Deck 22: Managing the Firm S Assets

Question 1

Days sales outstanding should be decreased to increase accounts receivable conversion.

Answer 1

True

Question 2

Inventory is a concern only for manufacturing companies.

Answer 2

False

Question 3

Expenses occur when items are purchased; disbursements are the receipts made later for these expenses.

Answer 3

False

Question 4

The cash conversion period is the time period between ordering inventory and receiving cash for its sale.

Question 5

The disadvantage of accounts receivable financing is the negative impact on cash flow.

Question 6

In a healthy business, cash flow is typically even.

Question 7

Net cash flow should be equated with net profit.

Question 8

Pledging accounts receivable can indicate troublesome accounts.

Question 9

The average collection period is the number of days that a firm extends credit to its customers.

Question 10

Accounts receivable are sometimes called near cash because they can be converted to cash whenever a business needs to do so.

Question 11

Factoring account receivables involves the business selling its accounts receivable to a finance company, and the finance company assumes any bad-debt risk.

Question 12

A firm's working capital cycle refers to the flow of cash to purchase and sell fixed assets.

Question 13

The longer the cash conversion period, the greater the potential for cash flow problems to exist for a company.

Question 14

Revenue is recorded at the time a sale is made, but cash receipts are recorded when money actually flows into the firm.

Question 15

Working capital management focuses on the attractiveness of long-run investment opportunities.

Question 16

Managing cash flow well will give a company a competitive edge over their competitors.

Question 17

Management should be working continuously to shorten the working capital cycle.

Question 18

During the cash conversion period, the firm has the benefit of the financing provided by the supplier.

Question 19

Batching may hold up receipts of customer payments.

Question 20

A firm's net cash flow may be determined by examining the company's bank account.

Question 21

In managing accounts payable, the principle of "Buy now, pay later" allows the small business to postpone a payment.

Question 22

Software programs can provide adequate assistance in inventory identification and control.

Question 23

Capital budgeting primarily involves short-term decisions on the part of management.

Question 24

The management of a small firm's long-term assets is called capital budgeting.

Question 25

Capital budgeting analysis helps managers make decisions about inventory investments.

Question 26

Inventory management and accounts payable management are intertwined.

Question 27

Every component of working capital has two dimensions: interest and money.

Question 28

Improperly managed and uncontrolled stockpiling may greatly increase inventory-carrying costs and place a heavy drain on the funds of a small business.

Question 29

A company should pay accounts payable on Day 30 if funds are available.

Question 30

Accounting profits are identical to actual cash flows.

Question 31

The cash conversion period equals the days in inventory plus the days sales outstanding minus days in payables.

Question 32

The goal of the cash conversion period is to have as few days as possible in the process so as to be able to finance other activities with working capital.

Question 33

The calculation for days in payables is very similar to days sales outstanding and days in inventory.

Question 34

Carrie's decision to research a new product for her children's party business is considered an example of a capital budget decision.

Question 35

Days in inventory is equal to the number of days a firm waits to be paid for inventory that has been sold.

Question 36

Small business managers tend to overbuy inventory due to not understanding inventory management.

Question 37

A shortcoming of the accounting return on investment technique is that it is based on accounting profits rather than cash flows received.

Question 38

The percentage annual interest rate is the rate a business will pay by not taking a discount.

Question 39

The goal of the cash conversion period is convert paid-for inventory and accounts receivables into cash as quickly as possible.

Question 40

The last step in managing inventory is to discover how long inventory has been at the company.

Question 41

Discounted cash flow techniques take into consideration that cash received today is more valuable than cash received at a later date.

Question 42

The payback period technique does not consider the time value of money.

Question 43

The third day in the working capital time line is

A) accounts payable are paid.
B) collect accounts receivable.
C) inventory is sold on credit.
D) pay accounts payable.

Question 44

The payback period technique measures how long it will take to recover the initial cash outlay and the total amount of interest unearned over the payback period as an opportunity cost.

Question 45

Which statement is true about firms with a cash culture?

A) Cash policies are not their first priority.
B) They are less likely to have good vendor terms.
C) Their metrics are murky.
D) They need less working capital.

Question 46

The first step in the working capital cycle process is to

A) order inventory.
B) purchase or produce inventory for sale.
C) receive inventory.
D) sell the inventory for cash or credit.

Question 47

Working capital management

A) deals with assigning cash values to employees.
B) is not important to small businesses.
C) involves managing short-term assets and sources of financing.
D) involves managing long-term assets and liabilities.

Question 48

A firm's cost of capital is simply the interest rate it must pay on its loans.

Question 49

Historically, many small business owners have relied on quantitative analysis in making capital budgeting decisions.

Question 50

Cash deposits during a month less checks written during the same period equal

A) net cash flow.
B) net profit.
C) net working capital.
D) operating profit.

Question 51

The under-capitalization and liquidity problems of a small firm can directly affect the decision-making process, and survival often becomes the top priority.

Question 52

Use of the accounting return on investment technique answers the question, "How long will it take to recover the original investment outlay?"

Question 53

Net cash flow and revenue are

A) opposites.
B) different.
C) identical.
D) identical after adjustment for depreciation.

Question 54

A advantage of the accounting return on investment technique is that it ignores the time value of money.

Question 55

Pearl has been asked by her boss to manage the company's working capital.  This means Pearl is now in charge of

A) cash, fixed assets, and inventory.
B) cash, accounts receivable, inventory, and accounts payable.
C) cash, accounts receivable, and fixed assets.
D) accounts receivable, accounts payable, and long-term investments.

