursing authority.

Q: The benefits derived from reduced mail and processing floats must be greater than the bank fees associated with a lockbox system or else a firm would be better off without the lockbox.

Q: Lock-box arrangements yield benefits for all companies regardless of the size of sales or customer remittance checks.

Q: The main purpose of using a payable-through draft system is to gain effective control over field payments.

Q: Payable-through drafts look like checks but are not drawn on a bank.

Q: Zero balance accounts reduce disbursing float.

Q: One advantage of zero balance accounts is an increase in disbursing float.

Q: A zero balance account permits divisions to disburse funds while maintaining centralized control of several bank accounts.

Q: The estimated value of reducing float by one day is one day's interest on the freed-up sales.

Q: In a lockbox system, customer payments are collected directly by the bank and deposited immediately in the corporation's account.

Q: Lockbox arrangements may reduce mail float, processing float, and transit float.

Q: Companies with the largest cash balances reduce their risk of insolvency and thus maximize the value of the companies for their shareholders.

Q: Firms like to hold large stocks of cash since the risk of becoming insolvent is minimized.

Q: The objective of managing cash inflows is to decrease the float while the objective of managing cash outflows is to increase the float.

Q: The initial step in any effective cash management program is cash flow forecasting.

Q: The risk-return trade-off leads to two objectives: (1) keep enough cash on hand to make necessary payments, and (2) reduce investments in idle cash to a minimum.

Q: Effective cash management involves the trade-off between the risk of insolvency (resulting in higher near cash balances) and the desire to earn higher returns (resulting in lower near cash balances).

Q: The goal of cash management is to hold the minimum amount of cash necessary to meet the firm's obligations in a timely manner.

Q: The most important reasons firms hold cash balances are the transaction and precautionary motives.

Q: Speculative cash balances are held to take advantage of uncertain profit-making opportunities.

Q: The industry in which a firm operates has relatively little effect on the relative amounts of transaction cash held.

Q: Generally, the least important motive for holding liquid assets for a typical company is the speculative motive.

Q: The funds needed to satisfy the precautionary motive are entirely held in cash.

Q: Motives for holding stocks of cash include transaction, precautionary, and speculative.

Q: The more difficult it is to estimate a firm's cash flow needs, the greater the need to carry higher precautionary balances.

Q: Transaction balances are used to meet the regular cash needs of the firm, not irregular outflows that will be handled with speculative balances.

Q: Marketable securities are purchased when excess cash is temporarily available and sold when cash is needed.

Q: Near-cash assets consist of marketable securities and accounts receivable.

Q: What assumptions underlie the EOQ formula?

Q: The economic order quantity (EOQ) model is well accepted. However, there are weaknesses associated with several of its assumptions. What are these weaknesses?

Q: A textile manufacturer has cloth that has a $14 per yard carrying cost per year. This cloth is used at a rate of 25,000 yards per year, and ordering costs are $10 per order. a. What is the economic order quantity for this cloth? b. What are the annual inventory costs for this firm if it orders in this quantity?

Q: A local lamp store expects to sell 2000 lamps in the coming year. It costs the store $1.00 in carrying costs for each lamp and $10.00 for each order placed. a. What is the economic order quantity for the lamps? b. How many orders will be placed each year? c. If the store wants a one-week safety stock and it takes one week to receive an order after it has been placed, what should the inventory level be when a new order is placed? Assume a 50-week year.

Q: A flower shop is trying to determine the optimal order quantity of the wicker baskets that it places many of its arrangements in. The store thinks it will sell 2000 of these baskets over the next year. The baskets cost the shop $2.00 each. The carrying cost of the baskets is $0.15 each per year. It costs the shop $8.00 to order. a. What is the economic order quantity? b. What is the total cost for ordering the baskets once a year? Four times a year?

Q: Manfred Manufacturing is involved in the production of machine parts. The company uses 600,000 pounds of steel annually. The current purchasing cost for steel is $3.20 per pound. The carrying cost for inventory is 10 percent of the purchase price. The cost of ordering steel is $800 per order. The company has decided to maintain a safety stock of 15,000 pounds. The delivery time per order is 6 days. The company works 365 days a year. a. Determine the optimal EOQ. b. How many orders will be placed annually? c. What is the average inventory? d. What is the inventory order point? (That is, at what level of inventory should a new order be placed?) e. What is the company's total inventory cost for the year?

Q: Fiesta Taco Company purchases 30,000 boxes of ground beef each year. It costs $50 to place each order and $10.00 per year for each box held as inventory. a. What is the average inventory held during the year? b. What is the economic order quantity for the ground beef? c. How many orders will be made each year?

Q: Mountain Snow Sports, Inc. is trying to determine the optimal order quantity for snow boards for the next twelve months. Annual sales are expected to be 1,000,000 units at a retail price of $400 each. The cost of carrying snow boards is $80 per year. Studies show that it costs Mountain Snow $250 to prepare and receive an order. What is the EOQ? A) 2,750 B) 2,500 C) 2,000 D) 1,850

Q: Which of the following is NOT an underlying assumption of the EOQ? A) uniform demand B) constant unit price C) variable carrying cost D) instantaneous delivery

Q: Inflation affects the EOQ model in all of the following ways EXCEPT A) changing the investment in accounts receivable. B) encourages anticipatory buying. C) increased carrying costs. D) encourages buying early to avoid price increases.

