Deck 6: Working Capital and the Financing Decision

Question 1

Walmart requires manufacturers to ship goods with RFID tags so it can better track inventory and reduce the need for supply chain management.

Answer 1

False

Question 2

When a company sells more than it produces, its inventory levels increase.

Answer 2

False

Question 3

The key to current asset planning is the ability to forecast sales accurately and then match production schedules with the sales forecast.

Answer 3

True

Question 4

Permanent current assets are not similar to fixed assets because they are fully liquidated within the year.

Question 5

As a general rule, it is desirable to finance the permanent assets, including "permanent current assets," with long-term debt and equity.

Question 6

Ideally, permanent current assets should be financed exclusively with short-term borrowings.

Question 7

The use of point-of-sale terminals has made it easier for many retail store managers to manage their inventory.

Question 8

A firm will generally generate more financing from internal sources if the firm is experiencing sales growth.

Question 9

Working capital management is relatively unimportant for a small business.

Question 10

Many companies such as McDonald's have embraced supply chain management using Web-based procedures.

Question 11

The financial managers generally devote little time to the management of working capital.

Question 12

Increased use of long-term financing is generally a more conservative approach to current asset financing.

Question 13

When using level production, inventory will peak in the month where unit sales trend above the planned production level.

Question 14

Liquidating current assets is like liquidating fixed assets since they have lives greater than one year.

Question 15

A "risky" financial plan will use long-term financing for fixed assets, permanent current assets, and a portion of temporary current assets.

Question 16

One of the primary benefits of implementing supply chain management is reducing inventory on hand.

Question 17

Cash, accounts receivables, and inventory all move monthly in the same direction under level production.

Question 18

Level production methods smooth production schedules and utilize manpower and equipment more efficiently than seasonal production methods.

Question 19

The cash budget combines the cash receipts and cash payments schedules in determining cash flow.

Question 20

Supply chain management has little impact on financial performance and is primarily a marketing and management concept.

Question 21

Yield curves change very little in the short run (i.e. one year or less).

Question 22

Short-term interest rates are more dependent upon inflation than on current demand for money.

Question 23

According to the expectations hypothesis, when long-term interest rates are higher than short-term interest rates, short-term rates are expected to rise.

Question 24

By using long-term capital to cover short-term needs, the firm is virtually assured of becoming technically insolvent.

Question 25

The "term structure of interest rates" is a schedule that tells when a company's bonds mature and shows how many dollars a firm must pay in interest payments.

Question 26

Short-term interest rates have historically been more volatile than long-term rates.

Question 27

During an economic "boom" period, a shortage of low-cost financing alternatives exists.

Question 28

The behavior of various kinds of financial institutions determines the shape of the yield curve, according to the market segmentation theory.

Question 29

Short-term interest rates are generally lower than long-term interest rates.

Question 30

The "term structure of interest rates" refers to the relationship between yields on debt and their maturities.

Question 31

According to the expectations hypothesis, when long-term interest rates are higher than short-term interest rates, long-term rates are expected to decline.

Question 32

The term structure of interest rates will influence the ratio of long-term financing to short-term financing used at any given time.

Question 33

Short-term financing is risky because of the possibility of rising short-term rates and the inability of paying off debt within a short period of time.

Question 34

Heavy use of long-term financing generally leads to lower financing costs.

Question 35

If the liquidity premium theory was the only correct theory, yield curves would always be upward-sloping.

Question 36

The market segmentation theory is the only theory that has any significant impact on interest rates.

Question 37

The "term structure of interest rates" represents the competitive cost of funds for the various short-term sources of funds such as Treasury bills, commercial paper, and bank CDs.

Question 38

Interest rates and inflation are inversely related.

Question 39

A successful financial manager is very interested in the term structure of interest rates but is not concerned with the relative volatility or historical level of interest rates.

Question 40

It is not necessary to understand interest rate movements when deciding the structure of short-term debt relative to long-term debt.

Question 41

The three most important factors when selecting a financing plan are risk, asset liquidity, and timing.

Question 42

Firms with predictable cash-flow patterns should assume relatively low levels of risk.

Question 43

If we examine the ratio of working capital to sales, we can see that for the last several decades, firms' liquidity has been increasing.

Question 44

Expected value techniques allow consideration of more than one possible outcome.

Question 45

Generally, a downward sloping yield curve indicates aforthcoming economic boom.

Question 46

Working capital management primarily involves long-term planning.

Question 47

The more short-term financing there is relative to long-term financing, the riskier the financial structure.

Question 48

Pressure to increase current asset buildup often results from

A) a decline in sales growth.
B) rapidly expanding sales.
C) increased demands of short-term creditors.
D) None of the options are true.

Question 49

Use of long-term financing and the carrying of highly liquid assets is a high-risk combination.

Question 50

In periods of tight money, long-term rates are typically higher than short-term rates.

Question 51

Heavy risk exposure due to short-term borrowing can be compensated for by carrying more illiquid assets.

Question 52

Heavy use of long-term financing can generate more profit for the company during a tight money period.

Question 53

Long-term financing is usually less expensive than short-term financing because firms have longer periods of time to pay off long-term debt.

Question 54

Expected value analysis requires taking the difference between the actual projected outcome and the historic outcome times its probability and then summing these totals.

Question 55

During tight money periods, short-term financing may be difficult to find.

Question 56

Working capital management is primarily concerned with the management and financing of

A) cash and inventory only.
B) current assets and current liabilities.
C) current assets.
D) receivables and payables.

