Deck 15: Managing Working Capital

Question 1

Activities that decrease the cash conversion cycle will increase the firm's need to obtain financing.

Answer 1

False

Question 2

Increases in the cash conversion cycle will lower the firm's short-term financing needs.

Answer 2

False

Question 3

The size of the accounts payable is affected by the level of the firm's cost of goods sold and the average payment period.

Answer 3

True

Question 4

The inventory conversion period is calculated by inventory divided by costs of goods sold.

Question 5

The accounts payable period is the time between a firm pays its suppliers for inventory and collecting cash from inventories.

Question 6

More efficient management of working capital assets will lessen the firm's needs for financing.

Question 7

The estimated cash inflows are affected by the sales forecast and customer payment patterns.

Question 8

If the cash conversion cycle is shortensr, then the firm's investment in inventories and receivables will always be smaller.

Question 9

A level production plan has problems, such as idle plant and laid-off workers during slow sales months and production bottlenecks during busy times.

Question 10

A cash budget is a tool the treasurer uses to forecast future cash flows and estimate future short-term borrowing needs.

Question 11

Fixed capital would be defined as the firm's fixed assets, which include plant, equipment and property.

Question 12

The accounts payable period would be added to the operating cycle to get the cash conversion cycle.

Question 13

The operating cycle measures the time it takes between ordering materials and collecting cash from receivables.

Question 14

If the average payment period is longer, then the cash conversion cycle will be longer.

Question 15

The transaction motive for holding cash is the demand for cash needed to take advantage of unusual cash discounts for needed materials.

Question 16

Working capital is essentially a firm's current assets and consists of cash, accounts receivable, inventories, plant and equipment.

Question 17

By multiplying the average sales per day times the inventory conversion period, the inventories investment amount can be determined.

Question 18

To construct a cash budget, two sets of information are needed: estimated cash inflows and estimated cash outflows.

Question 19

The cash conversion cycle measures a firm's financing gap in terms of time.

Question 20

The operating cycle is the inventory conversion period plus the accounts receivable period.

Question 21

Credit extended on purchases to a firm's customers is called trade credit.

Question 22

Theoretically, the transactions demand for cash could be reduced to zero.

Question 23

A banker's acceptance is used to finance international trade, represents an unconditional obligation of an accepting bank, and has a yield that closely follows the yield on commercial paper.

Question 24

Because commercial paper rates are typically below U.S.Treasury bill rates, they are a valuable short-term financing source for high quality business firms.

Question 25

An increase in the cash conversion cycle would lead to an increase in the firm's short-term needs and financing costs.

Question 26

All businesses can earn interest at the prime rate on funds in their checking accounts.

Question 27

The federal funds rate is normally several points lower than the Treasury Bill rate.

Question 28

Firms may not sell marketable securities to cover cash shortfalls.

Question 29

An inverted yield curve is upward sloping.

Question 30

The transactions motive is the demand for holding cash.

Question 31

Marketable securities may be held for speculative motives.

Question 32

The account receivable period may be calculated as accounts receivable divided by daily sales.

Question 33

A negotiable CD is a marketable receipt issued by a bank in exchange for a deposit of funds.

Question 34

The operating cycle measures the time between when a firm pays its suppliers for inventory and when it collects cash from customers on a sale of the finished product.

Question 35

The account receivable period may be calculated as accounts receivable divided by sales.

Question 36

The cash conversion cycle measures the time between when a firm pays its suppliers for inventory and when it collects cash from customers on a sale of the finished product.

Question 37

A financial manager should strive to maximize the investment in current assets.

Question 38

U.S.Treasury bills are sold at a discount through competitive bidding in an annual auction.

Question 39

Lowering a firm's credit standards or customer credit quality will cause the average collection period to lengthen.

Question 40

The inventory period may beis calculated as sales divided by inventories.

Question 41

A firm with an inventory period of 100 days and an accounts receivable period of 50 days will have an operating cycle of 150 days.

Question 42

Speculative motives for holding cash include holding funds to meet unexpected demands.

Question 43

The delivery or transmission float is the delay in transferring the means of payment from the payor (customer) to the payee (the provider of goods or services).

Question 44

Transactions motives for holding cash include holding funds to meet unexpected demands.

Question 45

A mercantile credit bureau serves primarily as a (n):

A)collection agency for delinquent accounts
B)common meeting place where credit managers may exchange information
C)organization through which accounts receivable may be sold to other businesses
D)central record-keeping organization for credit information on business firms

Question 46

Both the operating cycle and the cash conversion cycle can be reduced by shortening the inventory period.

Question 47

The operating cycle can be reduced by lengthening the accounts payable period.

Question 48

The cash conversion cycle can be reduced by lengthening the accounts payable period.

Question 49

Which of the following would not normally be discussed when describing a firm's short-term operating cycle?

A)manufacturing process
B)selling effort
C)acquiring financing
D)collection period

Question 50

The portion of current assets financed through long-term financing is referred to as the:

A)net working capital
B)current ratio
C)seasonal current assets
D)fixed assets

Question 51

Which of the following cycles is not a component of the firm's short-term operating cycle?

