Deck 15: Working Capital and Current Assets Management

Question 1

Working capital represents refers to a firm's long term capital.

Answer 1

False

Question 2

Net working capital is defined as

A) a ratio measure of liquidity best used in cross-sectional analysis.
B) the portion of the firm's assets financed with short-term funds.
C) current liabilities minus current assets.
D) current assets minus current liabilities.

Answer 2

current assets minus current liabilities.

Question 3

The goal of short-term financial management is to manage each of the firm's current assets and current liabilities in order to achieve a balance between profitability and risk that contributes to the firm's value.

Answer 3

True

Question 4

The goal of working capital management is to

A) balance current assets against current liabilities.
B) pay off short-term debts.
C) achieve a balance between risk and return in order to maximize the firm's value.
D) achieve a balance between short-term and long-term assets so that they add to the achievement of the firm's overall goals.

Question 5

A firm that is unable to pay its bills as they come due is technically insolvent.

Question 6

The conversion of current assets from inventory to receivables to cash provides the ________ of cash used to pay the current liabilities, which represents a(n) ________ of cash.

A) outflow; inflow
B) use; source
C) source; use
D) inflow; outflow

Question 7

The effect of a decrease in the ratio of current assets to total assets and the effect of an increase in the ratio of current liabilities to total assets are increases in the firm's profits and, correspondingly, its risk.

Question 8

An increase in current assets increases net working capital, thereby reducing the risk of technical insolvency.

Question 9

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

A) working capital.
B) accounts receivable.
C) net working capital.
D) inventory.

Question 10

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

Question 11

Because firms are unable to match cash inflows to outflows with certainty, most of them need current liabilities that more than cover outflows for current assets.

Question 12

As the ratio of current assets to total assets increases, the firm's risk increases.

Question 13

In working capital management, risk is measured by the probability that a firm will become

A) liquid.
B) technically insolvent.
C) unable to meet long-term obligations.
D) less profitable.

Question 14

Short-term financial management is concerned with management of the firm's current assets and current liabilities.

Question 15

The more predictable a firm's cash inflows, the more net working capital it will need.

Question 16

Current liabilities can be viewed as

A) debts that mature in one year or less.
B) debts that mature in more than one year.
C) sources of cash inflows.
D) none of the above

Question 17

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

Question 18

Net working capital can be defined as the portion of the firm's current assets financed with long-term funds.

Question 19

A firm is said to be technically insolvent when its total assets is less than its total liabilities and stockholders' equity.

Question 20

In general, the greater a firm's current assets relative to its short-term obligations, the better able it will be to pay its bills as they come due.

Question 21

The most difficult set of accounts to predict are

A) current assets.
B) stockholder's equity.
C) fixed assets.
D) long-term debt.

Question 22

By efficiently managing the firm's operating and cash conversion cycles, the financial manager can maintain a high level of cash investment and thereby contribute toward maximization of share value.

Question 23

The permanent financial need of a firm is the financing requirements for the firm's fixed assets plus the permanent portion of the firm's current assets.

Question 24

The conservative financing strategy is a strategy by which the firm finances at least its seasonal requirements, and possibly some of its permanent requirements, with short-term funds and the balance of its permanent requirements with long-term funds.

Question 25

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

A) has positive net working capital.
B) has negative net working capital.
C) has excessive amounts of current assets.
D) is in a low-risk position.

Question 26

The ability to purchase production inputs on credit allows the firm to partially (or may be even totally) offset the length of time resources are tied up in the operating cycle.

Question 27

The operating cycle is the amount of time the firm's cash is tied up between payment for production inputs and receipt of payment from the sale of the resulting finished product.

Question 28

The cash conversion cycle is the amount of time that elapses from the point when the firm inputs materials and labor into the production process to the point when cash is collected from the sale of the resulting finished product.

Question 29

The purpose of managing current assets and current liabilities is to

A) achieve as low a level of current assets as possible.
B) achieve as low a level of current liabilities as possible.
C) achieve a balance between profitability and risk that contributes to the firm's value.
D) achieve as high a level of current liabilities as possible.

Question 30

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

Question 31

A negative cash conversion cycle (CCC) means the average payment period (APP) exceeds the operating cycle (OC).

Question 32

The cash conversion cycle is the total number of days in the operating cycle less the average payment period for inputs to production.

