Deck 19: Working Capital Management

Question 1

Which of the following would be considered an issue that is related to the management of working capital?

A)How much inventory should the firm maintain?
B)Should the firm purchase items for its inventories on credit or pay cash?
C)To whom should credit by extended?
D)All of the above

Answer 1

D

Question 2

An increase in [blank] would increase a firm's current ratio and net working capital.

A)notes payable
B)inventories
C)cash
D)both B and C

Answer 2

D

Question 3

Which of the following is most likely to occur if a firm over-invests in net working capital?

A)The current ratio will be lower than it should be.
B)The quick ratio will be lower than it should be.
C)The return on investment will be lower than it should be.
D)The times interest earned ratio will be lower than it should be.

Answer 3

C

Question 4

Current assets include [blank].

A)all assets that have not been fully depreciated
B)accounts payable, accounts receivable and short-term notes
C)cash, accounts receivable and leased equipment
D)cash, accounts receivable and inventory

Question 5

Net working capital refers to which of the following?

A)Current assets
B)Current assets minus current liabilities
C)Current assets minus inventory
D)Current assets divided by current liabilities

Question 6

Silicon Union's current ratio is 2.Current liabilities are $500,000.Silicon Union's current assets equal [blank] and net working capital is [blank].

A)$500,000 and $1,000,000
B)$500,000 and $250,000
C)$1,000,000 and $500,000
D)$500,000 and $500,000

Question 7

A decrease in [blank] would increase net working capital.

A)accounts payable
B)accounts receivable
C)cash
D)equipment

Question 8

Which of the following is most likely to occur if a firm under-invests in net working capital?

A)The firm might not have sufficient cash to pay its bill in a timely manner.
B)The firm might not have adequate inventory to meet the needs of its customers.
C)The firm could be losing sales because its terms of sale are too strict.
D)All of the above.

Question 9

XYTIQ has current assets of $10 million and current liabilities of $8 million.XYTIQ's current ratio is [blank] and its net working capital is [blank].

A)1.25, $10 million
B)1.25, $2 million
C)2, $1.25 million
D).8, $2 million

Question 10

Working capital management encompasses the day-to-day activities of managing a firm's [blank].

A)current assets
B)current liabilities
C)current status
D)both A and B

Question 11

A company with a current ratio less than one or negative net working capital would not be able to pay its bills on time.

Question 12

Working capital refers to investment in current assets, while net working capital is the difference between current assets and current liabilities.

Question 13

What is the major difference between the current ratio and net working capital?

A)Interpretation of the current ratio does not depend on the firm's industry.
B)The current ratio is more stable throughout the year.
C)They are calculated using different variables.
D)Interpretation of the current ratio does not depend on firm size.

Question 14

Which of the following could offset the higher risk exposure a company would face if its current ratio and net working capital were relatively low?

A)Its current assets would need to be highly liquid.
B)Its accounts receivable collection policy could increase the average collection period.
C)It could offer no discounts for early payment by its customers.
D)It could buy back some of its shares in the open market in order to reduce its equity.

Question 15

Within the context of working capital management, the risk-return trade-off involves an increased risk of illiquidity versus increased profitability.

Question 16

An increase in [blank] would increase net working capital.

A)plant and equipment
B)accounts payable
C)accounts receivable
D)both B and C

Question 17

Which of the following policies will reduce a retailer's investment in working capital?

A)Using cash rather than trade credit for inventory purchases
B)Accepting major credit cards rather than offering store credit
C)Keeping unsold seasonal merchandise in storage so that it can be offered again the following year
D)All of the above

Question 18

A firm that is extremely efficient in managing current assets while maximising the free financing provided by accounts payable will have a lower current ratio and a lower net working capital than a less efficient firm.

Question 19

Bert's Wholesale Club has current assets of $12.25 million and current liabilities of $14 million.Which of the following is possible?

A)Bert makes efficient use of its current assets.
B)Bert may be at some risk of being unable to pay its bills.
C)Bert appears to be over-investing in current assets.
D)Either or both A and B may be true.

