Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)
A firm has a cash conversion cycle of 80 days, an average collection period of 25 days, and an
average age of inventory of 70 days. Its operating cycle is ________ days.
1)
A)
60
B)
105
C)
130
D)
95
2)
The purpose of managing current assets and current liabilities is to
2)
A)
achieve as low a level of current assets as possible.
B)
achieve as low a level of current liabilities as possible.
C)
achieve as high a level of current liabilities as possible.
D)
achieve a balance between profitability and risk that contributes to the firm’s value.
3)
Net working capital is defined as
3)
A)
current assets minus current liabilities.
B)
the portion of the firm’s assets financed with short–term funds.
C)
current liabilities minus current assets.
D)
a ratio measure of liquidity best used in cross–sectional analysis.
4)
The basic strategies that should be employed by the business firm in managing cash include all of
the following EXCEPT
4)
A)
turning over inventory as quickly as possible, avoiding stockouts.
B)
paying accounts payable as late as possible without damaging the firm’s credit rating.
C)
collecting accounts receivable as quickly as possible without damaging customer rapport.
D)
operating in a fashion that requires maximum cash.
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5)
An increase in the average collection period will result in ________ in the working capital cycle.
5)
A)
a decrease
B)
no change
C)
an undetermined change
D)
an increase
6)
The ________ of a firm is the amount of time that elapses from the point when the firm inputs
material and labor into the production process to the point when cash is collected from the sale of
the finished product that contains these production inputs.
6)
A)
average age of inventory
B)
average collection period
C)
working capital cycle
D)
cash conversion cycle
7)
A decrease in the inventory conversion period will result in ________ in the cash conversion cycle.
7)
A)
an increase
B)
an undetermined change
C)
a decrease
D)
no change
8)
The conversion of current assets from inventory to receivables to cash provides the ________ of
cash used to pay the current liabilities, which represents a(n) ________ of cash.
8)
A)
outflow; inflow
B)
inflow; source
C)
use; source
D)
source; use
9)
In general, the more net working capital a firm has,
9)
A)
the greater its risk.
B)
the less likely are creditors to lend to the firm.
C)
the lower its risk.
D)
the lower its level of long–term funds.
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10)
The ________ of a firm is the amount of time that elapses from the point when the firm makes an
outlay to purchase raw materials to the point when cash is collected from the sale of the finished
good.
10)
A)
average age of inventory
B)
cash conversion cycle
C)
cash turnover
D)
average collection period
11)
A firm has an average age of inventory of 60 days, an average collection period of 45 days, and an
average payment period of 30 days. The firm’s cash conversion cycle is ________ days.
11)
A)
135
B)
45
C)
15
D)
75
12)
The ________ is the time period that elapses from the point when the firm purchases raw materials
for manufacturing a finished good to the point when the finished good is sold.
12)
A)
cash turnover
B)
average collection period
C)
inventory conversion period
D)
cash conversion cycle
13)
A firm has an operating cycle of 120 days, an average collection period of 40 days, and an average
payment period of 30 days. The firm’s average age of inventory is ________ days.
13)
A)
50
B)
70
C)
80
D)
90
14)
A(n) ________ in current assets ________ net working capital, thereby ________ the risk of technical
insolvency.
14)
A)
decrease; decreases; reducing
B)
increase; decreases; increasing
C)
increase; increases; reducing
D)
decrease; increases; increasing
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15)
A firm purchased raw materials on account and paid for them within 30 days. The raw materials
were used in manufacturing a finished good sold on account 100 days after the raw materials were
purchased. The customer paid for the finished good 60 days later. The firm’s cash conversion cycle
is ________ days.
15)
A)
10
B)
130
C)
190
D)
70
16)
A firm has a working capital cycle of 170 days, an average payment period of 50 days, and an
inventory conversion period of 145 days. The firm’s average collection period is ________ days.
16)
A)
95
B)
120
C)
75
D)
25
17)
A firm has an average age of inventory of 90 days, an average collection period of 40 days, and an
average payment period of 30 days. The firm’s working capital cycle is ________ days.
17)
A)
130
B)
120
C)
70
D)
110
18)
In the EOQ model, if carrying costs increase while all other costs remain unchanged, the number of
orders placed would be expected to
18)
A)
decrease.
B)
remain unchanged.
C)
change without regard to carrying costs.
D)
increase.
19)
A firm could reduce its cash conversion cycle by
19)
A)
increasing the average collection period.
B)
increasing the average payment period.
C)
decreasing the average payment period.
D)
increasing the inventory conversion period.
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20)
A firm has an inventory conversion period of 20 days, an average collection period of 30 days, and
an average payment period of 60 days. The firm‘s cash conversion cycle, in terms of days, is
________
20)
A)
70
B)
110
C)
–10
D)
50
21)
The economic order quantity (EOQ) is the order quantity which minimizes
21)
A)
order quantity in units.
B)
the carrying costs per unit per period.
C)
the total inventory costs.
D)
the order cost per order.
22)
A firm with a cash conversion cycle of 175 days can stretch its average payment period from 30
days to 45 days. This will result in a(n )
22)
A)
decrease of 30 days in the cash conversion cycle.
B)
increase of 15 days in the cash conversion cycle.
C)
increase of 30 days in the cash conversion cycle.
D)
decrease of 15 days in the cash conversion cycle.
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.
23)
The cash conversion cycle is the amount of time that elapses from the point when the firm inputs
materials and labor into the production process to the point when cash is collected from the sale of
the resulting finished product.
23)
24)
A firm that is unable to pay its bills as they come due is technically insolvent.
24)
25)
Short–term financial management is concerned with management of the firm’s current assets and
current liabilities.
25)
5
26)
A positive cash conversion cycle means that the firm must obtain financing to support the cash
conversion cycle.
26)
27)
When a firm’s cash conversion cycle is negative, the firm should benefit by being able to use the
financing provided by the suppliers of its production inputs to help support aspects of the business
other than just the operating cycle.
27)
28)
The working capital cycle is the recurring transition of a firm’s working capital from cash to
inventories and inventories to receivables and back to cash.
28)
29)
The goal of short–term financial management is to manage each of the firm’s current assets and
current liabilities in order to achieve a balance between profitability and risk that contributes to the
firm’s value.
29)
30)
The cash conversion cycle is the total number of days in the operating cycle less the average
payment period for inputs to production.
30)
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Answer Key
Testname: C13
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