Question 1

The cash conversion cycle is the sum of average age of the inventory and average collection period minus average payment period.

Accepted Answer

This is the correct formula for calculating the cash conversion cycle.

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

Short-term financing is generally associated with variable interest rates, which are subject to change. As a result, if interest rates increase, the cost of borrowing will also increase, increasing the risk associated with the strategy.

Question 3

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 cash conversion cycle measures the amount of time it takes for a company to convert its investments in operations back into cash received as a result of those operations. It includes three components: the average age of inventory, the average collection period, and the average payment period.

Question 4

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 5

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 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 aggressive funding strategy involves relying heavily on short-term sources of funds, which can result in a low level of net working capital and leaves the company vulnerable to changing short-term interest rates. This makes the strategy riskier than a more conservative funding approach.

Question 7

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

This statement is true. An aggressive funding strategy involves using short-term debt to fund seasonal requirements, such as inventory buildup for the holiday season or financing accounts receivable during a slow sales period. Long-term debt is used to fund permanent requirements, such as fixed assets or ongoing operations. This approach can allow the firm to take advantage of lower short-term interest rates while still being able to obtain the necessary long-term funds for ongoing business needs.

Question 8

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 9

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 funds both its seasonal (short-term) and permanent (long-term) requirements with long-term debt.

Question 10

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

The aggressive funding strategy is a strategy by which a firm finances its current assets with short-term funds and its fixed assets with short-term funds as well. This strategy is characterized by high risk since short-term funds must be refinanced frequently, which exposes the firm to interest rate risk and may result in financial distress if the funds are not available when needed.

Question 11

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 12

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 13

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 is the time taken by a company to pay its suppliers after the purchase of raw materials. It is calculated by dividing the accounts payable by the average daily purchases. The cash conversion cycle is the length of time it takes to convert the investments in inventories and accounts receivables back into cash. The average age of inventory is the time taken by the company to sell its inventory. The average collection period is the time taken by the company to collect its accounts receivables.

Question 14

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 measures the time it takes for a company to convert its inventory and other resources into cash through sales. It includes the time it takes to purchase inventory, transform it into a product, sell that product, and collect payment from customers. Therefore, the operating cycle encompasses the cash conversion cycle (A) and the average age of inventory (B) as well as the average collection period (D).

Question 15

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 16

Nonmanufacturing firms are more likely to have positive cash conversion cycles; they generally carry smaller,faster-moving inventories and often sell their products for cash.

Accepted Answer

Nonmanufacturing firms, such as service companies, often have negative cash conversion cycles because they typically do not hold inventories and may receive payments from customers before paying their suppliers.

Question 17

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 18

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 identifies the low risk of conservative funding requirements due to high net working capital and no need for short-term borrowing.

Question 19

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

The answer of If a firm's sales are constant,its investment...

Question 20

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 conservative funding strategy, short-term financing is used to finance permanent current assets as well as the variable portion, in order to minimize the risk of being unable to meet obligations when they fall due. Emergency and unexpected outflows are typically covered by a reserve fund.

Quiz 14: Working Capital and Current Assets Management