Question 1

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

Accepted Answer

Forecasting collections and disbursement check clearings is necessary for a firm that relies on float to effectively manage its cash flow. Float refers to the time between when a payment is made and when it is processed, allowing a company to use those funds in the meantime. Accurately predicting inflows and outflows of cash is crucial for properly managing float and avoiding cash shortages.

Question 2

Offering trade credit discounts is costly to a firm and as a result, firms that offer trade discounts are usually those that are performing poorly and need cash quickly.

Accepted Answer

This statement is false. Trade credit discounts can be used as a tool to incentivize early payment and can be offered by firms that are performing well and have surplus cash. While offering discounts can result in a slight decrease in revenue, it can also lead to increased cash flow and customer loyalty.

Question 3

A zero balance account is used by firms as an effective tool of cash management to reduce the amount of idle cash a firm might otherwise keep.

Accepted Answer

A zero balance account is designed to automatically transfer funds from a main operating account into a subsidiary account to maintain a zero balance in the operating account. This helps firms to avoid keeping excess cash idle in the operating account and improves cash management.

Question 4

The pledging of receivables differs from factoring in that, under pledging, the lender normally has recourse against the borrower.

Accepted Answer

In pledging of receivables, the lender holds the borrower's receivables as collateral for a loan, and the borrower remains responsible for collecting the receivables and paying back the loan. This means that the lender can recourse against the borrower if the receivables are not collected or if there is a default on the loan. In factoring, the factoring company purchases the receivables from the borrower and assumes the responsibility for collecting them, so there is typically no recourse against the borrower.

Question 5

The aging schedule is a commonly used method of monitoring receivables.

Accepted Answer

The aging schedule is a commonly used method of monitoring receivables. It categorizes accounts receivable by the length of time they have been outstanding (i.e. by age) and helps management assess the likelihood of collection and identify any potential collection issues.

Question 6

Cash is often referred to as a "non-earning" asset.Thus, one goal of cash management is to minimize the amount of cash necessary to conduct business.

Accepted Answer

Cash is considered an asset, but it does not earn interest or generate income on its own. Therefore, one objective of cash management is to reduce the amount of cash on hand that is not actively being used to conduct business.

Question 7

The economic order quantity (EOQ) is that order quantity that results in the minimum ordering cost and the minimum carrying cost; that is, the EOQ minimizes both of these cost components individually.

Accepted Answer

The EOQ minimizes the total cost, which is the sum of ordering costs and carrying costs, not each cost component individually.

Question 8

Inventory management focuses on three basic questions: (1) how many units to hold in stock, (2) how many units of each item to order, and (3) at what point to reorder.

Accepted Answer

This is the correct definition of inventory management.

Question 9

If the unit sales of a firm double, the optimal order quantity as determined by the EOQ model will also double.

Accepted Answer

The EOQ formula is not affected by changes in unit sales. Therefore, doubling the unit sales does not necessarily result in a doubling of the optimal order quantity as determined by the EOQ model.

Question 10

A firm changes its credit policy from 2/10, net 30, to 3/10, net 30.The change is meant to meet competition, so no increase in sales is expected.Average accounts receivable will probably decline as a result of this change.

Accepted Answer

The answer of A firm changes its credit policy from...

Question 11

Two of the primary motives for a firm to hold cash are the transaction motive and the precautionary motive.

Accepted Answer

The transaction motive refers to the need to hold cash to facilitate day-to-day business transactions, while the precautionary motive refers to the need to hold cash as a buffer against unforeseen events and emergencies. These are two common reasons for firms to hold cash.

Question 12

The central goal of inventory management is to provide sufficient incentives to ensure that the firm never suffers a stock-out (i.e.runs out of an inventory item).

Accepted Answer

The answer of The central goal of inventory management is...

Question 13

The three major elements in a firm's credit policy are (1) credit standards, (2) credit terms, and (3) collection policy.

Accepted Answer

This statement is true. Credit standards refer to the criteria for extending credit to customers, credit terms refer to the time allowed for customers to pay off their credit, and collection policy refers to the actions taken by the firm to collect overdue payments. These three elements collectively make up a firm's credit policy.

Question 14

The average accounts receivables balance is determined jointly by the volume of credit sales and the days sales outstanding.

Accepted Answer

The formula for calculating average accounts receivables is (beginning accounts receivable + ending accounts receivable) / 2. However, the volume of credit sales and days sales outstanding can also affect the average accounts receivables balance.

