Exam 17: Working Capital Management and Short-Term Financing

On average, Bragg Inc. has sales of $2,000,000 per month. It keeps inventory equal to 50% of its monthly sales on hand at all times. Based on using a 365-day year, what is the inventory conversion period?

One of the advantages of short-term debt financing is that firms can obtain short-term credit more quickly than long-term credit.

Other things held constant, if a firm stretches its accounts payable, this will lengthen its CCC.

Which of the following statements best describes working capital financing policy?

The cost of an installment loan is always slightly less than twice the stated annual rate.

A firm is offered trade credit terms of 2/8, net 45 days. The firm does not take the discount, and it pays after 58 days. What is the effective annual cost of not taking this discount? (Assume a 365-day year.)

Because money has time value, cash sales are always more profitable than credit sales.

Which of the following is typically NOT considered when constructing a cash budget?

A large, well-established, highly rated firm needs to borrow money for the next 3 months. How would it likely get the best interest rate?

One of the effects of not taking trade credit discounts when offered is that the firm's use of accounts payable rises.

If a firm fails to take trade credit discounts, then it may cost the firm some money, but generally such a policy has a negligible effect on the firm's income statement and no effect on its balance sheet.

Ferson Inc. has annual sales of $36,500,000, or $100,000 a day on a 365-day basis. On average, the company has $12,000,000 in inventory and $8,000,000 in accounts receivable. The firm is looking for ways to shorten its cash conversion cycle, which is calculated on a 365-day basis. Its CFO has proposed new policies that would result in a 20% reduction in both average inventories and accounts receivables. She also anticipates that these policies would reduce sales by 10%, while accounts payable would remain unchanged. What effect would these policies have on the company's cash conversion cycle? Round to the nearest whole day.

An increase in the holding of marketable securities must be accompanied by a corresponding increase in the net operating working capital.

Which of the following items should a company report directly in its monthly cash budget?

The factoring of receivables involves the specific use of receivables as collateral for the loan.

Generally, the longer the normal inventory holding period of customers, the longer the credit period.

Helena Furnishings wants to reduce its cash conversion cycle sharply. Which of the following actions should it take?

The inventory conversion period of the operating cycle terminates when the inventory is paid for with cash.

Filbeck Company buys on terms of 2/15, net 30 days. It does not take discounts, and it typically pays 30 days after the invoice date. Net purchases amount to $500,000 per year. On average, how much free trade credit does the firm receive during a 365-day year?

Which of the following statements is INCORRECT?