A)inventory cycle
B)accounts receivable cycle
C)accounts payable cycle
D)fixed asset cycle

Question 52

The current ratio concept is particularly useful in: Not in the chapter

A)analyzing large firms
B)comparing the financial positions of firms of varying sizes
C)examining firms with large seasonal sales
D)comparing the financial structures of firms of varying sizes

Question 53

A risk which results from a firm's inability to meet currently maturing obligations is often referred to as: Not in the chapter

A)liquidity risk
B)purchasing power risk
C)interest rate risk
D)financial leverage risk

Question 54

One type of investment that would not be suitable for marketable securities would be:

A)bankers' acceptances
B)short-term notes of U.S.government agencies
C)negotiable CD's
D)mortgages

Question 55

Precautionary motives for holding cash include holding funds to take advantage of unusual cash discounts for needed materials.

Question 56

1A.28.Which one of the following activities is not a major component of the operating cycle?

A)manufacturing process
B)selling effort
C)collection period
D)asset investment decisions

Question 57

A firm with an inventory period of 100 days and an accounts payable period of 50 days will have an operating cycle of 150 days.

Question 58

As sales increase over time, assets will increase at the same growth rate so long as the

A)asset turnover increases
B)asset turnover ratio remains constant
C)asset turnover ratio decreases
D)profit margin remains constant

Question 59

Sources of short-term financing such as accounts payable, notes payable, and accruals should be used to finance:

A)all current assets
B)all fixed assets
C)a portion of the current assets needed to support nonseasonal sales levels plus all of the seasonal build-up in current assets
D)a portion of the fixed assets plus all of the seasonal build-up in current assets

Question 60

The disbursement float is the delay in transferring the means of payment from the payor (customer) to the payee (the provider of goods or services).

Question 61

In the cash budget, the firm's final sales forecast us usually a function of Not in the chapter

A)economic forecasts.
B)the sales force estimate of demand.
C)external and internal factors in combination.
D)accounts payable experience.

Question 62

Assume a firm's production process requires an average of 80 days to go from raw materials to finished products and another 40 days before the finished goods are sold.If the accounts receivable cycle is 70 days and the accounts payable cycle is 80 days, what would the short-term operating cycle be?

A)110 days
B)130 days
C)190 days
D)270 days

Question 63

Which one of the following activities is not a major component of the short-term cash operating cycle?

A)manufacturing process
B)selling effort
C)collection period
D)asset investment decisions

Question 64

Dun & Bradstreet serves as:

A)an agency for rating the bonds of businesses and governmental bodies
B)the principal rating agency for commercial paper
C)a research and advisory facility for stocks and bonds
D)a general credit reporting agency covering all fields of business activity

Question 65

If a firm's inventories on hand are $200,000 and its cost of goods sold is $600,000, what is the inventory turnover?

A)2.0 times
B)3.0 times
C)4.0 times
D)5 0.33 times

Question 66

Working capital does not include:

A)cash
B)accounts receivable
C)marketable securities
D)property, plant, and equipment

Question 67

Calculation of a firm's average collection period is the same as calculating the:

A)accounts receivable cycle
B)inventory cycle
C)accounts payable cycle
D)short-term operatingcash cycle

Question 68

Which of the following is not an advantage of short-term borrowing?

A)flexibility
B)establishing continuous relationships with a bank or financial institution
C)frequent renewals
D)lower cost

Question 69

The willingness of a credit applicant to pay her or his bills is measured by:

A)capacity
B)capital
C)conditions
D)character
E)collateral

Question 70

In cash budgeting, the ________ seasonal and uncertain a firm's cash flows, the ________ the number of budgeting intervals it should use

A)more; greater
B)more; fewer
C)less; greater
D)less; fewer

Question 71

The principle of hedging calls for the matching of a firm's average:

A)liquidity of its assets with its liabilities and equity
B)liquidity of its accounts receivable with its accounts payable
C)maturities of its assets with its liabilities and equity
D)maturities of its sales with its assets

Question 72

A firm's cCash receipts may include all of the following except

A)dividends received from other firms
B)collections of accounts receivable
C)cash sales
D)interest income
E)all of the above

Question 73

The key input to the short-run financial planning process is easiest to estimate is Not in the chapter

A)cash sales.
B)cash receipts.
C)cash disbursements.
D)the amount of month to month short term borrowing.

Question 74

Taking advantage of unusual cash discounts or price bargains is an example of the:

A)transactions motive
B)precautionary motive
C)speculative motive
D)leverage motive

Question 75

Reasons to invest in marketable securities would not include:

A) transactions motives
B) precautionary motives
C) speculative motives
D) all the above are reasons to invest in marketable securities
E) none of the above

Question 76

Federal funds rates usually parallel the:

A)prime rate
B)U.S.Treasury bill rate
C)Dow Jones Industrial Average
D)none of the above

Question 77

When determining the short-term operating cycle, which of the following components reduce the length of the cycle?

A)increases in the inventory period
B)increases in the accounts receivable period
C)increases in the accounts payable period
D)all of the above

Question 78

If a firm has net sales of $400,000, annual cost of goods sold of $315,000, an inventory turnover of 4.5 times a year, and an accounts receivable turnover of five times a year, the combined investment in inventories and accounts receivable would be:

A)$64,500
B)$92,000
C)$122,500
D)$150,000

Question 79

Marketable securities are held primarily to meet:

A)transactions motives
B)precautionary motives
C)speculative motives
D)leverage motives

Question 80

Which of the following statements is most correct?

A)Eurodollars are deposits placed in foreign banks that remain denominated in U.S.dollars.
B)Treasury bills are actively traded in secondary money markets.
C)The most common trading unit for federal funds is $1 million.
D)All of the above statements are correct.