Question 1

In theory, the conservative financing strategy ignores

Accepted Answer

The conservative financing strategy purposely relies on the use of long-term financing, while ignoring the use of spontaneous forms of short-term financing, such as accounts payable and accrued expenses. The idea is to minimize the company's risk by relying on more stable and predictable sources of funding, even if it means sacrificing some potential cost savings from using short-term financing options. Therefore, option B is correct as it describes the purposeful exclusion of spontaneous short-term financing.

Question 2

A firm with a cash conversion cycle of 175 days can stretch its average payment period from 30days to 45 days. This will result in a(n)___________ in the cash conversion cycle of ____________ days.

Accepted Answer

Stretching the average payment period from 30 days to 45 days decreases the cash conversion cycle by 15 days, as the firm takes longer to pay its suppliers, effectively reducing the cycle.

Question 3

Irish Air Services has determined several factors relative to its asset and financing mix. A.   The firm earns 10 percent annually on its current assets.
B.    The firm earns 20 percent annually on its fixed assets.
C.   The firm pays 13 percent annually on current liabilities. D.   The firm pays 17 percent annually on longterm funds.
E.    The firm's monthly current, fixed and total asset requirements for the previous year are summarized in the table below:
$$\begin{array} { l c r r } 
\text { Month } & \begin{array} { c } 
\text { Current } \
\text { Assets }
\end{array} & \begin{array} { c } 
\text { Fixed } \
\text { Assets }
\end{array} & \begin{array} { c } 
\text { Total } \
\text { Assets }
\end{array} \
\hline \text { January } & \$ 45,000 & \$ 100,000 & \$ 145,000 \
\text { February } & 40,000 & 100,000 & 140,000 \
\text { March } & 50,000 & 100,000 & 150,000 \
\text { April } & 55,000 & 100,000 & 155,000 \
\text { May } & 60,000 & 100,000 & 160,000 \
\text { June } & 75,000 & 100,000 & 175,000 \
\text { July } & 75,000 & 100,000 & 175,000 \
\text { August } & 75,000 & 100,000 & 175,000 \
\text { September } & 60,000 & 100,000 & 160,000 \
\text { October } & 55,000 & 100,000 & 155,000 \
\text { November } & 50,000 & 100,000 & 150,000 \
\text { December } & 50,000 & 100,000 & 150,000
\end{array}$$
-The firm's annual financing costs of conservative financing strategy is__________

Accepted Answer

The answer of Irish Air Services has determined several factors...

Question 4

When a portion of the firm's fixed assets are financed with current liabilities, the firm

Accepted Answer

Financing fixed assets with current liabilities can create a negative working capital position. This is because current liabilities are due within a year, while fixed assets often have a longer life span. This creates a potential risk for the firm if they are unable to renew or roll over these liabilities when they mature. In this situation, the firm may have to sell its fixed assets to pay off current liabilities, which can lead to losses. Therefore, this scenario can create a riskier financial position for the firm.

Question 5

A firm which uses the aggressive financing strategy plans to purchase raw materials in large quantities to take price discounts. The firm will finance the purchase with a loan. The most likely consequence of this action is

Accepted Answer

The answer of A firm which uses the aggressive financing...

Question 6

Caren's Canoes is considering relaxing its credit standards to encourage more sales. As a result, sales are expected to increase
15 percent from 300 canoes per year to 345 canoes per year. The average collection period is expected to increase to 40 days
from 30 days and bad debts are expected to double the current 1 percent level. The price per canoe is $850, the variable cost per canoe is $650 and the average cost per unit at the 300 unit level is $700. The firm's required return on investment is 20
percent.

-What is the cost of marginal investments in accounts receivable under the proposed plan?

Accepted Answer

The cost of marginal investments in accounts receivable is calculated by determining the increase in accounts receivable due to the change in credit policy. The increase in sales is 45 canoes (345 - 300), and the average collection period increases by 10 days (40 - 30). The cost of marginal investment is calculated as: (45 canoes * $650 variable cost per canoe * 10/365) * 20% required return = $1,733.

Question 7

A firm has a cash conversion cycle of 60 days and average collection period of 40 days. The firm'soperating cycle is__________ days.

Accepted Answer

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

Question 8

The conversion of current assets from inventory to receivables to cash provides the___________ of cash used to pay the current liabilities, which represents a(n)___________ of cash.

Accepted Answer

The conversion of inventory to receivables to cash represents a source of cash because it increases the cash on hand of a company. Therefore, options B and C can be eliminated. Option D is incorrect because it suggests that this conversion represents a use of cash, which is not the case.

