Question 1

Synchronization of cash flows is an important cash management technique, as proper synchronization can reduce the required cash balance and increase a firm's profitability.

Accepted Answer

Synchronization of cash flows involves aligning inflows and outflows of cash to optimize cash balance and reduce borrowing costs, which ultimately increases profitability.

Question 2

a firm has set up a revolving credit agreement with a bank, the risk to the firm of being unable to obtain funds when needed is lower than if it had an informal line of credit.

Accepted Answer

A revolving credit agreement with a bank means that the firm has a set amount of funds available to borrow at any time, which reduces the risk of being unable to obtain funds when needed compared to relying on an informal line of credit.

Question 3

relative profitability of a firm that employs an aggressive current asset financing policy will improve if the yield curve changes from upward sloping to downward sloping.

Accepted Answer

The answer of relative profitability of a firm that employs...

Question 4

Since receivables and payables both result from sales transactions, a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio.

Accepted Answer

The receivables-to-sales ratio and payables-to-sales ratio are not directly related. A firm may have a high receivables-to-sales ratio because its customers take a long time to pay, but this does not necessarily mean that the firm has a high payables-to-sales ratio. The firm may have negotiated longer payment terms with its suppliers or may be able to negotiate better terms due to its strong credit rating.

Question 5

Because money has time value, a cash sale is always more profitable than a credit sale.

Accepted Answer

The profitability of a cash sale versus a credit sale depends on various factors including the interest rate, the time period of the credit, and the opportunity cost of having cash now versus later. A credit sale could potentially be more profitable if the terms of the credit include a favorable interest rate or if the deferred payments allow the seller to invest the receivables in high-return opportunities.

Question 6

cash budget and the capital budget are handled separately, and although they are both important, they are developed completely independently of one another.

Accepted Answer

Cash budget and capital budget are interrelated and must be developed in coordination with each other as they both involve allocating financial resources. The cash budget is prepared to ensure that the company has enough cash to meet its daily operational needs, while the capital budget is prepared to make long-term investments in fixed assets such as property, plant, and equipment. A company cannot develop an effective capital budget without considering its cash position and vice versa.

Question 7

average, a firm collects checks totaling $250,000 per day It takes the firm approximately 4 days from the day the checks were mailed until they result in usable cash for the firm Assume that (1) a lockbox system could be employed which would reduce the cash conversion procedure to 2 1/2 days and (2) the firm could invest any additional cash generated at 6% after taxes The lockbox system would be a good buy if it costs $25,000 annually.

Accepted Answer

The answer of average, a firm collects checks totaling $250,000...

Question 8

firm's collection policy, i.e., the procedures it follows to collect accounts receivable, plays an important role in keeping its average collection period short, although too strict a collection policy can reduce profits due to lost sales.

Accepted Answer

A firm's collection policy plays an important role in keeping its average collection period short, but it should be balanced with the risk of losing potential customers due to a too strict policy.

Question 9

Uncertainty about the exact lives of assets prevents precise maturity matching in an ex post (i.e., after the fact) sense even though it is possible to match maturities on an ex ante (expected) basis.

Accepted Answer

Since we cannot predict the exact lives of assets, we can only match maturities based on our expectations. After the fact, we may find that our predictions were not accurate, which means that we cannot achieve precise maturity matching in an ex post sense.

Question 10

Since depreciation is a non-cash charge, it neither appears on nor has any effect on the cash budget Thus, if the depreciation charge for the coming year doubled or halved, this would have no effect on the cash budget.

Accepted Answer

The answer of Since depreciation is a non-cash charge, it...

Question 11

a zero-growth firm, it is possible to increase the percentage of sales that are made on credit and still keep accounts receivable at their current level, provided the firm can shorten the length of its collection period sufficiently.

Accepted Answer

If the firm can shorten the length of its collection period, it will be able to receive payments from credit sales faster, which will allow it to maintain its current level of accounts receivable even if it increases the percentage of sales made on credit. This assumes no other changes or factors impacting accounts receivable.

