Question 1

Which of the following measures the average time it takes a firm to complete its operating cycle after deducting the days supported by trade credit and delayed payroll financing?

Accepted Answer

The cash conversion cycle measures the average time it takes for a firm to convert its inventory into cash, and then pay off its accounts payable. It considers both the inventory-to-sale conversion period and the purchase-to-payment conversion period, but also deducts the days supported by trade credit and delayed payroll financing. Therefore, choice D is the correct answer.

Question 2

Calculate the inventory-to-sale conversion period based on the following information: average inventories = $120,000; average receivables = $90,000; average payables = $40,000; cost of goods sold = $182,500; and net sales = $365,000.

Accepted Answer

Inventory-to-sale conversion period = (Average inventories ÷ Cost of goods sold) × 365

= ($120,000 ÷ $182,500) × 365

= 240 days

Therefore, the correct choice is A) 240 days.

Question 3

Which of the following conversion periods is not a component in the cash conversion cycle?

Accepted Answer

The fixed assets-to-usage conversion period is not a component in the cash conversion cycle because it refers to the time it takes to convert fixed assets, such as machinery or equipment, into productive use. The cash conversion cycle focuses on the process of converting inventory into cash, so it includes the inventory-to-sale conversion period, the sale-to-cash conversion period, and the purchase-to-payment conversion period.

Question 4

The cash conversion cycle measures the time it takes to pay off the principal on a loan.

Accepted Answer

The cash conversion cycle measures the time it takes for a company to convert its investments in inventory and other resources into cash flow from sales, and then use that cash flow to pay off its accounts payable and other obligations. It is a measure of a company's liquidity and efficiency in managing its cash flow.

Question 5

Seed financing is generally associated with which of the following life cycle stages?

Accepted Answer

Seed financing is typically associated with the development stage, where initial funding is used to develop a business idea or product before the company is fully operational.

Question 6

A firm would not be considered to be an early-stage venture when it reaches which of the following life cycle stages?

Accepted Answer

An early-stage venture is typically in the startup stage or the survival stage, where the business is still in the process of establishing itself and building a customer base. Once a firm reaches the early-maturity stage, it has already gone beyond the initial startup phase and is starting to generate consistent profits and establish a stable position in the market, which means it is no longer considered an early-stage venture.

Question 7

The cash conversion cycle is the amount of time taken to buy materials and produce a finished good plus the time needed to collect sales made on credit minus the time taken to pay suppliers for purchases on credit.

Accepted Answer

The cash conversion cycle (CCC) is a financial metric that measures the length of time it takes for a business to convert its investments in inventory and other resources into cash flow from sales. It is calculated by adding the number of days a company takes to sell its inventory, the number of days it takes to collect accounts receivables, and then subtracting the number of days it takes to pay its accounts payable.

Question 8

The cash conversion cycle refers to the time it takes to convert a sale into net income.

Accepted Answer

The cash conversion cycle refers to the time it takes to convert cash spent on inventory back into cash. It includes the time it takes to sell inventory, collect accounts receivable, and pay accounts payable. It is a measure of a company's efficiency in managing its working capital.

Question 9

Which of the following measures the average days of sales committed to the extension of trade credit?

Accepted Answer

The sale-to-cash conversion period measures the average number of days a company takes to collect cash from sales, which directly relates to the extension of trade credit to customers.

Question 10

The sale-to-cash conversion period is calculated by dividing average revenues by net sales per day.

Accepted Answer

The sale-to-cash conversion period is calculated by dividing the number of days in a period (usually a year) by the accounts receivable turnover ratio. It is not calculated by dividing average revenues by net sales per day.

Question 11

Which of the following measures the average time from purchase of materials and labor to actual cash payment?

Accepted Answer

The purchase-to-payment conversion period measures the length of time it takes a company to convert its purchases of materials and labor into actual cash payments. A longer conversion period indicates that a company is taking longer to pay its suppliers, which can negatively impact relationships and potentially result in a reduction in credit terms.

Question 12

A venture's operating cycle is the same as its cash conversion cycle.

Accepted Answer

The operating cycle is the time it takes for a company to receive inventory, sell the inventory, and collect payment from customers. The cash conversion cycle, on the other hand, includes the additional time it takes to pay suppliers for the inventory purchased. Therefore, the cash conversion cycle is longer than the operating cycle.

Question 13

The sum of the inventory-to-sale conversion period and the purchase-to-payment conversion period minus the sale-to-cash conversion period is called the cash conversion cycle.

Accepted Answer

The answer of The sum of the inventory-to-sale conversion period...

Question 14

Which of the following is not considered to be an operating schedule?

Accepted Answer

A balance sheet schedule is a summary of a company's financial position at a specific date, but it is not an operating schedule as it does not relate to the day-to-day operations of a business. Operating schedules usually include sales, purchases, wages and commissions, and other activities related to the primary operations of the business.

Question 15

The process of examining exit opportunities is generally associated with which one of the following life cycle stages?

Accepted Answer

The answer of The process of examining exit opportunities is...

Question 16

A venture's cash conversion cycle will decrease if the purchase-to-payment conversion period increases.

Accepted Answer

The answer of A venture's cash conversion cycle will decrease...

Question 17

Which of the following is not part of the operating cycle?

Accepted Answer

The operating cycle involves the time it takes to produce and sell products (A and B) and the time it takes to collect receivables (D), but not the time it takes to pay suppliers (C), which is part of the cash conversion cycle.

Question 18

Which of the following is measured by dividing the average daily cost of goods sold into the average inventories?

Accepted Answer

Dividing the average daily cost of goods sold into the average inventories gives the inventory-to-sale conversion period, which measures the number of days it takes for a company to convert its inventory into sales.

Question 19

Which of the following conversion periods operates to reduce the length of the cash conversion cycle?

Accepted Answer

The answer of Which of the following conversion periods operates...

Question 20

First-round financing is generally associated with which of the following life cycle stages?

Accepted Answer

The answer of First-round financing is generally associated with which...

Quiz 6: Managing Cash Flow