Question 1

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

Accepted Answer

Activities that decrease the cash conversion cycle, such as faster collection of accounts receivable or longer payment terms to suppliers, actually improve the firm's cash position and decrease its need for external financing.

Question 2

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

Accepted Answer

Increases in the cash conversion cycle indicate that the firm is taking longer to convert its inventory and accounts receivable into cash, which means the firm needs more cash to finance its operations in the short term. Therefore, increases in the cash conversion cycle would increase the firm's short-term financing needs.

Question 3

The size of the accounts payable is affected by the level of the firm's cost of goods sold and the average payment period.

Accepted Answer

The level of a firm's cost of goods sold directly affects the amount it owes to suppliers, while the average payment period determines the length of time the firm takes to pay its suppliers, thereby affecting the size of its accounts payable. Therefore, both factors affect the size of the accounts payable.

Question 4

The inventory conversion period is calculated by inventory divided by costs of goods sold.

Accepted Answer

The inventory conversion period is calculated by dividing the number of days in a period by the inventory turnover ratio (costs of goods sold divided by average inventory).

Question 5

The accounts payable period is the time between a firm pays its suppliers for inventory and collecting cash from inventories.

Accepted Answer

The accounts payable period is the time between a firm receiving goods or services from suppliers and paying for them. It is not related to the collection of cash from inventories.

Question 6

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

Accepted Answer

Effective management of working capital assets such as inventory, accounts receivable, and accounts payable can help free up cash flow, reducing a firm's need for external financing.

Question 7

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

Accepted Answer

The estimated cash inflows take into account the sales forecast and the expected timing of customer payments. Therefore, any changes in these factors can impact the estimated cash inflows.

Question 8

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

Accepted Answer

A shorter cash conversion cycle means the firm is able to convert its inventories and receivables into cash more quickly. As a result, the firm would need to invest less in inventories and receivables to maintain its operations, leading to a smaller investment in these areas.

Question 9

A level production plan has problems, such as idle plant and laid-off workers during slow sales months and production bottlenecks during busy times.

Accepted Answer

The answer of A level production plan has problems, such...

Question 10

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

Accepted Answer

A cash budget is indeed a tool used by the treasurer to predict cash inflows and outflows and estimate future borrowing needs in the short-term.

Question 11

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

Accepted Answer

Fixed capital refers to the long-term investment in fixed assets such as machinery, equipment, buildings, etc.

Question 12

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

Accepted Answer

The answer of The accounts payable period would be added...

Question 13

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

Accepted Answer

The operating cycle includes both the time it takes to convert inventory into accounts receivable and the time it takes to convert accounts receivable into cash, so it measures the time between ordering materials and collecting cash from receivables.

Question 14

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

Accepted Answer

The answer of If the average payment period is longer,...

Question 15

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

Accepted Answer

The transaction motive for holding cash refers to the need to have cash on hand for the day-to-day operations of the business, such as paying bills and purchasing supplies, not specifically for taking advantage of unusual cash discounts.

Question 16

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

Accepted Answer

Working capital consists of current assets such as cash, accounts receivable, and inventories, but plant and equipment are not included as they are classified as fixed assets.

Question 17

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

Accepted Answer

The answer of By multiplying the average sales per day...

Question 18

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

Accepted Answer

The answer of To construct a cash budget, two sets...

Question 19

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

Accepted Answer

The cash conversion cycle (CCC) measures the time it takes for a company to convert its investments in inventory and other resources into cash flows from sales. It is not a measure of a financing gap.

Question 20

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

Accepted Answer

The operating cycle is the time it takes for a company to purchase raw materials, produce goods, sell them, and receive payment from customers. It consists of two components: the inventory conversion period (time it takes to convert raw materials into finished goods) and the accounts receivable period (time it takes to collect payment from customers). Adding these two periods together gives us the total operating cycle.

Quiz 15: Managing Working Capital