Question 1

If a firm has a large percentage of accounts over 30 days old, this is proof positive that its receivables manager is not doing a good job.

Accepted Answer

A large percentage of accounts over 30 days old could be influenced by several factors beyond the receivables manager's control, such as industry norms, economic conditions, or company credit policies.

Question 2

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

Accepted Answer

The aging schedule is a widely used method for monitoring receivables, which categorizes outstanding receivables according to the length of time they have been unpaid. This technique assists in determining the creditworthiness of a company's clients and aids in determining how much of Accounts Receivable may be bad debts.

Question 3

Net operating working capital is defined as operating current assets minus operating current liabilities..

Accepted Answer

Net operating working capital is indeed defined as operating current assets minus operating current liabilities, representing the amount of funds available for day-to-day operations of a business.

Question 4

The twin goals of inventory management are (1)to ensure that the inventories needed to sustain operations are available, but (2)to hold the costs of ordering and carrying inventories to the lowest possible level.

Accepted Answer

This is a commonly accepted definition of the goals of inventory management.

Question 5

Determining a firm's optimal investment in working capital and deciding how that investment should be financed are critical to working capital management.

Accepted Answer

Determining the optimal investment in working capital is important to ensure smooth operations and profitability of a firm. Moreover, deciding on the appropriate financing for working capital needs helps to strike a balance between costs and risk.

Question 6

Setting up a lockbox arrangement is one way for a firm to speed up the collection of payments from its customers.

Accepted Answer

Setting up a lockbox arrangement involves customers sending payments directly to a designated lockbox, which enables faster processing and collection of payments by the firm. Therefore, it is a way to speed up the collection of payments from customers.

Question 7

The average accounts receivable balance is a function of both the volume of credit sales and the days sales outstanding.

Accepted Answer

The average accounts receivable balance is calculated by dividing the total accounts receivable by the number of days in the period being measured. The total accounts receivable balance is influenced by both the volume of credit sales and the number of days it takes to collect those sales (days sales outstanding). Therefore, the statement is true.

Question 8

If a firm takes actions that reduce its days sales outstanding (DSO), then, other things held constant, this will lengthen its cash conversion cycle (CCC).

Accepted Answer

The statement is false. A reduction in DSO, which measures the average amount of time it takes for a firm to collect payment from customers, would result in a shorter cash conversion cycle. The cash conversion cycle is calculated by subtracting the firm's average payment period from its average collection period, so a reduction in DSO would decrease the average collection period and therefore shorten the cash conversion cycle.

Question 9

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

Accepted Answer

Net float refers to the difference between the time at which funds are disbursed and the time at which the funds are collected by the recipient. For a firm that heavily relies on net float, it is important to forecast collections and disbursement check clearings to effectively manage cash flow and ensure that there is enough net float to cover any outstanding obligations. Therefore, the statement is true.

Question 10

Shorter-term cash budgets¾say a daily cash budget for the next month¾are generally used for actual cash control while longer-term cash budgets¾say monthly cash budgets for the next year¾are generally used for planning purposes.

Accepted Answer

Shorter-term cash budgets are used for actual cash control because they provide a detailed plan for daily cash inflows and outflows. Longer-term cash budgets are used for planning purposes because they allow businesses to anticipate their future cash needs and make strategic decisions accordingly.

Question 11

Net working capital is defined as current assets divided by current liabilities.

Accepted Answer

Net working capital is defined as current assets minus current liabilities, not current assets divided by current liabilities.

Question 12

Cash is often referred to as a "non-earning" asset.Thus, one goal of cash management is to minimize the amount of cash necessary for conducting a firm's normal business activities.

Accepted Answer

Cash is not capable of generating profit or income on its own and hence it is referred to as a non-earning asset. Therefore, one of the goals of cash management is to reduce the amount of cash held by the firm to the minimum necessary level.

Question 13

The overriding goal of inventory management is to ensure that the firm never suffers a stock-out, i.e., never runs out of an inventory item.

Accepted Answer

The overriding goal of inventory management is to balance the costs of holding inventory against the benefits of holding inventory, including ensuring product availability without unnecessarily tying up capital in excess stock. Avoiding stock-outs is important, but it's not the sole goal.

Question 14

The concept of permanent current operating assets reflects the fact that some components of current assets do not shrink to zero even when a business is at its seasonal or cyclical low.Thus, permanent current operating assets represent a minimum level of current assets that must be financed.

Accepted Answer

The statement accurately describes the concept of permanent current operating assets.

Question 15

An increase in any current asset must be accompanied by an equal increase in some current liability.

Accepted Answer

An increase in a current asset can be funded through sources other than current liabilities, such as long-term liabilities or equity. Thus, an increase in any current asset does not necessarily require an equal increase in some current liability.

Question 16

Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive current operating asset financing strategy because of the inherent risks of using short-term financing.

Accepted Answer

The statement is true. Although short-term interest rates have historically been lower than long-term rates, relying heavily on short-term debt for financing current operating assets is seen as aggressive due to the risks involved in using short-term financing.

Question 17

A conservative current operating asset financing approach will result in permanent current assets and some seasonal current assets being financed using long-term securities.

Accepted Answer

A conservative approach to current asset financing involves using long-term securities to finance permanent current assets and some seasonal current assets. This approach aims to ensure that the company has a stable and reliable source of funding for its current assets, which in turn helps to ensure smooth operations and minimize liquidity risk. By using long-term financing, the company can also take advantage of potentially lower interest rates and avoid the costs and risks associated with short-term borrowing.

Question 18

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

Accepted Answer

Firms hold cash balances to complete transactions and cover expenses, as well as to have a cushion for unexpected events and as a form of payment to banks for their services.

Question 19

Net working capital, defined as current assets minus the sum of payables and accruals, is equal to the current ratio minus the quick ratio.

Accepted Answer

Net working capital is equal to current assets minus current liabilities, including both payables and accruals. The formula for net working capital is not directly related to the current ratio or quick ratio.

Question 20

Other things held constant, if a firm "stretches" (i.e., delays paying)its accounts payable, this will lengthen its cash conversion cycle (CCC).

Accepted Answer

Stretching accounts payable (delaying payment to suppliers) actually decreases the cash conversion cycle (CCC) because it increases the firm's cash on hand for a longer period, thus reducing the time and cash needed to cover its short-term liabilities.

Quiz 16: Supply chains and working capital management