Exam 14: Working Capital and Management of Current Assets

A _________is a telegraphic communication that, via bookkeeping entries, removes funds from the payer's bank and deposits them in an account of the payee's bank.

The aggressive financing strategy is risky in two respects: the firm operates with a low level of ___________,and the firm has only a limited amount of ___________capacity.

If the firm's credit period is decreased, the sales volume can be expected to ___________, the investment in accounts receivable can be expected to ___________, and the bad debt expenses can be expected to ___________.

In economic conditions characterized by short-term interest rates which exceed long-term interest rates, the financing strategy which would maximize profits is ___________strategy.

A firm has an average age of inventory of 101 days, an average collection period of 49 days, and an average payment period of 60 days. The firm's inventory turnover is ____________ .

Too much investment in current assets reduces profitability, whereas too little investment increasesthe risk of not being able to pay debts as they come due.

Dizzy Animators, Inc. currently makes all sales on credit and offers no cash discount. The firm is considering a 3 percent cash discount for payment within 10 days. The firm's current average collection period is 90 days, sales are 400 films per year, selling price is $25,000 per film, variable cost per film is $18,750 per film, and the average cost per film is $21,000. The firm expects that the change in credit terms will result in a minor increase in sales of 10 films per year, that 75 percent of the sales will take the discount, and the average collection period will drop to 30 days. The firm's bad debt expense is expected to become negligible under the proposed plan. The bad debt expense is currently 0.5 percent of sales. The firm's required return on equal-risk investments is 20 percent. -What is the firm's marginal profit contribution from sales under the proposed plan of initiating the cash discount?

The ____________in current liabilities____________ net working capital, thereby____________ the risk of technical insolvency.

When a portion of the firm's fixed assets are financed with current liabilities, the firm

Under the conservative financing strategy, short-term financing is used only to finance an emergency, an unexpected outflow of funds, and the variable portion of the firm's current assets.

The cash conversion cycle is the difference between the number of days resources are tied up in the operating cycle and the average number of days the firm can delay making payment on the production inputs purchased on credit.

Controlled disbursing is a method of consciously anticipating the mail, processing, and clearingtime involved with the payment process.

A decrease in the current asset to total asset ratio has the effects of__________on profits and_________on risk.

The cost of marginal bad debts is found by multiplying the firm's opportunity cost by the difference between the level of bad debts before and after the relaxation of credit standards.

The most difficult set of accounts to predict are

__________is a procedure resulting in a number reflecting the applicant's credit strength, derived as a weighted average of the scores obtained on a variety of key financial and credit characteristics.

Disbursement float results from the delay between the time that a payer or customer deducts a payment from its checking account ledger (disburses it) and the time that the payee or vendor actually receives these funds in a spendable form.

The portion of a firm's current assets financed with long-term funds may be called

Nonmanufacturing firms are more likely to have positive cash conversion cycles; they generally carry smaller, faster-moving inventories and often sell their products for cash.

Certain financing plans are termed conservative when