Question 20

The risk of a firm not being able to pay its bills on time is called [blank].

A)illiquidity
B)insolvency
C)capital inadequacy
D)float

Question 21

[blank] are sources of financing that arise automatically.

A)Permanent investments
B)Permanent sources of financing
C)Spontaneous sources of financing
D)Temporary sources of financing

Question 22

Disadvantages of using current liabilities as opposed to long-term debt include [blank].

A)greater risk of illiquidity
B)uncertainty of interest costs
C)higher cash flow exposure
D)both A and B

Question 23

The balance sheet for Kinektic Co.is presented below.
During 2009, the firm earned $28 000 after taxes based on net sales of $480,000.
a.Calculate Kinektic's current ratio and net working capital.
b.Assume that Kinektic uses $20,000 of its cash to reduce current liabilities.Recompute the current ratio and net working capital.
c.What effect, if any, does the change proposed in question b have on Peterson's liquidity?

Question 24

Accounts payable is considered a [blank].

A)spontaneous liability
B)temporary financing source
C)permanent financing source
D)both A and B

Question 25

Current assets of SantasElves.com at the end of each quarter were: first quarter $1.3 million, second quarter $1.7 million, third quarter $1.5 million and fourth quarter $2.2 million.The best estimate for Santa's Elves permanent current assets is [blank].

A)$2.2 million
B)$1.675 million
C)$1.3 million
D)$0.9 million

Question 26

Which of the following is NOT a spontaneous source of financing?

A)Accrued salaries payable
B)Loans secured by accounts receivable
C)Accrued taxes payable
D)Accounts payable

Question 27

The current ratio and net working capital are good predictors of a firm's ability to meet its short-term obligations.Agree or disagree.

Question 28

What is the conventional method for financing permanent levels of accounts receivable and inventory?

A)Bonds and equity
B)Short-term loans
C)Accounts payable and accrued expenses
D)Equity only

Question 29

Which of the following is considered to be a spontaneous source of financing?

A)Operating leases
B)Accounts receivable
C)Inventory
D)Accounts payable

Question 30

According to the self-liquidating debt principle permanent assets should be financed with [blank] liabilities.

A)permanent
B)spontaneous
C)current
D)fixed

Question 31

A quite risky working capital management policy would have a high ratio of [blank].

A)short-term debt to bonds and equity
B)short-term debt to total debt
C)bonds to property, plant and equipment
D)short-term debt to equity

Question 32

Another term for the self-liquidating debt principle is [blank].

A)sinking fund debt
B)declining principal loans
C)maturity matching
D)debt that is secured by the asset purchased

Question 33

Spontaneous sources of financing include [blank].

A)marketable securities
B)accruals
C)bonds
D)commercial paper

Question 34

The December 31, 1995 balance sheet for Uniotec is presented below.
a.Calculate Uniotec's current ratio, and net working capital.
b.Uniotec feels that its current ratio is too far below the industry average of 2.40.To improve their liquidity, the treasurer of Uniotec has devised a plan to issue $12,000 in long-term debt at 12% and pay off its notes payable.The funds would be invested in marketable securities at 7% interest when not needed to finance the firm's seasonal asset needs.The notes payable would remain outstanding through the year.Assume this plan had been implemented for 2010.Calculate what the firm's current ratio, and net working capital would have been.
c.Did Uniotec improve their liquidity? What do you think happened to Uniotec's return on investment?

Question 35

Commercial paper [blank].

A)rates are generally higher than rates on bank loans and comparable sources of short-term financing
B)generally has a minimum compensating balance requirement
C)offers the firm with very large credit that needs a single source for all its short-term financing
D)has all of the properties stated above

Question 36

With respect to working capital policy, firms most often employ [blank].

A)a cautious approach which finances short-term assets with long-term financing
B)the principle of self-liquidating debt
C)an aggressive approach which finances long-term assets with short-term financing
D)the principle of liquidity optimisation

Question 37

Spirit Halloween store wants to use vacated space at a shopping mall to sell seasonal merchandise during the months of October, November and December.The rent is $10,000 per month, but the mall's owners are requiring a payment of $100,000 on September 1.If the space is vacated in good condition at the end of December, the owners will return $70,000 to the lessees.How should the $100,000 be financed?