Question 12

promissory note is the document signed when a bank loan is executed, and it specifies financial aspects of the loan.

Accepted Answer

A promissory note is indeed a document signed by the borrower when a bank loan is executed, which outlines the financial terms and conditions of the loan.

Question 13

longer its customers normally hold inventory, the longer the credit period supplier firms normally offer Still, suppliers have some flexibility in the credit terms they offer If a supplier lengthens the credit period offered, this will shorten the customer's cash conversion cycle but lengthen the supplier firm's own CCC.

Accepted Answer

This statement is true. Suppliers can adjust their credit terms to affect the cash conversion cycle of their customers, but it will also impact their own CCC. A longer credit period offered to customers will reduce their CCC but increase the supplier's CCC.

Question 14

firm that follows an aggressive current asset financing approach uses primarily short-term credit and thus is more exposed to an unexpected increase in interest rates than is a firm that uses long-term capital and thus follows a conservative financing policy.

Accepted Answer

A firm that relies on short-term credit to finance its current assets will be more vulnerable to fluctuations in interest rates compared to a firm that uses long-term capital. This is because short-term loans need to be renewed frequently, which means the interest rates can change frequently. Long-term loans, on the other hand, have a fixed interest rate, which brings stability to the firm's financial structure. Thus, the statement is true.

Question 15

line of credit can be either a formal or an informal agreement between a borrower and a bank regarding the maximum amount of credit the bank will extend to the borrower during some future period, assuming the borrower maintains its financial strength.

Accepted Answer

This statement correctly defines what a line of credit is, and it can be either a formal or informal agreement between a borrower and a bank. The maximum amount of credit will be extended assuming the borrower maintains its financial strength.

Question 16

firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption that both cash receipts and cash payments occur uniformly over the month but in reality receipts are concentrated at the beginning of each month.

Accepted Answer

If a firm assumes that cash receipts and payments occur uniformly over the month but in reality, receipts are concentrated at the beginning of the month, it will overstate its peak borrowing needs because it has not taken into account the uneven cash flow pattern. This could lead to the firm taking on unnecessary debt or borrowing more than it needs.

Question 17

maturity matching, or "self-liquidating," approach to financing involves obtaining the funds for permanent current assets with a combination of long-term capital and short-term capital that varies depending on the level of interest rates When short-term rates are relatively high, short-term assets will be financed with long-term debt to reduce costs.

Accepted Answer

The maturity matching approach involves financing short-term assets with short-term liabilities and long-term assets with long-term liabilities, not varying based on interest rates.

Question 18

Dimon Products' sales are expected to be $5 million this year, with 90% on credit and 10% for cashSales are expected to grow at a stable, steady rate of 10% annually in the future Dimon's accounts receivable balance will remain constant at the current level, because the 10% cash sales can be used to support the 10% growth rate, other things held constant.

Accepted Answer

If sales grow at a steady rate of 10%, the accounts receivable balance would also be expected to grow at a similar rate if credit sales continue to account for 90% of sales. Therefore, it is unlikely that the accounts receivable balance would remain constant at the current level.

Question 19

firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption that both cash receipts and cash payments occur uniformly over the month but in reality payments are concentrated at the beginning of each month.

Accepted Answer

The answer of firm's peak borrowing needs will probably be...

Question 20

cash conversion cycle (CCC) combines three factors: The inventory conversion period, the average collection period, and the payables deferral period, and its purpose is to show how long a firm must finance its working capital Other things held constant, the shorter the CCC, the more effective the firm's working capital management.

Accepted Answer

This is a true statement. A shorter cash conversion cycle means that the firm is able to quickly turn its inventory into sales, collect those sales promptly, and defer payments to suppliers, which leads to a more effective management of working capital.

Quiz 21: Working Capital