Question 57

Immediate access to capital markets allows greater risk-taking capability.

Question 58

Firms with highly volatile and perishable inventory should assume relatively low levels of risk.

Question 59

The aggressive financing plan involves utilizing long-term financing for permanent and temporary current assets.

Question 60

Expected value analysis involves assigning "weights" to various expected future profit outcomes by their respective probabilities of occurrence.

Question 61

The term "permanent current assets" implies

A) the same thing as fixed assets.
B) nonmarketable assets.
C) some minimum level of current assets that are not self-liquidating.
D) inventory.

Question 62

The use of cash budgeting procedures

A) helps the firm plan its current asset levels for a given production plan.
B) makes managing inventory easier under seasonal production.
C) illustrates fluctuating levels of current assets for a given production plan.
D) All of the options are correct.

Question 63

RFID chips have been used to

A) track livestock.
B) track marathon runners' times.
C) track inventory at retailers.
D) All of the options are true.

Question 64

When actual sales are greater than production,

A) inventory will decline.
B) production schedules might have to be revised upward.
C) accounts receivable will rise.
D) All of the options are true.

Question 65

In company XYZ, assume that level production happens throughout the year and that receivables are collected in two equal installments over a two-month period subsequent to the sales period. If XYZ wants to developacash budget, which of the following steps is required?

A) Calculate ending accounts receivable balances.
B) Calculate cost of goods sold.
C) Estimate monthly net cash flow and bank borrowing or repayments.
D) Calculate ending inventory.

Question 66

Samuelson will produce 20,000 units in January using level production. If each unit costs $500 to manufacture, what is the dollar value of ending inventory in January if beginning inventory is 10,000 units and January sales are 15,000?

A) Less than $5,000,000
B) Between $5,000,000 and $10,000,000
C) Greater than $10,000,000
D) There will be a shortage of inventory.

Question 67

One advantage of level production is that

A) manpower and equipment are used efficiently at lower cost.
B) current assets fluctuate more than with seasonal production.
C) seasonal bulges and sharp declines in current assets occur.
D) None of the options are advantageous.

Question 68

Samuelson has a beginning inventory balance on January 1 of 12,000 units and desires an ending balance of 20% of the next month's sales. If sales are expected to be 17,000 for January and 20,000 for February, what amount of units does Samuelson have to produce during the month of January?

A) 4,000 units
B) 9,000 units
C) 3,400 units
D) 8,400 units

Question 69

A financial executive devotes the most time to

A) long-range planning.
B) capital budgeting.
C) short-term financing.
D) working capital management.

Question 70

Permanent current assets are not a factor in a manager's decision-making process when all current assets are

A) financed by short-term debt.
B) long-term in nature.
C) self-liquidating.
D) internally financed.

Question 71

The concept of a self-liquidating asset implies that

A) the working capital associated with a product will be liquidated within a one-year period.
B) all the product will be sold, receivables collected, and bills paid over the time period specified.
C) assets associated with the production of a product will be liquidated over the depreciable life of the assets.
D) self-liquidating assets will be financed by long-term sources of capital.

Question 72

Retail companies like Target and Macy's exhibit sales patterns that are most typically influenced by

A) cyclical economic indicators.
B) competitive prices.
C) seasonality.
D) sales promotions.

Question 73

Well-implemented Web-based supply chain management has all of the following benefits except

A) it reduces inventory on hand.
B) it speeds up the ordering and delivery process.
C) it limits the number of suppliers bidding for a company's business.
D) it decreases overall costs.

Question 74

Tinbergen Cans expects sales next year to be $50,000,000. Inventory and accounts receivable (combined) will increase $8,000,000 to accommodate this sales level. The company has a profit margin of 6 percent. Its dividend payout is 30 percent of profit. How much external financing will the firm have to seek? Assume there is no increase in liabilities other than that which will occur with the external financing.

A) No external financing will be needed.
B) Less than $1,000,000 of external financing is needed.
C) Between $1,000,000 and $5,000,000 of external financing is needed.
D) More than $5,000,000 of external financing is needed.

Question 75

When actual sales are greater than forecasted sales

A) inventory will decline.
B) production schedules might have to be revised upward.
C) accounts receivable will rise.
D) All of the options are true.

Question 76

Samuelson has a beginning inventory balance on January 1 of 12,000 units and desires an ending balance of 20% of the next month's sales. If sales are expected to be 17,000 for January and 20,000 for February, what is the ending balance as of January 31?

A) 4,000 units
B) 5,500 units
C) 3,400 units
D) 8,400 units

Question 77

If a firm uses level production with seasonal sales and sales decline further than expected,

A) inventory will increase.
B) inventory will decrease.
C) accounts receivables will increase.
D) inventory and accounts receivables will increase.

Question 78

Normally, permanent current assets should be financed by

A) long-term funds.
B) short-term funds.
C) borrowed funds.
D) internally generated funds.

Question 79

Companies that sell electricity are characterized by

A) fluctuating production to match sales.
B) seasonal sales.
C) low inventories due to computer inventory management.
D) fluctuating production to match sales and seasonal sales.

Question 80

Retail companies like Target and Macy's are more likely to have

A) stable sales and earnings per share.
B) cyclical sales but less volatile earnings per share.
C) cyclical sales and more volatile earnings per share.
D) cyclical sales but stable accounts receivable and inventory.