Deck 15: Managing Working Capital

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

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

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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 12

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 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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 22

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

Question 23

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

Question 24

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 25

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

Question 26

Marketable securities may be held for speculative motives.

Question 27

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 28

The transactions motive is the demand for holding cash.

Question 29

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

Question 30

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

Question 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

Firms may not sell marketable securities to cover cash shortfalls.

Question 37

An inverted yield curve is upward sloping.

Question 38

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 39

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

Question 40

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

Question 41

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 42

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 43

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

Question 44

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 45

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

Question 46

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

Question 47

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 48

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 49

A risk which results from a firm's inability to meet currently maturing obligations is often referred to as:

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

Question 50

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 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

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 53

The current ratio concept is particularly useful in:

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 54

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 55

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

Question 56

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 57

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

Question 58

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

Question 59

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 60

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 61

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 62

In the cash budget,the firm's final sales forecast us usually a function of

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

Question 63

Working capital does not include:

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

Question 64

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 operating cycle

Question 65

Cash 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 66

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 67

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 68

The key input to the short-run financial planning process is easiest to estimate is

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

Question 69

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 70

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 71

Which of the following would not be a characteristic of commercial paper?

A)issued by well-known business firms
B)debt is secured
C)short-term debt
D)all are characteristics of commercial paper

Question 72

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 times
B)3 times
C)4 times
D)5 times

Question 73

Marketable securities are held primarily to meet:

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

Question 74

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 75

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 76

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 77

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 78

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 79

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.

Question 80

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