Exam 14: Working Capital and Management of Current Assets

$\text { Flum Packages, Inc. }$ Assets Liabilities \& Equity Current assets \ 10,000 Current Liabilities \ 5,000 Fixed assets 20,000 Long-term debt 12,000 Equity 13,000 --- --- Total \3 0,000 Total \3 0,000 The company earns 5 percent on current assets and 15 percent on fixed assets. The firm's current liabilities cost 7 percent to maintain and the average annual cost of long-term funds is 20 percent. -If the firm was to shift $7,000 of fixed assets to current assets, the firm's net working capital would__________, the annual profits on total assets would__________and the risk of not being able to meet current obligations would__________, respectively

Processing float is the delay between the receipt of a check by the payee and its deposit in the firm's account.

The permanent financial need of a firm is the financing requirements for the firm's fixed assets plus the permanent portion of the firm's current assets.

A negative cash conversion cycle (CCC) means the average payment period (APP) exceeds the operating cycle (OC).

An applicant's capacity to repay the requested credit is shown by

The more predictable its cash inflows, the more net working capital a firm needs.

The aggressive financing strategy is a strategy by which the firm finances all projected funds requirements with long-term funds and uses short-term financing only for emergencies or unexpected outflows.

A firm's credit terms specify the minimum requirements for extending credit to a customer.

The operating cycle is the recurring transition of a firm's working capital from cash to inventories and inventories to receivables and back to cash.

If a firm uses an aggressive financing strategy,

One major risk a firm assumes in an aggressive financing strategy is

Playing the float involves the strategic use of mailing points and bank accounts to lengthen mailfloat and clearing float, respectively.

A firm has an average age of inventory of 60 days, an average collection period of 45 days, and an average payment period of 30 days. The firm's operating cycle is _________days.

The cost of marginal investment in accounts receivable can be calculated by finding the difference between the average investment in accounts receivable before and after the introduction of the changes in credit standards.

If the firm relaxes its credit standards, the volume of accounts receivable increases and so does the firm's carrying cost.

Relative to cash flows affecting net working capital, all of the following are true EXCEPT

If the cash discount period is increased, the firm's investment in accounts receivable due to discount takers still getting cash discounts but paying later is expected to increase.

Company ___________ are the procedures followed to collect accounts receivable when they come due.

While credit scoring provides sound credit information, it is frequently NOT used in business because

The economic order quantity (EOQ) is the order quantity which minimizes