Question 15

Firms hold cash balances in order to complete transactions that are necessary in business operations and as compensation to banks for providing loans and services.

Accepted Answer

Firms need cash to make necessary transactions in the course of their operations and to compensate banks for providing loans and services.

Question 16

Generally, ordering costs are the single most important cost element in inventory management, because they are greater in magnitude than carrying costs.

Accepted Answer

Carrying costs are often considered more significant because they include expenses related to holding inventory, such as storage, insurance, taxes, and opportunity costs, which can accumulate over time and surpass ordering costs.

Question 17

Lockbox arrangements are one way for a firm to speed up the receipt of payments from customers.

Accepted Answer

Lockbox arrangements involve having customer payments sent directly to a designated post office box or bank lockbox, which is then processed by the bank and deposited into the firm's account. This can speed up the payment process and reduce the time it takes for the firm to receive funds.

Question 18

The average accounts receivables balance is determined jointly by the volume of credit sales and the days sales outstanding.

Accepted Answer

The average accounts receivables balance is calculated by dividing the total accounts receivable by the number of days in the period being analyzed. Days sales outstanding is a component of this calculation, as it represents the average number of days it takes for a company to collect payment on its credit sales. Therefore, both the volume of credit sales and the days sales outstanding impact the average accounts receivables balance.

Question 19

The economic order quantity is that order quantity that results in the minimum ordering costs.

Accepted Answer

The Economic Order Quantity (EOQ) is the order quantity that minimizes the total holding costs and ordering costs, not just the ordering costs.

Question 20

The principal goal of most inventory management systems is to balance the costs of ordering, shipping, and receiving goods with the cost of carrying those goods, while simultaneously meeting the firm's policy with respect to avoiding running short of stock and disrupting production schedules.

Accepted Answer

This statement is true. The main objective of inventory management systems is to find the right balance between the costs involved in ordering, shipping, and receiving goods and the costs of carrying those goods in inventory. At the same time, these systems aim to ensure that the company avoids stockouts that could disrupt production schedules or result in lost sales.

Quiz 15: Working Capital Management

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

Offering trade credit discounts is costly to a firm and as a result, firms that offer trade discounts are usually those that are performing poorly and need cash quickly.

A zero balance account is used by firms as an effective tool of cash management to reduce the amount of idle cash a firm might otherwise keep.

The pledging of receivables differs from factoring in that, under pledging, the lender normally has recourse against the borrower.

The aging schedule is a commonly used method of monitoring receivables.

Cash is often referred to as a "non-earning" asset.Thus, one goal of cash management is to minimize the amount of cash necessary to conduct business.

The economic order quantity (EOQ) is that order quantity that results in the minimum ordering cost and the minimum carrying cost; that is, the EOQ minimizes both of these cost components individually.

Inventory management focuses on three basic questions: (1) how many units to hold in stock, (2) how many units of each item to order, and (3) at what point to reorder.

If the unit sales of a firm double, the optimal order quantity as determined by the EOQ model will also double.

A firm changes its credit policy from 2/10, net 30, to 3/10, net 30.The change is meant to meet competition, so no increase in sales is expected.Average accounts receivable will probably decline as a result of this change.

Two of the primary motives for a firm to hold cash are the transaction motive and the precautionary motive.

The central goal of inventory management is to provide sufficient incentives to ensure that the firm never suffers a stock-out (i.e.runs out of an inventory item).

The three major elements in a firm's credit policy are (1) credit standards, (2) credit terms, and (3) collection policy.

The average accounts receivables balance is determined jointly by the volume of credit sales and the days sales outstanding.

Firms hold cash balances in order to complete transactions that are necessary in business operations and as compensation to banks for providing loans and services.

Generally, ordering costs are the single most important cost element in inventory management, because they are greater in magnitude than carrying costs.

Lockbox arrangements are one way for a firm to speed up the receipt of payments from customers.

The average accounts receivables balance is determined jointly by the volume of credit sales and the days sales outstanding.

The economic order quantity is that order quantity that results in the minimum ordering costs.

The principal goal of most inventory management systems is to balance the costs of ordering, shipping, and receiving goods with the cost of carrying those goods, while simultaneously meeting the firm's policy with respect to avoiding running short of stock and disrupting production schedules.