A)Space is a permanent asset and should be financed with equity or long-term debt.
B)Because the lessee may rent the same or similar space in future years, they should use long-term debt or equity.
C)The space is a temporary asset and should be financed with short-term loans.
D)The space is a temporary asset and should be financed with trade credit.

Question 38

Which of the following is most likely to be a temporary source of financing?

A)Commercial paper
B)Preferred stock
C)Long-term debt
D)All of the above

Question 39

A toy manufacturer following the self-liquidating debt principle will generally finance seasonal inventory build-up prior to the Holiday season with [blank].

A)common stock
B)selling equipment
C)trade credit
D)preferred stock

Question 40

The principle of maturity matching suggests that [blank].

A)machinery with a five-year economic life be financed with debt that will be paid off in five years or less
B)seasonal peaks in inventory be financed with traded credit
C)the minimum level of current assets required for the firm's year around operations be financed with permanent sources
D)all of the above

Question 41

A firm can reduce net working capital by substituting long-term financing, such as bonds, with short-term financing, such as an one-year notes payable.

Question 42

Potential risks of using short-term bank loans for permanent assets include [blank].

A)higher costs
B)a loss of flexibility
C)inability to renew the loans on favourable terms
D)falling interest rates

Question 43

Spontaneous sources of financing may be either short term or long term.

Question 44

All else equal, which of the following is the most likely to occur if actual sales are much less than forecasted sales?

A)The company will be in a better position to pay down most of its debt.
B)The firm's actual investment in inventory will be unchanged from the amount forecasted.
C)Accounts receivable will rise significantly above the forecast.
D)The company might face a cash flow crunch.

Question 45

Trade credit appears on a company's balance sheet as accounts payable.

Question 46

Cognegic inventory turnover ratio is 30.4.Its inventory conversion period is [blank].

A)12 days
B)30.4 days
C)2.5 days
D)There is not enough information

Question 47

Spontaneous sources of debt [blank].

A)do not involve selling securities
B)are guaranteed by a bank in exchange for the firm keeping a specified level of deposits at that bank
C)are non-interest bearing
D)Both A and C

Question 48

Increasing the use of short-term debt versus long-term debt financing will increase profit.

Question 49

Using accounts payable that must be paid within 30 days to finance inventory that turns over monthly would be an example of self-liquidating debt.

Question 50

Trade credit is a source of spontaneous financing.

Question 51

Within the context of working capital management, the risk-return trade-off involves an increased risk of illiquidity versus increased profitability.

Question 52

Unlike spontaneous sources of financing, discretionary financing requires a managerial decision.

Question 53

If management expects interest rates to rise and credit to tighten in the near future, it should consider [blank].

A)increasing its use of commercial paper and loans secured by current assets
B)decreasing the use of spontaneous financing
C)decreasing the level of permanent financing
D)increasing the level of permanent financing

Question 54

Summary data from the quarterly balance sheets of Capital HVAC are shown below.
.
a.If Capital follows the self-liquidating debt principle, how much long-term debt will be used to finance current assets? Explain your answer briefly.
b.What would be the highest and lowest levels of temporary debt?

Question 55

Short-term debt is frequently less expensive because it provides the borrower more security.

Question 56

The use of short-term debt provides flexibility in financing since the firm is only paying interest when it is actually using the borrowed funds.

Question 57

Trade credit is an example of which of the following sources of financing?

A)Spontaneous
B)Temporary
C)Permanent
D)Both A and B

Question 58

Qubeta uses permanent sources of financing to cover its peak level of current assets.When it does not need the money to finance inventories and accounts receivable, it invests the excess funds in short-term certificates of deposit.What are the advantages and disadvantages of this policy?

Question 59

Oceonic inventory turnover ratio is 12.Its inventory conversion period is [blank].

A)12 days
B)30.4 days
C)2.5 days
D)There is not enough information

Question 60

Spontaneous sources of financing are sources over which the firm has no control.

