Question 1

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.

Accepted Answer

The average payment period measures the number of days it takes a company to pay its suppliers for raw materials purchased on account. The cash conversion cycle measures the time it takes to convert raw materials into cash received from customers and back into cash through payment to suppliers, while the average age of inventory measures the number of days a company holds inventory before it is sold. The average collection period measures the time it takes a company to collect payment from its customers after a sale has been made.

Question 2

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

This is because short-term financing typically has variable interest rates, whereas long-term financing has fixed interest rates. Therefore, any increase in short-term interest rates will directly impact the cost of borrowing for the company, potentially resulting in significantly higher payments and increasing the risk of financial distress.

Question 3

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 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.

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 80 days,an average collection period of 25 days,and an average age of inventory of 70 days.Its operating cycle is ________ days.

Accepted Answer

The answer of A firm has a cash conversion cycle...

Question 6

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

The statement accurately describes the risks associated with an aggressive funding strategy. A low level of net working capital and heavy reliance on short-term funds can pose a significant risk to the financial health of an organization, especially in times of changing short-term interest rates.

Question 7

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 8

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

Accepted Answer

Under a conservative funding strategy, the firm uses long-term debt to finance both its seasonal and permanent requirements. This approach is considered conservative because it minimizes the risk of a cash shortfall and provides stability in uncertain market conditions.

Question 9

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 10

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.

Accepted Answer

The cash conversion cycle formula is:
Cash conversion cycle = Inventory conversion period + Receivable conversion period – Payable conversion period
Inventory conversion period = 60 days
Receivable conversion period = 45 days
Payable conversion period = 30 days
Substituting these values into the formula, we get:
Cash conversion cycle = 60 + 45 – 30 = 75 days

Question 11

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 states that the risk of conservative funding requirements is low due to a high level of net working capital and the lack of reliance on short-term borrowing.

Question 12

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.

Accepted Answer

The description provided in the question is that of the cash conversion cycle, which is calculated by subtracting the number of days of inventory outstanding and the number of days of accounts payable outstanding from the number of days of accounts receivable outstanding. The cash turnover refers to the number of times cash or cash equivalents are used to fund a company's operations over a given period. The average age of inventory and the average collection period are both components used to calculate the cash conversion cycle.

Question 13

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 a firm's sales are constant, its investment in operating assets should remain constant to support those sales. This means that the firm will have a steady funding requirement for those assets, which becomes a permanent funding requirement.

Question 14

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.

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 15

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.)

Accepted Answer

The answer of A firm has a cash conversion cycle...

Question 16

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 17

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?

Accepted Answer

The answer of Tryst Energy Inc.has an average age of...

Question 18

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.

Accepted Answer

The operating cycle captures the time it takes for a firm to convert its inputs (material and labor) into finished goods that are sold and the cash collected. A longer operating cycle implies that a company takes more time to convert its inputs into cash, which can affect its liquidity and profitability. The cash conversion cycle (A) is similar to the operating cycle but includes the time taken to pay suppliers for raw materials, which is not part of the question. The average age of inventory (B) captures the time it takes for a firm to sell its inventory, but it does not include the time it takes to convert raw material and labor into finished goods. The average collection period (D) is the time it takes for customers to pay for their purchases, which is only part of the operating cycle.

Question 19

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 firm...

Question 20

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

The statement describes an aggressive funding strategy known as the matching maturity approach, where a firm matches the maturity of its assets and liabilities by using short-term funds for temporary needs and long-term funds for permanent needs. This approach maximizes returns but also increases the risk of financial distress.

Quiz 14: Working Capital and Current Assets Management