Question 1

Albrecht Inc. is a no-growth firm whose sales fluctuate seasonally, causing total assets to vary from $320,000 to $410,000, but fixed assets remain constant at $260,000. If the firm follows a maturity matching (or moderate) working capital financing policy, what is the most likely total of long-term debt plus equity capital?

Accepted Answer

The answer of Albrecht Inc. is a no-growth firm whose...

Question 2

Data on Nathan Enterprises for the most recent year are shown below, along with the days sales outstanding of the firms against which it benchmarks. The firm's new CFO believes that the company could reduce its receivables enough to reduce its DSO to the benchmarks' average. If this were done, by how much would receivables decline? Use a 365-day year.

Accepted Answer

The answer of Data on Nathan Enterprises for the most...

Question 3

Brothers Breads has the following data. What is the firm's cash conversion cycle?

Accepted Answer

The answer of Brothers Breads has the following data. What...

Question 4

The 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

If the supplier lengthens the credit period offered, this will allow the customer to hold inventory for a longer time, which will shorten the customer's cash conversion cycle. However, the supplier firm will have to wait longer to receive payment from the customer, which will lengthen their own CCC.

Question 5

Frosty Corporation has the following data, in thousands. Assuming a 365-day year, what is the firm's cash conversion cycle?

Accepted Answer

The answer of Frosty Corporation has the following data, in...

Question 6

The 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 statement accurately describes the purpose and impact of the cash conversion cycle on a firm's working capital management.

Question 7

Thornton Universal Sales' cost of goods sold (COGS) average $2,000,000 per month, and it keeps inventory equal to 50% of its monthly COGS on hand at all times. Using a 365-day year, what is its inventory conversion period?

Accepted Answer

The answer of Thornton Universal Sales' cost of goods sold...

Question 8

Other things held constant, which of the following would tend to reduce the cash conversion cycle?

Accepted Answer

The answer of Other things held constant, which of the...

Question 9

Mark's Manufacturing's average age of accounts receivable is 45 days, the average age of accounts payable is 40 days, and the average age of inventory is 69 days. Assuming a 365-day year, what is the length of its cash conversion cycle?

Accepted Answer

Cash conversion cycle = Average age of inventory + Average age of accounts receivable - Average age of accounts payable 
= 69 + 45 - 40 
= 74 days

Question 10

Fireside Inc. has the following data. What is the firm's cash conversion cycle?

Accepted Answer

The answer of Fireside Inc. has the following data. What...

Question 11

Marshall Inc. recently hired your consulting firm to improve the company's performance. It has been highly profitable but has been experiencing cash shortages due to its high growth rate. As one part of your analysis, you want to determine the firm's cash conversion cycle. Using the following information and a 365-day year, what is the firm's present cash conversion cycle?

Accepted Answer

The answer of Marshall Inc. recently hired your consulting firm...

Question 12

Data on Mertz Co. for the most recent year are shown below, along with the payables deferral period (PDP) for the firms against which it benchmarks. The firm's new CFO believes that the company could delay payments enough to increase its PDP to the benchmarks' average. If this were done, by how much would payables increase? Use a 365-day year.

Accepted Answer

The answer of Data on Mertz Co. for the most...

Question 13

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 reduces the cash conversion cycle (CCC) because it increases the amount of time cash remains with the firm before it needs to pay its suppliers, thus shortening the cycle.

Question 14

Data on Liu Inc. for the most recent year are shown below, along with the inventory conversion period (ICP) of the firms against which it benchmarks. The firm's new CFO believes that the company could reduce its inventory enough to reduce its ICP to the benchmarks' average. If this were done, by how much would inventories decline? Use a 365-day year.

Accepted Answer

The answer of Data on Liu Inc. for the most...

Question 15

Which of the following actions would be likely to shorten the cash conversion cycle?

Accepted Answer

Shortening the manufacturing process will result in quicker conversion of inventory to finished goods, which will reduce the amount of time inventory sits on the shelves, thereby shortening the cash conversion cycle.

Question 16

Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable securities?

Accepted Answer

When a firm is going from its slack season to its peak sales season, it is more likely to need cash to finance increases in receivables and inventories, rather than increasing its holdings of short-term marketable securities.

Question 17

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

A reduction in DSO means that the firm is collecting its accounts receivable more quickly, which should shorten its cash conversion cycle, not lengthen it.

Question 18

Which of the following statements is CORRECT?

Accepted Answer

The statement correctly explains that despite historical trends, heavy use of short-term debt is considered aggressive due to the risks associated with such financing. The other statements are either incorrect or incomplete.

Question 19

Whaley & Whaley has the following data. What is the firm's cash conversion cycle?

Accepted Answer

Cash conversion cycle = Days inventory outstanding + Days sales outstanding - Days payable outstanding
Days inventory outstanding = (365/COGS)*avg. inventory = (365/1,900)*600 = 115.26 days
Days sales outstanding = (365/revenue)*avg. accounts receivable = (365/7,600)*900 = 42.24 days
Days payable outstanding = (365/purchases)*avg. accounts payable = (365/1,900)*200 = 38.16 days
Therefore, cash conversion cycle = 115.26 + 42.24 - 38.16 = 34.34 days, which rounds to 34 days.

Question 20

Which of the following actions should Reece Windows take if it wants to reduce its cash conversion cycle?

Accepted Answer

Reece Windows can reduce its cash conversion cycle by taking steps to reduce the DSO (days sales outstanding). This would mean collecting payment from customers more quickly, which would increase the cash available to the company and reduce the amount of time it takes for cash to cycle through the business. Options B, C, D, and E are not likely to have a significant impact on the cash conversion cycle.

Quiz 16: Working Capital Management