Question 33

The operating cycle is the recurring transition of a firm's working capital from cash to inventories and inventories to receivables and back to cash.

Question 34

The aggressive strategy operates with minimum net working capital since only the permanent portion of the firm's current assets is being financed with long-term funds.

Question 35

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

A) decrease; increases; increasing
B) increase; decreases; increasing
C) increase; increases; reducing
D) decrease; decreases; reducing

Question 36

Relative to cash flows affecting net working capital, all of the following are true EXCEPT

A) cash inflows are generally more predictable than cash outlays.
B) cash outlays for current liabilities are relatively predictable.
C) the more predictable the cash inflows, the less net working capital a firm needs.
D) because most firms are unable to match cash inflows to outflows with certainty, current assets that more than cover outflows for current liabilities are necessary.

Question 37

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.

Question 38

In general, the more net working capital a firm has,

A) the greater its risk.
B) the lower its risk.
C) the less likely are creditors to lend to the firm.
D) the lower its level of long-term funds.

Question 39

The aggressive financing strategy is a strategy by which the firm finances its current assets with short-term funds and its fixed assets with long-term funds.

Question 40

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

A) decrease; increases; increasing
B) increase; decreases; increasing
C) increase; increases; reducing
D) decrease; decreases; reducing

Question 41

One aspect of risk associated with the aggressive strategy's maximum use of short-term financing is the fact that changing short-term interest rates can result in significantly higher borrowing costs as the short-term debt is refinanced.

Question 42

When a firm's cash conversion cycle is negative, the firm should benefit by being able to use the financing provided by the suppliers of its production inputs to help support aspects of the business other than just the operating cycle.

Question 43

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.

Question 44

The basic strategies that should be employed by the business firm in managing cash include all of the following EXCEPT

A) paying accounts payable as late as possible without damaging the firm's credit rating.
B) turning over inventory as quickly as possible, avoiding stockouts.
C) operating in a fashion that requires maximum cash.
D) collecting accounts receivable as quickly as possible without damaging customer rapport.

Question 45

One major risk a firm assumes in an aggressive financing strategy is

A) the possibility that collections will be slower than expected.
B) the possibility that long-term funds may not be available when needed.
C) the possibility that short-term funds may not be available when needed.
D) the possibility that it will run out of cash.

Question 46

The aggressive financing strategy is risky due to its minimum level of net working capital, high dependency on short-term sources of funds, and the changing short-term interest.

Question 47

The firm's financing requirements can be separated into

A) current liabilities and long-term funds.
B) current assets and fixed assets.
C) current liabilities and long-term debt.
D) seasonal and permanent.

Question 48

The basic strategies for determining the appropriate financing mix are

A) seasonal and permanent.
B) short-term and long-term.
C) aggressive and conservative.
D) current and fixed.

Question 49

A positive cash conversion cycle means that the firm must obtain financing to support the cash conversion cycle.

Question 50

When managing inventories, a good strategy is to increase inventory turnover by doing the following EXCEPT

A) increase raw materials turnover.
B) shorten the production cycle.
C) produce low-cost short cycle goods.
D) increase finished goods turnover.

Question 51

The ________ is the time period that elapses from the point when the firm makes the outlay to purchase raw materials on account to the point when payment is made to the supplier of the goods.

A) cash conversion cycle
B) average payment period
C) average age of inventory
D) average collection period

Question 52

Under 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.

Question 53

Only the firm's permanent financing requirement (and not the seasonal requirement) is financed with ________ in the aggressive financing strategy.

A) long-term sources
B) short-term sources
C) retained earnings
D) accounts payable

Question 54

The aggressive financing strategy is a strategy by which the firm finances all projected funds requirements with long-term funds and uses short-term financing only for emergencies or unexpected outflows.

Question 55

If a firm uses an aggressive financing strategy,

A) it increases return and increases risk.
B) it increases return and decreases risk.
C) it decreases return and increases risk.
D) it decreases return and decreases risk.

Question 56

When implementing the cash management strategies, a firm should take care to avoid having a large number of inventory stockouts, to avoid losing the use of its cash by collecting its accounts receivable using high-pressure collection techniques, and to avoid damaging the firm's credit rating by overstretching accounts payable.

