Deck 15: Managing Working Capital

Question 1

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

Answer 1

False

Question 2

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.

Answer 2

False

Question 3

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

Answer 3

False

Question 4

"Investor spoofing" occurs when firms take actions at the end of their fiscal year (or sometimes toward the end of a quarter) to make themselves appear to be more profitable or financially healthy.

Question 5

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

Question 6

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

Question 7

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 8

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

Question 9

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 10

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 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

Current assets, typically, comprise about 80-90 percent of a firm's total assets.

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

Receivables investment amount = Net sales per day × Average collection period.

Question 23

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

Question 24

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

Question 25

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

Question 26

Most firms have a minimum desired cash balance.

Question 27

The inventory period is calculated as sales divided by inventories.

Question 28

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

Question 29

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

Question 30

Accounts payable = Cost of goods sold per day × Average payment period.

Question 31

Most firms need similar sized cash buffers.

Question 32

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

Question 33

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 34

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

Question 35

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

Question 36

Average payment period is calculated as Accounts payable divided by COGS per day.

Question 37

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

Question 38

Cash conversion cycle = Operating cycle - Average payment period.

Question 39

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

Question 40

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

Question 41

The transactions motive is the demand for holding cash.

Question 42

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

Question 43

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

Question 44

Federal funds are an excellent investment alternative for a firm's excess cash.

Question 45

Firms may not sell marketable securities to cover cash shortfalls.

Question 46

Securities issued by municipalities, such as cities, towns, states, and school districts, pay interest that, under law, is exempt from federal income taxes.

Question 47

Typically, business firms should strive to maximize their cash holdings.

Question 48

Commercial paper is the long-term, unsecured notes of well-known business firms, such as IBM or General Electric (GE).

Question 49

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

Question 50

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

Question 51

An inverted yield curve is upward sloping.

Question 52

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 53

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

Question 54

To qualify as a marketable security, an investment must have a long maturity.

Question 55

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

Question 56

The federal funds rate is normally several points lower than the T-bill rate.

Question 57

Eurodollars are dollar deposits placed in foreign banks and converted to euros.

Question 58

Marketable securities may be held for speculative motives.

Question 59

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 60

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

Question 61

In general, the less net working capital a company has

A) the greater the risk.
B) the lower the risk.
C) the less likely creditors will lend to the firm.
D) the faster it will grow

Question 62

Wells Fargo is a credit bureau.

Question 63

Holding all other factors constant, if a firm increases its current assets relative to total assets,

A) its financing costs will fall.
B) net working capital will rise.
C) has no effect on return and reduces risk.
D) it reduces return and increases risk.

Question 64

Which one of the following asset accounts is not a part of a firm's working capital?

A) cash and marketable securities
B) accounts receivable
C) inventories
D) fixed assets

Question 65

A credit bureau is an institutions that obtain credit information about business firms and individuals.

Question 66

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

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

Question 67

An account in which just enough funds are transferred to cover that day's checks presented for payment is called a daily account.

Question 68

Costs of owning raw materials, such as financing, storage, and insurance, need to be balanced against other items on the balance sheet.

Question 69

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

Question 70

Holding all other factors constant, if a firm increases its current assets relative to total assets,

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

Question 71

Processing float is the delay in transferring funds between payer and payee because of the banking system check-clearing processes.

Question 72

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

Question 73

Working capital does not include:

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

Question 74

In general, the more net working capital a company has

A) the greater the risk.
B) the lower the risk.
C) the less likely creditors will lend to the firm.
D) the lower its profits

Question 75

Inventory administration is primarily a financial management function.

Question 76

Holding all other factors constant, if a firm increases its current liabilities relative to total assets,

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

Question 77

Cutting working capital can increase company earnings.

Question 78

A system in which payments are sent to a P.O. box and processed by a bank to reduce collection float is called a lockbox system.

Question 79

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

Question 80

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