Q: In the EOQ model, carrying costs of inventory include A) the required rate of return on inventory. B) wages for warehouse workers. C) costs associated with inventory shrinkage. D) B and C. E) all of the above.

Q: Which of the following is NOT a category of inventory? A) raw materials B) work-in-process C) purchases D) finished goods

Q: How do interest rates affect the optimal order quantity Q*? A) As interest rates increase, Q* decreases. B) As interest rates decrease, Q* decreases. C) As interest rates increase, Q* increases until it reaches a maximum, after which any further increase in interest causes a decline in Q*. D) None of the above

Q: The Road Ready Riding, Inc. will use an estimated 24,000 wheel assemblies in its manufacturing process next year. The carrying cost of the wheel assembly inventory is $1.80 per wheel and the ordering cost per order is $50. What is Road Ready's economic ordering quantity of wheel assemblies? A) 785 B) 997 C) 1,098 D) 1,155

Q: Newtown Manufacturing, Inc. uses semi-hex joints in its manufacturing process. If Newtown's total demand for the joints for next year is estimated to be 57,000 units, and if the cost per order is $225, what is Newtown's economic order quantity of semi-hex joints? Assume that carrying costs for semi-hex joints are $0.75 per unit. A) 3,729 B) 3,987 C) 4,944 D) 5,848

Q: Krause Precision Tools, Inc. will use an estimated 700,000 small processors in its manufacturing process next year. The carrying cost of processor inventory is $3.00 per unit and the cost of reordering processors is $100 per order. What is Krause's economic ordering quantity for small processors? A) 6,340 B) 6,831 C) 7,118 D) 7,300

Q: Brett's Gift Box estimates that it will sell 30,000 porcelain figurines next year. Because porcelain figurines are so easily damaged, the average per unit carrying cost of the figurines is $25. The per order cost of ordering is $800. Assume that Brett wants a safety stock of 75 figurines. If Brett reorders the figurines based on the economic order quantity, what is Brett's average inventory of porcelain figurines? A) 768 B) 854 C) 628 D) 700

Q: If the variables in the EOQ inventory model are defined as: S = total units demanded during the planning period, O = ordering costs per order, C = carrying costs per unit and Q = inventory order size in units, then the average level of inventory which a company should have during the planning period is A) 2/3 Q. B) 1/2 Q. C) SO/C. D) 1/2 S.

Q: In the basic EOQ model, the optimal inventory level is the point at which A) total cost is minimized. B) total revenue is maximized. C) carrying costs are minimized. D) ordering costs are minimized.

Q: Of the following EOQ model assumptions, the most limiting is A) uniform demand. B) constant unit price. C) constant ordering costs. D) independent orders.

Q: The purpose of carrying inventory is to A) make different production processes more dependent on sales. B) make sales more independent of the production process. C) have collateral for loans. D) improve the current ratio.

Q: The purpose of work-in-process inventory is to ensure that machine failures and work stoppages in one operation do not affect other operations.

Q: The purpose of finished goods inventory is to uncouple the production and sales functions so that it is not necessary to produce the goods before a sale can occur.

Q: Two factors that go into the determination of the appropriate order point are the deliver-time stock and the safety stock required.

Q: The purpose of maintaining a raw materials inventory is to integrate the purchasing and production functions.

Q: The just-in-time inventory control system is just a new approach to the EOQ model which tries to produce the lowest average inventory possible.

Q: The EOQ model assumes constant demand and constant unit price.

Q: In the EOQ model, the carrying cost on inventory should include the required rate of an investment in inventory.

Q: Determination of safety stock involves a trade-off between the risk of a stock-out and increased costs of carrying additional inventory.

Q: As inflation pushes interest rates up, the cost of carrying inventory rises.

Q: EOQ model recommendations may be replaced by anticipatory buying during periods of high inflation.

Q: Anticipatory buying occurs because of an anticipated decrease in interest rates.

Q: Safety stock may be included into the EOQ model to alleviate problems caused by violation of the assumptions of constant demand and instantaneous delivery.

Q: Non-uniform demand can be accommodated in the EOQ model by allowing for non-uniform ordering costs.

Q: In the EOQ model the optimal ordering quantity is the quantity for which the sum of the costs of ordering and carrying inventory is minimized.

Q: The EOQ model calculates the size of the firm's inventory given its expected usage, carrying costs, and ordering costs.

Q: Carrying inventory reduces the costs associated with periodic bad debt losses.

Q: What are the key decision variables at the firm's disposal for managing the level of the firm's accounts receivable balance?

Q: What are the most important types of current assets? List your answer in order of declining liquidity.

Q: The Bike Store orders $2000 worth of supplies every 30 days. If they take advantage of the 3/10 net 30 discount offered by their supplier, how much would they save over the year? Assume a 360-day year.

Q: You purchase $10,000 worth of supplies every 90 days and never take the trade discount of 2/10 net 30. How much could you save each (360-day) year if you took the discount?