Deck 14: Working Capital and Current Assets Management

Question 1

Too much investment in current assets reduces firm's profitability,whereas too little investment in current assets increases the risk of not being able to pay debts as they come due.

Answer 1

True

Question 2

Which of the following is TRUE of net working capital?

A)When current assets of a firm exceed its current liabilities,a firm is said to have negative net working capital.
B)When current assets of a firm are less than its total assets,a firm is said to have positive net working capital.
C)When current assets of a firm exceed its current liabilities,a firm is said to have positive net working capital.
D)When current assets of a firm exceed its total assets,the firm is said to have negative net working capital.

Answer 2

When current assets of a firm exceed its current liabilities,a firm is said to have positive net working capital.

Question 3

When current assets exceed current liabilities,a firm has negative net working capital.

Answer 3

False

Question 4

Assuming that the level of total assets remains unchanged,the effect of a decrease in the ratio of current assets to total assets is an increase in a firm's risk of insolvency.

Question 5

The more predictable a firm's cash inflows,the more net working capital it will need.

Question 6

An increase in current assets increases net working capital,thereby reducing the risk of insolvency.

Question 7

As firms are unable to match cash inflows to outflows with certainty,most of them need current liabilities.

Question 8

Short-term financial management is concerned with management of a firm's current assets and current liabilities to achieve a balance between profitability and risk.

Question 9

As the ratio of current assets to total assets increases,a firm's risk increases.

Question 10

On average in recent years,U.S.firms have been increasing their cash balances relative to total assets.

Question 11

A long-term trend in U.S.companies is that ________.

A)firms are increasing their investments in current assets relative to total assets,and most of this increase has occurred as firms increase their cash holdings
B)firms are increasing their investments in current assets relative to total assets,and most of this increase has occurred as firms increase their inventory balances
C)firms are decreasing their investments in current assets relative to total assets,and most of this decrease has occurred as firms decrease their cash holdings
D)firms are decreasing their investments in current assets relative to total assets,and most of this decrease has occurred as firms decrease their inventory balances.

Question 12

A firm is said to be insolvent when its total assets is less than its total liabilities and stockholders' equity.

Question 13

Working capital refers to a firm's long-term capital.

Question 14

In general,the greater a firm's current assets relative to its short-term obligations,the better able it will be to pay its bills as they come due.

Question 15

The goal of working capital management is to ________.

A)achieve a balance between short-term and long-term liabilities so that they add to the achievement of a firm's overall goals
B)achieve a balance between a firm's non-current assets and non-current liabilities
C)achieve a balance between profitability and risk that contributes positively to a firm's value
D)achieve a balance between short-term and long-term assets so that they add to the achievement of a firm's overall goals

Question 16

Net working capital can be defined as the portion of a firm's current assets financed with long-term funds.

Question 17

Net working capital is defined as ________.

A)total assets minus total liabilities
B)total liabilities minus total assets
C)current liabilities minus current assets
D)current assets minus current liabilities

Question 18

Firms are able to reduce financing costs or increase the funds available for expansion by maximizing the amount of funds tied up in working capital.

Question 19

A firm that is unable to pay its bills as they come due is said to be insolvent.

Question 20

The purpose of managing current assets and current liabilities is to ________.

A)achieve a balance between short-term and long-term financing of a firm
B)achieve as low a level of current liabilities as possible
C)achieve a balance between profitability and risk that contributes to a firm's value
D)achieve as high a level of current liabilities as possible

Question 21

A positive cash conversion cycle means that a firm must obtain financing to support the cash conversion cycle.

Question 22

The conversion of current assets ________.

A)from cash to receivables to inventory provides the cash used to pay non-current liabilities
B)from inventory to receivables to marketable securities provides the cash used to buy plant and equipment
C)from inventory to receivables to cash provides the cash used to pay current liabilities
D)from cash to receivables to inventory provides the cash used to repurchase stock

Question 23

In working capital management,risk is measured by the probability that a firm will be ________.

A)unable to pay annual dividends to stockholders
B)unable to pay its bills as they come due
C)unable to repay its long-term obligations
D)unable to earn profits from day-to-day operations

Question 24

A firm's operating cycle (OC)is simply the sum of the average age of inventory (AAI)and the average payment period (APP).

Question 25

In general,the more net working capital a firm has,________.

A)the greater its risk
B)the lower its risk
C)the less likely are creditors to lend to the firm
D)the lower its level of long-term funds

Question 26

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

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

Question 27

By efficiently managing a firm's operating and cash conversion cycles,the financial manager can maintain a high level of cash investment and thereby contribute toward maximization of share value.

Question 28

The operating cycle is the recurring transition of a firm's working capital from cash to inventories and inventories to receivables and back to cash.

Question 29

Which of the following is TRUE of current assets?