Question 56

A firm will have difficulty attracting investors if investments in the firm have internal rates of return below an investor's required rate of return.

Question 57

The internal rate of return method estimates the rate of return that can be expected from a contemplated investment.

Question 58

The cash conversion period is the time between

A) cash payment for inventory and collection of accounts receivable.
B) placement of an order and cash payment for it.
C) receipt of inventory and cash payment for it.
D) sale of inventory and cash collection of accounts receivable.

Question 59

Lester is watching the bank balance decline throughout the month and hopes his company won't run out of money before it runs out of month.  Lester is concerned about the net cash flow, which is:

A) is the difference between cash inflows and outflows.
B) is the difference between revenues and expenses.
C) is the same as net profit.
D) is the same as working capital plus inventory.

Question 60

The extensive use of discounted cash flow tools by a small firm probably has more to do with the nature of the small firm itself than it does with the owner's desire to be perceived as a community-minded business person..

Question 61

Owen was surprised when he calculated the percentage annual interest rate on his accounts payable.  He discovered that failure to take advantage of the discount offered by suppliers

A) makes small difference since a business does not pay a high interest rate.
B) makes a large difference since a business pays a high interest rate.
C) has no effect on cash flow since the interest rates are so low.
D) will have erratic effects on rates for the use of a supplier's money.

Question 62

The goal of the managing cash conversion period is to _____ the number of days.

A) increase
B) maintain
C) decrease
D) match the industry average for

Question 63

Accounts receivable financing

A) allows small businesses to extend credit to customers.
B) delays the time a company receives money from receivables.
C) means borrowing money against the firm's accounts receivable.
D) is not a suggested practice due to the cost.

Question 64

Nadine would like to improve the management of inventory in her company.  One of her first activities should be to:

A) discount current items.
B) discover how long items have been there.
C) organize current items by skew number.
D) purchase new items.

Question 65

Accounts receivable financing might include

A) using a bank, lender, or other finance company.
B) lending money against receivables and aging accounts receivable.
C) providing cash discounts and charging interest on delinquent accounts.
D) giving a customer more time to pay.

Question 66

A company with accounts payables of $35,000 and cost of goods sold of $300,000 would have days in payables of

A) 24 days.
B) 32 days.
C) 43 days.
D) The answer is not one of the above choices.

Question 67

Lucinda has decided to use a _______________ to speed up the processing of inovice payments.

A) customer box.
B) deposit box.
C) lock box.
D) mail box.

Question 68

Madeleine would like to know how long it takes, on average, from the time inventory is received until it is sold.  Madeleine is interested in the:

A) days in credit.
B) days in inventory.
C) days in payables.
D) days sales outstanding.

Question 69

The terms 2/10, net 45 offer

A) a 2 percent discount on purchases paid for within 45 days.
B) a 10 percent discount on purchases paid for within 2 days.
C) a 2 percent discount on purchases paid for within 10 days.
D) a 10 percent discount on purchases paid for within 45 days.

Question 70

Assuming that cash is available, payment for an account payable with terms of 3/10, net 30 should be made on day

A) 3.
B) 10.
C) 13.
D) 30.

Question 71

Why do small business managers tend to overbuy inventory?

A) They forecast greater demand than is realistic
B) Vendor's insist that prices may be going down.
C) They don't want to disappoint vendors and suppliers.
D) Maximizing inventory is a good way to decrease taxes.

Question 72

Margaret has just sold merchandise to a small beauty salon and has given the salon 45 days to pay the invoice. She is at the beginning of

A) the life cycle of receivables.
B) the cash conversion period.
C) the working capital management cycle.
D) the inventory management cycle.

Question 73

Tres has received a large contract and has taken a loan to buy inventory. Considering the timing of the loan, Tres may be  ____________ to complete the contract.

A) selling short
B) pledging receivables
C) mortgaging
D) factoring

Question 74

Nicholas wouild like to improve the management of his company's accounts payable.  One metric he might find useful is:

A) days in credit.
B) days in inventory.
C) days in payables.
D) days sales outstanding.

Question 75

Which statement is true concerning inventory management programs?

A) A yearly inventory for accounting purposed should be sufficient for most small businesses.
B) Keeping stock for "just in case" is suggested for customer satisfaction and is needed for inventory.
C) Software programs supplemented by a required physical inventory will assist in inventory control.
D) Slow moving items in a company's inventory are limited concerns since they can be marked down and sold.

Question 76

Accounts payable ____ cash available for the firm when payment is made.

A) increase the amount of
B) reduce the amount of
C) have no effect on the
D) represent all of the

Question 77

Long-term investments are the focus of

A) cash budgeting.
B) capital budgeting.
C) corporate planning.
D) investment planning.

Question 78

The number of days, on average, that a firm is extending credit to its customers is called

A) cash conversion period
B) days in inventory.
C) days sales outstanding.
D) cash flow cycle.

Question 79

Inventory is called a "necessary evil"; it is "necessary" because

A) it ties up funds that are not actively productive.
B) supply and demand cannot be managed precisely with day-to-day operations.
C) it reduces cash when it is sold.
D) it deteriorates so therefore a certain percent is lost to spoilage and waste.

Question 80

A company has 30 days in payables, 15 days in inventory, and 20 days for the average collection period.  How many days are in the company's cash conversion process?

A) 5
B) 25
C) 45
D) 65