Question 61

Cash conversion cycle = operating cycle − accounts payable deferral period

Question 62

As the inventory turnover ratio decreases, the inventory conversion cycle increases.

Question 63

It is not possible to have a negative cash conversion cycle.

Question 64

A firm buys on terms of 3/10, net 30.What is the cost of trade credit under these terms?

A)55.7%
B)47.4%
C)31.5%
D)23.2%

Question 65

Loxdon has an average collection period of 7 days, an inventory conversion period of 30 days and a payables deferrable period of 60 days.What is Loxdon's operating cycle?

A)97 days
B)37 days
C)23 days
D)-23 days

Question 66

Stich & Sell's annual credit sales are $18 million; the accounts receivable balance is $1.5 million; the cost of goods sold is $12.6 million; the inventory balance is $350,000 and the balance in accounts payable is $700,000.
a.Compute Stitch's operating cycle.
b.Compute Stitch's cash conversion cycle.

Question 67

Sereneva has an inventory turnover ratio of 52, an accounts receivable balance of $365,000, average daily credit sales of $36 500, accounts payable of $182 500 and cost of goods sold of $7 993 500.What is Sereneva's cash conversion cycle to the nearest day?

A)17 days
B)9 days
C)27 days
D)-27 days

Question 68

Which of the following would result in a negative cash conversion cycle?

A)A negative cash conversion cycle is not possible
B)Average collection period of 7 days, inventory conversion period of 30 days and payables deferral period of 30 days
C)Average collection period of 60 days, inventory conversion period of 30 days, payables deferral period of 7 days
D)Average collection period of 7 days, inventory conversion period of 30 days, payables deferral period of 60 days

Question 69

Increasing the accounts payable deferral period also increases the cash conversion cycle.

Question 70

Cotton St.has an average collection period of 49 days, an inventory conversion period of 83 days and a payables deferrable period of 36 days.What is Cotton's operating cycle?

A)96 days
B)70 days
C)85 days
D)132 days

Question 71

Anderson's Ice Cream has an average collection period of 49 days, an inventory conversion period of 83 days and a payables deferral period of 36 days.What is Anderson's cash conversion cycle?

A)96 days
B)70 days
C)85 days
D)132 days

Question 72

The correct equation for calculating the cost of short-term credit is [blank].

A)rate = interest/(principal × time)
B)rate = (principal × time)/interest
C)rate = principal/(time × interest)
D)rate = principal × interest × time

Question 73

Sereneva has an inventory turnover ratio of 52, an accounts receivable balance of $365,000, average daily credit sales of $36 500, accounts payable of $182 500 and cost of goods sold of $7 993 500.What is Sereneva's operating cycle to the nearest day?

A)17 days
B)61 days
C)27 days
D)-27 days

Question 74

The operating cycle equals the inventory conversion period plus the accounts payable deferral period.

Question 75

Which item would constitute poor collateral for an inventory loan?

A)Lumber
B)Vegetables
C)Copper
D)Chemicals

Question 76

Tixonic Lab's balance is $1.22 million.Tixonic's cost of goods sold is $30.4 million.Its inventory conversion period is [blank].

A)12 days
B)24.92 days
C)14.65 days
D)299.2 days

Question 77

Morgan's Meats has a cost of goods sold of $60.8 million.The company's accounts payable balance is $7.5 million.Its accounts payable deferral period is [blank].

A)81 days
B)45 days
C)8.11 days
D)48.7 days

Question 78

Edgology's balance in accounts receivable is $240,000.Annual credit sales are $2 880,000.Edgology's average collection period is [blank].

A)12 days
B)30.4 days
C)2.5 days
D)There is not enough information

Question 79

[blank] is a financial institution that purchases accounts receivable from firms.

A)Float
B)Line of credit
C)Commercial paper
D)Factor

Question 80

Ellemoor Inc.has increased its inventory turnover ratio from 12 to 18.By how many days has it reduced the operating cycle?

A)20 days
B)6 days
C)10 days
D)1.5 days