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Exam 16: Working Capital

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Question 51

True/False

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Shorter-term cash budgets--say a daily cash budget for the next month--are generally used for actual cash control while longer-term cash budgets--say monthly cash budgets for the next year--are generally used for planning purposes.

A) True
B) False

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Question 52

Multiple Choice

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firm buys on terms of 2/8, net 45 days, it does not take discounts, and it actually pays after 58 days.What is the effective annual percentage cost of its non-free trade credit? (Use a 365-day year.)

A) 14.34%
B) 15.10%
C) 15.89%
D) 16.69%
E) 17.52%

F) B) and D)
G) A) and B)

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Question 53

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Funds from short-term loans can generally be obtained faster than from long-term loans for two reasons: (1) when lenders consider long-term loans they must make a more thorough evaluation of the borrower's financial health, and (2) long-term loan agreements are more complex.

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.

Which of the following statements is most consistent with efficient inventory management? The firm has a

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

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.

firm's 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?

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

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

informal line of credit and a revolving credit agreement are similar except that the line of credit creates a legal obligation for the bank and thus is a more reliable source of funds for the borrower.

Edison Inc.has annual sales of $36,500,000, or $100,000 a day on a 365-day basis.The firm's cost of goods sold is 75% of sales.On average, the company has $9,000,000 in inventory and $8,000,000 in accounts receivable.The firm is looking for ways to shorten its cash conversion cycle.Its CFO has proposed new policies that would result in a 20% reduction in both average inventories and accounts receivable.She also anticipates that these policies would reduce sales by 10%, while the payables deferral period would remain unchanged at 35 days.What effect would these policies have on the company's cash conversion cycle? Round to the nearest whole day.

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.

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

Zarruk Construction's DSO is 50 days (on a 365-day basis) , accounts receivable are $100 million, and its balance sheet shows inventory of $125 million.What is the inventory turnover ratio?

of the advantages of short-term debt financing is that firms can obtain short-term credit more quickly than long-term credit.

Which of the following statements is NOT CORRECT?

Short-term marketable securities are held for two separate and distinct purposes: (1) to provide liquidity as a substitute for cash and (2) as a non-operating investment.Marketable securities held while awaiting reinvestment are not available for liquidity purposes.

firm constructing a new manufacturing plant and financing it with short-term loans, which are scheduled to be converted to first mortgage bonds when the plant is completed, would want to separate the construction loan from its current liabilities associated with working capital when calculating net working capital.

a firm busy on terms of 2/10 net 30, it should pay as early as possible during the discount period.