A)The time of conversion of current assets to more liquid form is relatively unpredictable.
B)They are used to fund long-term operations and pay long-term expenses.
C)They are more profitable because they add more value to the product than that provided by fixed assets.
D)They are sources of short-term financing for a firm.

Question 30

Current liabilities can be viewed as ________.

A)debts that mature in a period of one year or less
B)liabilities which represent a firm's long-term financing
C)sources of cash inflows from the operating activities of a firm
D)funds used to finance the noncurrent assets' portion of a firm

Question 31

The operating cycle is the length of time a firm's cash is tied up between payment for production inputs and receipt of payment from the sale of the resulting finished product.

Question 32

The cash conversion cycle of a firm is the length of time from the beginning of the production
process to the collection of cash from the sale of finished products.

Question 33

A decrease in current assets and an increase in current liabilities will ________ net working capital,thereby ________ the risk of insolvency.

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

Question 34

The cash conversion cycle is the total number of days in the operating cycle less the average payment period for inputs to production.

Question 35

A negative cash conversion cycle (CCC)means the average payment period (APP)exceeds the operating cycle (OC).

Question 36

When a portion of a firm's fixed assets are financed with current liabilities,________.

A)the firm will have positive net working capital
B)the net working capital will decrease
C)the current ratio will increase
D)the firm will have negative net working capital

Question 37

The cash conversion cycle of a firm is the difference between the number of days resources are tied up in the operating cycle and the average number of days the firm can delay making payment on the production inputs purchased on credit.

Question 38

Which of the following is TRUE of the impact of cash flows on net working capital?

A)The higher the cash inflows lower is the net working capital.
B)The lower the cash outflows lower is the net working capital.
C)The more predictable the cash inflows of a firm,the more current assets a firm needs.
D)The more predictable the cash inflows of a firm,the easier is the working capital management.

Question 39

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 40

The ability to purchase production inputs on credit allows a firm to partially offset the length of time resources are tied up in the operating cycle.

Question 41

The cash conversion cycle is the sum of average age of the inventory and average collection period minus average payment period.

Question 42

One aspect of risk associated with the aggressive strategy's maximum use of short-term financing is the fact that changing short-term interest rates can result in significantly higher borrowing.

Question 43

The ________ of a firm is the amount of time required for a company to convert cash invested in its operations to cash received as a result of its operations.

A)cash turnover
B)cash conversion cycle
C)average age of inventory
D)average collection period

Question 44

Tryst Energy Inc.has an average age of inventory of 65 days,an average collection period of 60 days and an average payment period of 65 days.The firm's total annual outlays for operating cycle investments are $3.65 million.Assuming a 365-day year,how much financing is required to support its cash conversion cycle?

A)$600,000
B)$650,000
C)$700,000
D)$559,000

Question 45

The conservative funding strategy is a strategy by which a firm finances at least its seasonal requirements,and possibly some of its permanent requirements,with short-term funds and the balance of its permanent requirements with long-term funds.

Question 46

The aggressive funding strategy is risky due to its minimum level of net working capital,high dependency on short-term sources of funds,and the changing short-term interest.

Question 47

Under an aggressive funding strategy,a firm funds its seasonal requirements with short-term debt and its permanent requirements with long-term debt.

Question 48

The aggressive funding strategy is a strategy by which a firm finances all projected funds requirements with long-term funds and uses short-term financing only for emergencies or unexpected outflows.

Question 49

Under a conservative funding strategy,the firm funds both its seasonal and its permanent requirements with long-term debt.

Question 50

The aggressive funding strategy is a strategy by which a firm finances its current assets with short-term funds and its fixed assets with long-term funds.

Question 51

A firm has an operating cycle of 120 days,an average collection period of 40 days,and an average payment period of 30 days.The firm's average age of inventory is ________ days.

A)80
B)50
C)90
D)70

Question 52

When implementing the cash management strategies,a firm should avoid damaging a firm's credit rating by overstretching accounts payable.

Question 53

The ________ is the length of time from the point when raw materials are purchased on account to the point when payment is made to the supplier of the goods.

A)cash conversion cycle
B)average payment period
C)average age of inventory
D)average collection period

Question 54

The ________ of a firm is the amount of time that elapses from the point when the firm inputs material and labor into the production process to the point when cash is collected from the sale of the finished product that contains these production inputs.

A)cash conversion cycle
B)average age of inventory
C)operating cycle
D)average collection period

Question 55

A firm has an average age of inventory of 90 days,an average collection period of 40 days,and an average payment period of 30 days.The firm's operating cycle is ________ days.

A)110
B)130
C)120
D)70

Question 56

Nonmanufacturing firms are more likely to have positive cash conversion cycles; they generally carry smaller,faster-moving inventories and often sell their products for cash.

