Deck 22: Managing the Firms Assets

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

Day sales outstanding is computed by dividing a firm's accounts payable by daily credit sales.

Question 8

Calculating cash flows requires that a small business owner be able to distinguish between sales revenue and cash receipts and between expenses and disbursements.

Question 9

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

Question 10

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

Question 11

Batching invoices holds up the receipt of customers' money and its deposit in the bank.

Question 12

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

Question 13

Inventory is a concern only for manufacturing companies.

Question 14

Monitoring cash flows is at the core of working capital management.

Question 15

When dealing with large corporations, small companies are especially vulnerable to problems caused by slow collections.

Question 16

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

Question 17

Depreciation is a cash outflow.

Question 18

In a healthy business, cash inflows and outflows are typically even.

Question 19

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

Question 20

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

Question 21

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

Question 22

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

Question 23

Capital budgeting analysis helps managers make decisions about inventory investments.

Question 24

Terms of 2/10, net 30 offer a 2% potential discount.

Question 25

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

Question 26

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

Question 27

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 28

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

Question 29

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

Question 30

Accounting profits are identical to actual cash flows.

Question 31

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

Question 32

Given the terms of 3/10, net 30, a company should pay accounts payable on day 30 if funds are available.

Question 33

Inventory management and accounts payable management are intertwined.

Question 34

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

Question 35

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

Question 36

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

Question 37

For most small businesses, a yearly inventory for accounting purposes is adequate for proper inventory control.

Question 38

By buying on credit, a small business is using creditors' funds to supply long-term cash needs.

Question 39

The cash conversion period is the time span required to convert paid-for inventory and accounts receivables into cash.

Question 40

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

Question 41

The cash conversion period is the time between _____ and _____.

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

Question 42

In step 3 of the working capital cycle,

A) accounts payable are paid.
B) accounts receivable are collected.
C) inventory is sold on credit.
D) cash is increased.

Question 43

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

Question 44

Working capital management

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

Question 45

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 46

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 47

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

Question 48

Small business owners' limited use of discounted cash flow (DCF) techniques has more to do with the nature of the small business itself than with their unwillingness to learn.

Question 49

Discounted cash flow (DCF) techniques can generally be trusted to provide a more reliable basis for decisions than can the accounting return on investment technique or the payback period technique.

Question 50

In the past, many small business owners relied on quantitative analysis in making capital budgeting decisions.

Question 51

Monthly cash deposits less checks written during the same period equal a firm's

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

Question 52

A firm will have difficulty attracting investors if an investment outlay has an internal rate of return below the firm's cost of capital.

Question 53

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

Question 54

Survival often becomes the top priority when the undercapitalization and liquidity problems of a small business directly affect the decision-making process.

Question 55

Discounted cash flow (DCF) techniques take into consideration the fact that cash received today is more valuable than cash received one year from now.

Question 56

During the cash conversion period, the firm

A) increases its cash flow by paying accounts payable.
B) no longer has the benefit of accounts receivable.
C) sells its long-term assets.
D) no longer has the benefit of accounts payable.

Question 57

The payback period technique measures how long it will take to recover the initial cash outlay of an investment.

Question 58

Cash flows and profits are

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

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 the

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

Question 60

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

Question 61

Lucinda has decided to use a _____ to speed up the processing of invoice payments.

A) customer box
B) deposit box
C) lock box
D) mailbox

Question 62

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

Question 63

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

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

Question 64

If two companies have the same amount of sales, why could one company still have more inventory than the other company?

A) The company with the larger inventory sells its inventory faster.
B) They are using different inventory systems.
C) The company with the larger inventory takes longer to sell its inventory.
D) The company with the smaller inventory uses better discounts.

Question 65

Nicholas would 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) the average collection period.

Question 66

A company has 30 days in payables, 15 days in inventory, and 20 days sales outstanding. How many days are in the company's cash conversion period?

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

Question 67

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

A) 24
B) 32
C) 43
D) 27

Question 68

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 69

Which of the following is a benefit of accounts receivable financing?

A) The volume of borrowing can be quickly expanded proportionally in order to match a firm's growth in sales and accounts receivable.
B) It is a low cost way of financing.
C) Pledging receivables may increase a firm's ability to borrow from a bank.
D) It considers the time value of money.

Question 70

Inventory is a "necessary evil" in a financial management system. It is an "evil" because

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

Question 71

The terms 2/10, net 45 offer a _____% discount on purchases paid for within _____ days.

A) 2; 45
B) 10; 2
C) 2; 10
D) 10; 45

Question 72

Madeleine would like to know the number of days, on average, that her company carries inventory. Madeleine is interested in the

A) days in credit.
B) days in inventory.
C) days in payables.
D) average collection period.

Question 73

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 the

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

Question 74

Accounts receivable typically are collected and become cash within _____ following a sale.

A) 30 days
B) 30 to 60 days
C) 60 to 90 days
D) six months

Question 75

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 76

Which of the following is a reason why small business managers tend to overbuy inventory?

A) They forecast greater demand than is realistic.
B) Vendors 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 77

Long-term assets are the focus of

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

Question 78

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 in inventory.
C) organize current items by skew number.
D) purchase new items.

Question 79

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 80

Which of the following is NOT a technique for making capital budgeting decisions?

A) Accounting return on investment
B) Internal rate of return
C) Quantitative forecasting
D) Payback period