Question 9

The___________ is an inventory technique that takes into account various operating and financial costs to determine the order quantity for a specific inventory item.

Accepted Answer

The EOQ (Economic Order Quantity) model takes into account both the inventory holding costs and the ordering costs to determine the optimal order quantity for a specific item. The ABC system, while also used for inventory management, focuses on classifying items based on their importance and value to the organization. The LIFO model and exponential smoothing technique are not inventory management techniques but rather inventory valuation and demand forecasting techniques, respectively.

Question 10

The economic order quantity (EOQ) is the order quantity which minimizes

Accepted Answer

The economic order quantity (EOQ) is calculated to minimize the total inventory costs, which include both ordering costs and holding costs. By optimizing the order quantity, a business can balance the cost of placing an order (order cost per order) with the cost of maintaining inventory (carrying costs per unit per period) to minimize overall costs.

Question 11

Dizzy Animators, Inc. currently makes all sales on credit and offers no cash discount. The firm is considering a 3 percent cash discount for payment within 10 days. The firm's current average collection period is 90 days, sales are 400 films per year, selling price is $25,000 per film, variable cost per film is $18,750 per film, and the average cost per film is $21,000. The firm expects that the change in credit terms will result in a minor increase in sales of 10 films per year, that 75 percent of the sales will take the discount, and the average collection period will drop to 30 days. The firm's bad debt expense is expected to become negligible under the proposed plan. The bad debt expense is currently 0.5 percent of sales. The firm's required return on equal-risk investments is 20 percent.
-What is the cost of marginal investment in accounts receivable under the proposed plan?

Accepted Answer

The cost of marginal investment in accounts receivable is calculated by considering the change in accounts receivable due to the new credit terms. The new average collection period is 30 days, and 75% of sales will take the discount. The increase in sales is 10 films, and the selling price is $25,000 per film. The calculation involves determining the change in accounts receivable and factoring in the cost of capital.

Question 12

Inventory insurance costs is an example of___________costs

Accepted Answer

Inventory insurance costs are a type of carrying cost, which are expenses associated with holding inventory such as storage, handling, and insurance costs.

Question 13

One major risk a firm assumes in an aggressive financing strategy is

Accepted Answer

An aggressive financing strategy typically relies on short-term funds to finance operations and expansion. This means that the company may be at risk of not being able to obtain short-term funds when they are needed, leading to liquidity problems and potential insolvency. While options A, B, and D are also potential risks, they are not as directly related to an aggressive financing strategy as the risk of not being able to obtain short-term funds.

Question 14

The ___________financing strategy requires the firm to pay interest on excess funds borrowed but not needed throughout the entire year.

Accepted Answer

The conservative financing strategy involves borrowing more funds than immediately needed, resulting in paying interest on excess funds throughout the year.

Question 15

The most important of the four C's of credit are

Accepted Answer

The most important of the four C's of credit are character and capacity. Character refers to a borrower's trustworthiness and willingness to repay debts on time. Capacity refers to a borrower's ability to repay debts, based on their income and expenses. While the other two C's (capital and collateral) are important, they are not as essential as character and capacity in determining a borrower's creditworthiness.

Question 16

The aggressive financing strategy is risky in two respects: the firm operates with a low level of ___________,and the firm has only a limited amount of ___________capacity.

Accepted Answer

An aggressive financing strategy typically involves borrowing heavily in the short-term to fund operations or investments. This can result in a low level of net working capital (current assets minus current liabilities), which is the amount of liquidity available to the company to meet its short-term obligations. Additionally, the firm may only have a limited amount of capacity (either in terms of physical assets or borrowing capacity) to continue financing operations if cash flow becomes tight or credit becomes less available. Therefore, the best choice is C - net working capital and short-term borrowing.

Question 17

A firm which uses the aggressive financing strategy plans to purchase a major fixed asset financedwith a loan. The most likely consequence of this action is

Accepted Answer

Aggressive financing strategy involves taking on more debt to finance business operations or purchases. Therefore, purchasing a major fixed asset through a loan will result in an increase in long-term debt. Choices B, C, and D are not likely consequences of aggressive financing strategy.

Question 18

A computerized inventory system that simulates needed materials requirements for the finishedproduct, and then compares production needs to available inventory balances to determine whenorders should be placed is the

Accepted Answer

The described system is a materials requirement planning (MRP) system, which is designed to manage inventory levels and production processes. The system calculates the necessary materials for production and compares them to inventory levels to determine when orders should be placed. This supports efficient inventory management and production planning. The other options (just-in-time system, red-line method, and basic economic order quantity system) do not fully capture the described system's capabilities and features.