Question 57

A firm has a cash conversion cycle of 60 days.Annual outlays are $12 million and the cost of financing is 12 percent.If the firm reduces its average age of inventory by 10 days,the annual savings is ________.(Assume a 365-day year.)

A)$10,400
B)$14,000
C)$28,800
D)$39,452

Question 58

The risk of the conservative funding requirements is low because of its high level of net working capital,and the fact that the strategy does not require a firm to use any of its limited short-term borrowing capacity.

Question 59

If a firm's sales are constant,its investment in operating assets should also be constant,and the firm will have only a permanent funding requirement.

Question 60

Under conservative funding strategy,short-term financing is used only to finance an emergency,an unexpected outflow of funds,and the variable portion of a firm's current assets.

Question 61

Other factors remaining constant,a decrease in the average age of inventory will result in ________.

A)a decrease in the average collection period
B)a decrease in the cash conversion cycle
C)an increase in the cash conversion cycle
D)an increase in the average collection period

Question 62

A firm has a cash conversion cycle of 80 days,an average collection period of 25 days,and an average age of inventory of 70 days.Its operating cycle is ________ days.

A)95
B)105
C)60
D)130

Question 63

A firm can reduce its cash conversion cycle by ________.

A)increasing the average age of inventory
B)increasing the average collection period
C)increasing the operating cycle
D)increasing the average payment period

Question 64

A firm has an operating cycle of 170 days,an average payment period of 50 days,and an average age of inventory of 145 days.The firm's average collection period is ________ days.

A)25
B)75
C)95
D)120

Question 65

The ________ is the time period that elapses from the point when a firm uses the raw materials in manufacturing a finished good to the point when the finished good is sold.

A)cash turnover
B)cash conversion cycle
C)average age of inventory
D)average collection period

Question 66

A firm has a cash conversion cycle of 60 days and average payment period of 40 days.The firm's operating cycle is ________ days.

A)20
B)100
C)50
D)30

Question 67

Other factors remaining constant,an increase in the average payment period will result in ________.

A)a decrease in the average collection period
B)a decrease in the cash conversion cycle
C)an increase in the cash conversion cycle
D)an increase in the average collection period

Question 68

A firm has an average age of inventory of 60 days,an average collection period of 45 days,and an average payment period of 30 days.The firm's operating cycle is ________ days.

A)75
B)105
C)90
D)135

Question 69

One way to improve the cash conversion cycle is to ________.

A)speed up collections
B)slow down credit approvals
C)slow down inventory turnover
D)speed up payments

Question 70

A firm has an average age of inventory of 101 days,an average collection period of 49 days,and an average payment period of 60 days.The firm's cash conversion cycle is ________ days.

A)60
B)52
C)41
D)90

Question 71

Other factors remaining constant,an increase in the average payment period will ________.

A)increase the average collection period
B)decrease the operating cycle
C)not affect the cash conversion cycle
D)not affect the operating cycle

Question 72

A firm with a cash conversion cycle of 175 days can stretch its average payment period from 30 days to 45 days.This will result in a/an ________.

A)decrease of 30 days in the cash conversion cycle
B)increase of 15 days in the cash conversion cycle
C)decrease of 15 days in the cash conversion cycle
D)increase of 30 days in the cash conversion cycle

Question 73

Other factors remaining constant,an increase in the average collection period will result in ________.

A)an increase in the operating cycle
B)an increase in the average payment period
C)a decrease in the operating cycle
D)a decrease in the average payment period

Question 74

Which of the following elements is required for the calculation of cash conversion cycle?

A)current assets ratio
B)average cost of goods sold
C)average collection period
D)cash flows from operations

Question 75

A firm has an average age of inventory of 20 days,an average collection period of 30 days,and an average payment period of 60 days.The firm's cash conversion cycle is ________ days.

A)70
B)50
C)-10
D)110

Question 76

The ________ is the time period that elapses from the point when a firm sells a finished good on account to the point when the receivable is collected.

A)cash conversion cycle
B)average payment period
C)average age of inventory
D)average collection period

Question 77

A firm has a cash conversion cycle of 120 days,an average collection period of 25 days,and an average payment period of 50 days.The firm's average age of inventory is ________ days.

A)45
B)95
C)125
D)145

Question 78

A firm has an average age of inventory of 60 days,an average collection period of 45 days,and an average payment period of 30 days.The firm's cash conversion cycle is ________ days.

A)15
B)45
C)75
D)135

Question 79

A firm has an average age of inventory of 101 days,an average collection period of 49 days,and an average payment period of 60 days.The firm's cash conversion cycle is ________ days.

A)150
B)90
C)109
D)11

Question 80

A firm purchased raw materials on account and paid for them within 30 days.The raw materials were used in manufacturing a finished good sold on account 100 days after the raw materials were purchased.The customer paid for the finished good 60 days later.The firm's cash conversion cycle is ________ days.

A)10
B)70
C)130
D)190