Question 1

taking cash discounts is costly, and as a result, firms that do not take them are usually those that are performing poorly and have inadequate cash balances.

Accepted Answer

Taking cash discounts is not costly; it is beneficial. Firms that do not take cash discounts are usually those that are performing poorly and have inadequate cash balances.

Question 2

aging schedule is a commonly used method for monitoring receivables.

Accepted Answer

An aging schedule is a widely-used method for monitoring receivables. It involves classifying accounts receivable according to their age, and then applying different collection strategies to each group.

Question 3

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

Accepted Answer

A lockbox arrangement involves having customers send their payments directly to a designated post office box or lockbox controlled by the firm's bank. This allows the bank to process the payments quickly and deposit funds directly into the firm's account, speeding up the collection process.

Question 4

four primary elements in a firm's credit policy are (1) credit standards, (2) discounts offered, (3) credit period, and (4) collection policy.

Accepted Answer

This statement is true. Credit standards determine the criteria a customer must meet to be approved for credit, discounts offered incentivize customers to pay earlier, credit period refers to the amount of time a customer has to pay their bill, and collection policy outlines the steps the firm takes to collect overdue payments.

Question 5

a firm takes actions that reduce its days sales outstanding (DSO), then, other things held constant, this will lengthen its cash conversion cycle (CCC).

Accepted Answer

A reduction in DSO would actually shorten the cash conversion cycle, since it means the company is collecting cash from customers more quickly.

Question 6

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

Working capital management involves balancing the need for sufficient working capital to maintain daily operations with the desire to minimize excess cash tied up in nonproductive assets. A firm's optimal investment in working capital and how it is financed can impact profitability and liquidity, making it a critical decision for management to make.

Question 7

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 equal increase in a current liability. It could be funded by other sources like long-term debt, equity, or cash.

Question 8

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 overriding goal of inventory management is to balance having enough inventory to meet customer demand while minimizing costs, not just to avoid stock-outs.

Question 9

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 is a true statement. The twin goals of inventory management are to balance the need for sufficient inventory to meet demand with the desire to keep costs associated with inventory as low as possible.

Question 10

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 dividing the total accounts receivable by the number of days in the period being analyzed. The total accounts receivable is affected by both the volume of credit sales and the days sales outstanding, which measures how long it takes for customers to pay their invoices. Therefore, the average accounts receivable balance is a function of both variables.

Question 11

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

Cash is often referred to as a "non-earning" asset as it does not generate any return or income for the business. Therefore, one of the goals of cash management is to optimize the amount of cash necessary for the company's operations and reduce idle cash holdings.

Question 12

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 13

Changes in a firm's collection policy can affect sales, working capital, and profits.

Accepted Answer

A firm's collection policy affects the amount of cash it has available, which in turn affects its ability to pay bills and invest in new projects. If a firm's collection policy is too strict, it may cause customers to seek out competitors with more lenient collection policies, resulting in lost sales. On the other hand, a policy that is too lenient may result in higher sales but lower profits and working capital. Therefore, any changes in a firm's collection policy should be carefully evaluated for their potential impact on sales, working capital, and profits.

Question 14

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

This statement is true. While short-term interest rates have typically been lower than long-term rates, relying too heavily on short-term debt can be risky because it leaves the company vulnerable to changes in interest rates and the availability of financing.

Question 15

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

Accepted Answer

A firm that heavily uses net float, which is the difference between collections and disbursement check clearings, relies on timely forecasts of these activities in order to effectively manage their cash flow.

Question 16

Other things held constant, if a firm "stretches" (i.e., delays paying) its accounts payable, this will lengthen its cash conversion cycle (CCC).

Accepted Answer

Stretching accounts payable (delaying payment to suppliers) actually reduces the cash conversion cycle (CCC) because it increases the amount of time cash remains with the firm before it needs to pay its suppliers, thus shortening the cycle.

Question 17

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

Question 18

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

This statement is not necessarily true. There could be other factors affecting the percentage of accounts over 30 days old, such as economic downturn or changes in customer payment behavior. It is not fair to solely blame the receivables manager without considering these factors.

Question 19

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 involves financing permanent current assets and some seasonal current assets using long-term securities, such as bonds or preferred stock, in order to ensure stability and minimize risk. This approach avoids relying too heavily on short-term financing, such as bank loans or commercial paper, which can be more volatile and expensive in the long run.

Question 20

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

This statement accurately explains two of the main reasons why firms hold cash balances. They need cash to complete routine transactions and to handle unexpected expenses (precautionary reasons), and they may also hold cash as compensation to banks for loans or other services.

Quiz 21: Working Capital