Exam 15: Working Capital and Current Assets Management

With the ACH (automated clearing house) credits, disbursement float is sacrificed because ACH transactions immediately draw down the company's payroll account on pay day.

Table 15.1 Irish Air Services has determined several factors relative to its asset and financing mix. (a) The firm earns 10 percent annually on its current assets. (b) The firm earns 20 percent annually on its fixed assets. (c) The firm pays 13 percent annually on current liabilities. (d) The firm pays 17 percent annually on long-term funds. (e) The firm's monthly current, fixed and total asset requirements for the previous year are summarized in the table below: -The firm's annual financing costs of the aggressive financing strategy are ________. (See Table 15.1)

A ________ is a professionally managed portfolio of marketable securities and is sold in fractional parts.

A firm has a cash conversion cycle of 80 days, an average collection period of 25 days, and an average age of inventory of 70 days. Its operating cycle is ________ days.

Credit analysts usually analyze an applicant's creditworthiness by using the dimensions of credit such as character, capacity, capital, collateral, and conditions.

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

Business risk is the risk of being unable to make the scheduled fixed financing payments on debt and preferred stock.

________ float results from the lapse between the time when a firm deducts a payment from its checking account ledger and the time when funds are actually withdrawn from its account.

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

Increased collection expenditures should reduce the investment in accounts receivable and bad debt expenses, increasing profits.

The conservative strategy is less profitable than the aggressive approach because it requires the firm to pay interest on unneeded funds.

A firm with a cash conversion cycle of 175 days can stretch its average payment period from 30 days to 45 days. This will result in a/an

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 firm's operating cycle (OC) is simply the sum of the average age of inventory (AAI) and the average payment period (APP).

A firm's credit policy generally includes determining credit selection, credit terms, and collection.

Table 15.3 -Ace's Business Forms pays 8 percent on short-term funds and 10 percent on long-term funds. Determine its annual financing costs using the trade-off strategy described: Ace's Business Forms has seasonal financing requirements ranging from zero to $50,000 per month. Based on this range, the firm has decided to finance $25,000 per month of the seasonal funds with long-term debt and the rest of the seasonal funds with short-term debt. The permanent funds requirement will be financed with long-term funds. (See Table 15.3)

The basic strategies for determining the appropriate financing mix are

A(n) ________ in current liabilities ________ net working capital, thereby ________ the risk of technical insolvency.

The ________ is the time period that elapses from the point when the firm uses the raw materials in manufacturing a finished good to the point when the finished good is sold.

Table 15.6 A breakdown of Teffan, Inc.'s outstanding accounts receivable dated June 30, 2003 on the basis of the month in which the credit sale was initially made follows. The firm extends 30-day credit terms. -An evaluation of the firm's collection efforts based on the aging schedule would suggest ________. (See Table 15.6)