Chapter 15: Working Capital Management
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1. Net operating working capital, defined as operating current assets minus the difference between current liabilities and
notes payable, is equal to the current ratio minus the quick ratio.
a. True
b. False
2. Net working capital is defined as current assets divided by current liabilities.
a. True
b. False
3. An increase in any current asset must be accompanied by an equal increase in some current liability.
a. True
b. False
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a. True
b. False
10. Shorter-term cash budgets (such as a daily cash budget for the next month) are generally used for actual cash control
while longer-term cash budgets (such as a monthly cash budgets for the next year) are generally used for planning
purposes.
a. True
b. False
11. Setting up a lockbox arrangement is one way for a firm to speed up the collection of payments from its customers.
a. True
b. False
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20. If a firm’s suppliers stop offering discounts, then its use of trade credit is more likely to increase than to decrease other
things held constant.
a. True
b. False
21. When deciding whether or not to take a trade discount, the cost of borrowing from a bank or other source should be
compared to the cost of trade credit to determine if the cash discount should be taken.
a. True
b. False
22. The calculated cost of trade credit can be reduced by paying late.
a. True
b. False
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28. A 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.
a. True
b. False
29. If 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.
a. True
b. False
30. Accruals arise automatically from a firm’s operations and are “free” capital in the sense that no explicit interest must
normally be paid on accrued liabilities.
a. True
b. False
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36. The relative profitability of a firm that employs an aggressive working capital financing policy will improve if the
yield curve changes from upward sloping to downward sloping.
a. True
b. False
37. If the yield curve is upward sloping, then short-term debt will be cheaper than long-term debt. Thus, if a firm’s CFO
expects the yield curve to continue to have an upward slope, this would tend to cause the current ratio to be relatively low,
other things held constant.
a. True
b. False
38. The risk to the firm of borrowing using short-term credit is usually greater than if it used long-term debt. Added risk
stems from (1) the greater variability of interest costs on short-term than long-term debt and (2) the fact that even if its
long-term prospects are good, the firm’s lenders may not be willing to renew short-term loans if the firm is temporarily
unable to repay those loans.
a. True
b. False
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a. True
b. False
42. The cash conversion cycle (CCC) combines three factors: The inventory conversion period, the receivables 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.
a. True
b. False
43. The target cash balance is typically (and logically) set so that it does not need to be adjusted for either seasonal
patterns or unanticipated random fluctuations.
a. True
b. False
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49. On 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.
a. True
b. False
50. 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.
a. True
b. False
51. Dimon Products’ sales are expected to be $5 million this year, with 90% on credit and 10% for cash. Sales 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.
a. True
b. False