Exam 22: Managing the Firms Assets

You Make the Call-Situation 1 A small firm specializing in the sale and installation of swimming pools was profitable but devoted very little attention to management of its working capital. It had, for example, never prepared or used a cash budget. To be sure that money was available for payments as needed, the firm kept a minimum of $25,000 in a checking account. At times, this account grew larger; it totaled $43,000 at one time. The owner felt that this approach to cash management worked well for a small company because it eliminated all of the paperwork associated with cash budgeting. Moreover, it had enabled the firm to pay its bills in a timely manner.

In making capital budgeting decisions, small business owners tend to rely to a significant extent on

A strength of the accounting return on investment technique is that it is based on accounting profits rather than cash flows received.

Discounted cash flow techniques consider the time value of money.

In using the net present value method, one does not consider the time value of money.

Accounting profits are not identical to actual cash flows.

What is the primary advantage of accounts receivable financing and what are the two types available?

A firm will have difficulty attracting investors if investments in the firm have internal rates of return below an investor's required rate of return.

Although the owner of a small business does not make long-term investment decisions often, capital budgeting is nonetheless important to the successful operation of the firm.

If the internal rate of return is less than the firm's cost of capital, the project should be accepted because capital for the project can be obtained more cheaply than usual.

Granting credit to customers

A firm's cost of capital is simply the interest rate it must pay on its loans.

The amount of time it takes to recover the original cost of an investment is computed using

Compare the two investment proposals below, using the payback period method. The projected cost of each investment proposal is $100,000.

The disadvantage of accounts receivable financing is its negative impact on cash flow.

The payback period and accounting return on investment techniques

The accounting return on investment technique compares the average before tax profits a firm expects to receive with the average book value of the investment.

The question "How does the present value of future benefits from the investment compare to the initial investment outlay?" is answered using

Accounts receivable are sometimes called near cash because they can be converted to cash whenever a business needs to do so.

Accounts receivable financing