Question 57

Most firms employ ________ financing strategy.

A) an aggressive
B) a conservative
C) a trade-off
D) a seasonal

Question 58

The risk of the conservative financing requirements is low because of its high level of net working capital, and the fact that the strategy does not require the firm to use any of its limited short-term borrowing capacity.

Question 59

The ________ of a firm is the amount of time that elapses from the point when the firm makes an outlay to purchase raw materials to the point when cash is collected from the sale of the finished good.

A) cash turnover
B) cash conversion cycle
C) average age of inventory
D) average collection period

Question 60

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

Question 61

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.

A) 95
B) 105
C) 60
D) 130

Question 62

An increase in the average collection period will result in ________ in the operating cycle.

A) an increase
B) a decrease
C) an undetermined change
D) no change

Question 63

An increase in the average payment period will result in ________ in the cash conversion cycle.

A) an increase
B) a decrease
C) an undetermined change
D) no change

Question 64

A firm has an operating cycle of 120 days, an average collection period of 40 days, and an average payment period of 30 days. The firm's average age of inventory is ________ days.

A) 80
B) 50
C) 90
D) 70

Question 65

The ________ is the time period that elapses from the point when the firm sells a finished good on account to the point when the receivable is collected.

A) cash conversion cycle
B) average payment period
C) average age of inventory
D) average collection period

Question 66

The ________ of a firm is the amount of time that elapses from the point when the firm inputs material and labor into the production process to the point when cash is collected from the sale of the finished product that contains these production inputs.

A) cash conversion cycle
B) average age of inventory
C) operating cycle
D) average collection period

Question 67

A firm has an average age of inventory of 90 days, an average collection period of 40 days, and an average payment period of 30 days. The firm's operating cycle is ________ days.

A) 110
B) 130
C) 120
D) 70

Question 68

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.

A) cash turnover
B) cash conversion cycle
C) average age of inventory
D) average collection period

Question 69

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

A) decrease of 30 days in the cash conversion cycle.
B) increase of 15 days in the cash conversion cycle.
C) decrease of 15 days in the cash conversion cycle.
D) increase of 30 days in the cash conversion cycle.

Question 70

A firm has an average age of inventory of 60 days, an average collection period of 45 days, and an average payment period of 30 days. The firm's operating cycle is ________ days.

A) 75
B) 105
C) 90
D) 135

Question 71

An increase in the average payment period will result in ________ in the operating cycle.

A) an increase
B) a decrease
C) an undetermined change
D) no change

Question 72

A decrease in the average age of inventory will result in ________ in the cash conversion cycle.

A) an increase
B) a decrease
C) an undetermined change
D) no change

Question 73

A firm has an average age of inventory of 60 days, an average collection period of 45 days, and an average payment period of 30 days. The firm's cash conversion cycle is ________ days.

A) 15
B) 45
C) 75
D) 135

Question 74

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 cash conversion cycle is

A) 150 days.
B) 90 days.
C) 112 days.
D) 8 days.

Question 75

A firm has a cash conversion cycle of 120 days, an average collection period of 25 days, and an average payment period of 50 days. The firm's average age of inventory is ________ days.

A) 45
B) 95
C) 125
D) 145

Question 76

A firm purchased raw materials on account and paid for them within 30 days. The raw materials were used in manufacturing a finished good sold on account 100 days after the raw materials were purchased. The customer paid for the finished good 60 days later. The firm's cash conversion cycle is ________ days.

A) 10
B) 70
C) 130
D) 190

Question 77

A firm has an operating cycle of 170 days, an average payment period of 50 days, and an average age of inventory of 145 days. The firm's average collection period is ________ days.

A) 25
B) 75
C) 95
D) 120

Question 78

A firm has an average age of inventory of 20 days, an average collection period of 30 days, and an average payment period of 60 days. The firm's cash conversion cycle is ________ days.

A) 70
B) 50
C) -10
D) 110

Question 79

A firm has a cash conversion cycle of 60 days and average collection period of 40 days. The firm's operating cycle is ________ days.

A) 20
B) 100
C) 50
D) cannot be determined

Question 80

A firm can reduce its cash conversion cycle by

A) increasing the average age of inventory.
B) increasing the average collection period.
C) decreasing the average payment period.
D) increasing the average payment period.