Exam 16: The Management of Working Capital

Because of the short-term nature of working capital assets and liabilities, it is always necessary to support working capital with short-term borrowing. To do otherwise would violate the matching principle, which is of paramount importance in financial management.

Most spontaneous financing comes from trade payables created when vendors sell on credit allowing deferred payment.

Working capital represents assets that support day-to-day operating activities. Funding working capital requires:

The ____ says the term of financing should match the duration of the item or project supported.

Which is the most appropriate form of funding for temporary working capital?

Which of the following account changes would reduce a firm's net working capital if all other account balances are held constant?

The objectives of cash management include to:

Which of the following is(are)true?

If a company decides to factor its receivables without recourse, it will:

We say a working capital financing policy is conservative if short-term funding is used to support working capital.

Haverly, Inc. has borrowed $100,000. The loan is subject to a 10% compensating balance and has an effective interest rate of 13.33%. Calculate the quoted interest rate on the loan. (Round to nearest whole percent)

The ____ measures the promptness with which customers pay their credit obligations.

Float, or money tied up in the process of check clearing, consists of transit float arising from the administrative functions of the payee that delay the actual deposit of the check and processing float created in the Federal Reserve's check clearing system.

In most companies, the level of working capital needed to operate efficiently varies with sales.

Assume the following facts about a firm that borrows by pledging its receivables: What is the effective cost of financing stated as an annual rate?

Childers, Inc. operates primarily in the Southeast but has a number of customers in Phoenix who remit about 8,000 checks a year.  The average check is $2,400.  It currently takes the Phoenix checks an average of seven days after mailing to clear into Childers' account.  A Phoenix bank has offered Childers a lock box system for $2,400 a year plus $.22 per check.  This will reduce the clearing time for the checks to four days.  How much will the lock box system save Childers if it borrows at 11%?

What is the effective interest rate on a 12% loan that requires a 10 percent minimum compensating balance?

Carrying excess cash is convenient but expensive because cash earns little or no return.

Which of the following is an incorrect statement of an issue involved in receivables management?

A firm's cash includes currency, coins, demand deposit accounts in banks, and may include marketable securities.