Question 1

twin goals of inventory management are (1) to ensure that the inventories needed to sustain operations are available, but (2) to hold the costs of ordering and carrying inventories to the lowest possible level.

Accepted Answer

This statement is true. The twin goals of inventory management are to balance the need for having enough inventory to support operations without having excessive inventory that can lead to higher costs.

Question 2

average accounts receivable balance is a function of both the volume of credit sales and the days sales outstanding.

Accepted Answer

The average accounts receivable balance is calculated by multiplying the volume of credit sales by the days sales outstanding. Therefore, it is a function of both factors.

Question 3

Firms hold cash balances in order to complete transactions (both routine and precautionary) that are necessary in business operations and as compensation to banks for providing loans and services.

Accepted Answer

Cash balances serve as a buffer for routine and precautionary transactions and also as a form of compensation to banks for their services.

Question 4

overriding goal of inventory management is to ensure that the firm never suffers a stock-out, i.e., never runs out of an inventory item.

Accepted Answer

The answer of overriding goal of inventory management is to...

Question 5

is often referred to as a "non-earning" asset.Thus, one goal of cash management is to minimize the amount of cash necessary for conducting a firm's normal business activities.

Accepted Answer

Correct, cash is considered a non-earning asset because it does not generate revenue or profits for the business. Therefore, the goal of cash management is to minimize the amount of cash on hand while still having enough to conduct daily business activities.

Question 6

increase in any current asset must be accompanied by an equal increase in some current liability.

Accepted Answer

An increase in a current asset does not necessarily require an increase in a current liability. For example, an increase in cash due to sales revenue does not require an increase in current liabilities unless there is an increase in accounts payable or other obligations.

Question 7

a firm has a large percentage of accounts over 30 days old, this is proof positive that its receivables manager is not doing a good job.

Accepted Answer

The statement is not necessarily true. There may be external factors such as a slow economy or industry downturn that have caused customers to delay payments, and the receivables manager may have no control over these factors. Additionally, certain industries may naturally have longer payment terms. Therefore, the percentage of accounts over 30 days old alone cannot be used as the sole indicator of the receivables manager's performance.

Question 8

a firm takes actions that reduce its days sales outstanding

Accepted Answer

The answer of a firm takes actions that reduce its...

Question 9

working capital is defined as current assets divided by current liabilities.

Accepted Answer

Working capital is defined as current assets minus current liabilities, not divided by them.

Question 10

Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive current operating asset financing strategy because of the inherent risks of using short-term financing.

Accepted Answer

The statement is true - while short-term interest rates have generally been lower than long-term rates, relying heavily on short-term debt can be risky due to the potential for interest rate fluctuations and the need to constantly refinance the debt.

Question 11

Other things held constant, if a firm "stretches"

Accepted Answer

The answer of Other things held constant, if a firm...

Question 12

Setting up a lockbox arrangement is one way for a firm to speed up the collection of payments from its customers.

Accepted Answer

By setting up a lockbox arrangement, the customers can directly deposit their payments into a special bank account designated for the firm, which can speed up the process of collecting payments.

Question 13

concept of permanent current operating assets reflects the fact that some components of current assets do not shrink to zero even when a business is at its seasonal or cyclical low.Thus, permanent current operating assets represent a minimum level of current assets that must be financed.

Accepted Answer

The statement is true. Permanent current operating assets refer to the minimum level of current assets that a business must finance, as some components of current assets do not diminish to zero even when the business is at its seasonal or cyclical low.

Question 14

a firm that makes heavy use of net float, being able to forecast collections and disbursement check clearings is essential.

Accepted Answer

Since a firm is making heavy use of net float, they need to be able to accurately forecast when they will receive collections and when their disbursement checks will clear in order to effectively manage their funds and avoid cash flow issues.

Question 15

conservative current operating asset financing approach will result in permanent current assets and some seasonal current assets being financed using long-term securities.

Accepted Answer

A conservative current operating asset financing approach aims to maintain a higher level of liquidity and stability, thus resulting in financing permanent current assets and a portion of seasonal current assets using long-term securities. This reduces the risks associated with short-term debt and ensures availability of funds for unexpected contingencies.

Question 16

aging schedule is a commonly used method for monitoring receivables.

Accepted Answer

Aging schedule is a well-established technique used to monitor receivables. It categorizes receivables into various time buckets based on the number of days they have been outstanding. This information is then used to identify delinquent accounts, analyze the aging trends, and take corrective action to improve cash flow.

Question 17

working capital, defined as current assets minus the sum of payables and accruals, is equal to the current ratio minus the quick ratio.

Accepted Answer

Working capital is equal to current assets minus current liabilities (not just payables and accruals). The formula for working capital is not related to the current ratio or quick ratio.

Question 18

of working capital is the amount of net operating working capital required per dollar of daily sales.

Accepted Answer

The turnover of working capital formula measures the efficiency of working capital management by analyzing how many times a company is able to convert its working capital into sales over a period of time.

Question 19

Shorter-term cash budgets--say a daily cash budget for the next month--are generally used for actual cash control while longer-term cash budgets--say monthly cash budgets for the next year--are generally used for planning purposes.

Accepted Answer

Shorter-term cash budgets are used for actual cash control and longer-term cash budgets are used for planning purposes.

Question 20

Determining a firm's optimal investment in working capital and deciding how that investment should be financed are critical to working capital management.

Accepted Answer

Determining the optimal level of investment in working capital and how to finance it is important for a firm's financial performance and liquidity.

Quiz 16: Working Capital