Question 19

The General Chemical Company uses 150,000 gallons of hydrochloric acid per month. The cost of carrying the chemical in inventory is 50 cents per gallon per year, and the cost of ordering the chemical is $150 per order. The firm uses the chemical at a constant rate throughout the year. It takes 18 days to receive an order once it is placed. The reorder point is

Accepted Answer

The answer of The General Chemical Company uses 150,000 gallons...

Question 20

An increase in accounts receivable turnover due to an increase in collection efforts will

Accepted Answer

An increase in accounts receivable turnover indicates that the firm is collecting its receivables more quickly, which reduces the amount of money tied up in accounts receivable, thus decreasing the firm's marginal investments in accounts receivable.

Quiz 14: Working Capital and Management of Current Assets

In theory, the conservative financing strategy ignores

A firm with a cash conversion cycle of 175 days can stretch its average payment period from 30days to 45 days. This will result in a(n) _ in the cash conversion cycle of __ days.

When a portion of the firm's fixed assets are financed with current liabilities, the firm

A firm which uses the aggressive financing strategy plans to purchase raw materials in large quantities to take price discounts. The firm will finance the purchase with a loan. The most likely consequence of this action is

A firm has a cash conversion cycle of 60 days and average collection period of 40 days. The firm'soperating cycle is__________ days.

The conversion of current assets from inventory to receivables to cash provides the_ of cash used to pay the current liabilities, which represents a(n) _ of cash.

The___________ is an inventory technique that takes into account various operating and financial costs to determine the order quantity for a specific inventory item.

The economic order quantity (EOQ) is the order quantity which minimizes

Inventory insurance costs is an example of___________costs

One major risk a firm assumes in an aggressive financing strategy is

The ___________financing strategy requires the firm to pay interest on excess funds borrowed but not needed throughout the entire year.

The most important of the four C's of credit are

The aggressive financing strategy is risky in two respects: the firm operates with a low level of _,and the firm has only a limited amount of _capacity.

A firm which uses the aggressive financing strategy plans to purchase a major fixed asset financedwith a loan. The most likely consequence of this action is

A computerized inventory system that simulates needed materials requirements for the finishedproduct, and then compares production needs to available inventory balances to determine whenorders should be placed is the

An increase in accounts receivable turnover due to an increase in collection efforts will

Quiz 14: Working Capital and Management of Current Assets

In theory, the conservative financing strategy ignores

A firm with a cash conversion cycle of 175 days can stretch its average payment period from 30days to 45 days. This will result in a(n) ___________ in the cash conversion cycle of ____________ days.

When a portion of the firm's fixed assets are financed with current liabilities, the firm

A firm which uses the aggressive financing strategy plans to purchase raw materials in large quantities to take price discounts. The firm will finance the purchase with a loan. The most likely consequence of this action is

A firm has a cash conversion cycle of 60 days and average collection period of 40 days. The firm'soperating cycle is__________ days.

The conversion of current assets from inventory to receivables to cash provides the___________ of cash used to pay the current liabilities, which represents a(n) ___________ of cash.

The___________ is an inventory technique that takes into account various operating and financial costs to determine the order quantity for a specific inventory item.

The economic order quantity (EOQ) is the order quantity which minimizes

Inventory insurance costs is an example of___________costs

One major risk a firm assumes in an aggressive financing strategy is

The ___________financing strategy requires the firm to pay interest on excess funds borrowed but not needed throughout the entire year.

The most important of the four C's of credit are

The aggressive financing strategy is risky in two respects: the firm operates with a low level of ___________,and the firm has only a limited amount of ___________capacity.

A firm which uses the aggressive financing strategy plans to purchase a major fixed asset financedwith a loan. The most likely consequence of this action is

A computerized inventory system that simulates needed materials requirements for the finishedproduct, and then compares production needs to available inventory balances to determine whenorders should be placed is the

An increase in accounts receivable turnover due to an increase in collection efforts will

A firm with a cash conversion cycle of 175 days can stretch its average payment period from 30days to 45 days. This will result in a(n) _ in the cash conversion cycle of __ days.

The conversion of current assets from inventory to receivables to cash provides the_ of cash used to pay the current liabilities, which represents a(n) _ of cash.

The aggressive financing strategy is risky in two respects: the firm operates with a low level of _,and the firm has only a limited amount of _capacity.