Question 1

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

Accepted Answer

The operating cycle is the sum of the average collection period and the average age of inventory. In this case, the operating cycle is 25 days + 70 days = 95 days.

Question 2

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

Accepted Answer

The cash conversion cycle is calculated as the average age of inventory plus the average collection period minus the average payment period: 65 + 60 - 65 = 60 days. The financing required is (60/365) * $3.65 million = $600,000.

Question 3

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

Accepted Answer

The formula for calculating the cash conversion cycle (CCC) is:

CCC = Inventory conversion period + Receivable conversion period - Payable conversion period

Inventory conversion period = Average age of inventory = 60 days
Receivable conversion period = Average collection period = 45 days
Payable conversion period = Average payment period = 30 days

Therefore, CCC = 60 + 45 - 30 = 75 days.

Hence, the best choice is C.

Question 4

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

Accepted Answer

The operating cycle is the sum of the average age of inventory (90 days) and the average collection period (40 days), which equals 130 days.

Question 5

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

Accepted Answer

The annual savings is calculated as follows:Annual savings = (Cost of financing * Annual outlays * Reduction in average age of inventory) / 365 days= (0.12 * $12 million * 10 days) / 365 days= $39,452

Question 6

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

Accepted Answer

The answer of When implementing the cash management strategies, a...

Question 7

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.

Accepted Answer

An aggressive funding strategy typically involves financing a significant portion of both current and fixed assets with short-term funds, aiming for higher profitability at the risk of higher liquidity issues.

Question 8

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

Accepted Answer

A conservative funding strategy involves using long-term financing to fund both permanent (long-term) and temporary (seasonal) needs, ensuring stability and lower risk of facing short-term liquidity issues.

Question 9

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.

Accepted Answer

The statement correctly assesses the risk of conservative funding requirements by highlighting the high level of net working capital and the lack of dependence on short-term borrowing, which both contribute to a low risk.

Question 10

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

Accepted Answer

The average payment period measures the time it takes for a company to pay its suppliers for the raw materials purchased on account. It is calculated by dividing the total accounts payable by the average daily cost of goods sold. The cash conversion cycle, on the other hand, measures the time it takes for a company to convert its investments in inventory and accounts receivable into cash. The average age of inventory measures the average number of days it takes for a company to sell its inventory, while the average collection period measures the average number of days it takes for a company to collect payment from its customers.

Question 11

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

Accepted Answer

The operating cycle measures the amount of time it takes for a firm to convert raw materials and labor into finished products, and then sell those products to collect cash. It is a measure of a firm's efficiency in managing its resources and generating cash flow. The cash conversion cycle and average collection period are related measures, but focus more specifically on cash management and accounts receivable, respectively. The average age of inventory is also related, but only measures the average amount of time inventory is held before being sold.

Question 12

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

Accepted Answer

The operating cycle is the sum of the average age of inventory and the average collection period. Given an operating cycle of 120 days and an average collection period of 40 days, the average age of inventory is 120 - 40 = 80 days.

Question 13

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.

Accepted Answer

Under a conservative funding strategy, a firm finances its permanent assets and possibly some part of its temporary assets with long-term financing, not just for emergencies or unexpected outflows. Short-term financing under this strategy is used more cautiously.

Question 14

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

Accepted Answer

Under an aggressive funding strategy, a firm prefers short-term debt for funding its seasonal requirements and long-term debt for permanent requirements. This strategy helps the firm to reduce its cost of capital and also to manage its cash flows more efficiently. However, it also increases the risk of default as short-term debt needs to be rolled over frequently, and any unexpected increase in interest rates can cause a significant strain on the firm's liquidity position.

Question 15

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.

Accepted Answer

An aggressive funding strategy typically involves financing some portion of the firm's permanent current assets or even all current assets with short-term funds, not just using short-term financing for emergencies.

Question 16

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.

Accepted Answer

If sales are constant, the firm's operating assets should remain stable, leading to a consistent level of funding needs, known as a permanent funding requirement.

Question 17

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.

Accepted Answer

The statement is true. As the aggressive strategy relies heavily on short-term financing, any change in short-term interest rates can lead to higher borrowing costs for the company, thus increasing the risks associated with this strategy.

Question 18

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.

Accepted Answer

Aggressive funding strategy involves relying heavily on short-term sources of funds and maintaining a minimum level of net working capital, which can make the business vulnerable to interest rate fluctuations and liquidity issues. This makes the strategy risky.

Question 19

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.

Accepted Answer

The conservative funding strategy involves financing both seasonal and permanent requirements with long-term funds, minimizing the risk of relying on short-term funds.

Question 20

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

Accepted Answer

The description in the question is a definition of the cash conversion cycle, which is the time it takes for a company to convert its investments in inventory and other resources to cash received from customers. Option A (cash turnover) refers to the ratio of net sales to average cash balance during a particular period. Options C and D (average age of inventory and average collection period) are components of the cash conversion cycle.

Quiz 15: Working Capital and Current Assets Management

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 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 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 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.)