Chapter 22—Managing the Firm’s Assets
TRUE/FALSE
1. Working capital management focuses on the attractiveness of long-run investment opportunities.
2. A firm’s working capital cycle refers to the flow of cash to purchase and sell fixed assets.
3. Management should be working continuously to shorten the working capital cycle.
4. The cash conversion period is the time period between ordering inventory and receiving cash for its
sale.
5. During the cash conversion period, the firm has the benefit of the financing provided by the supplier.
6. The longer the cash conversion period, the greater the potential for cash flow problems to exist for a
company.
7. In a healthy business, cash flow is typically even.
8. Managing cash flow well will give a company a competitive edge over their competitors.
9. A firm’s net cash flow may be determined by examining the company’s bank account.
10. Revenue is recorded at the time a sale is made, but cash receipts are recorded when money actually
flows into the firm.
11. Net cash flow should be equated with net profit.
12. Expenses occur when items are purchased; disbursements are the receipts made later for these
expenses.
13. Accounts receivable are sometimes called near cash because they can be converted to cash whenever a
business needs to do so.
14. Batching may hold up receipts of customer payments.
15. The average collection period is the number of days that a firm extends credit to its customers.
16. Days sales outstanding should be increased to increase accounts receivable conversion.
17. Pledging accounts receivable can indicate troublesome accounts.
18. Factoring account receivables involves the business selling its accounts receivable to a finance
company, and the finance company assumes any bad-debt risk.
19. The disadvantage of accounts receivable financing is the negative impact on cash flow.
20. Inventory is a concern only for manufacturing companies.
21. The last step in managing inventory is to discover how long inventory has been at the company.
22. Software programs can provide adequate assistance in inventory identification and control.
23. Days in inventory is equal to the number of days a firm waits to be paid for inventory that has been
sold.
24. Small business managers tend to overbuy inventory due to not understanding inventory management.
25. Improperly managed and uncontrolled stockpiling may greatly increase inventory-carrying costs and
place a heavy drain on the funds of a small business.
26. Inventory management and accounts payable management are intertwined.
27. In managing accounts payable, the principle of “Buy now, pay later” allows the small business to
postpone a payment.
28. The calculation for days in payables is very similar to days sales outstanding and days in inventory.
29. The percentage annual interest rate is the rate a business will pay by not taking a discount.
30. A company should pay accounts payable on Day 30 if funds are available.
31. The cash conversion period equals the days in inventory plus the days sales outstanding minus days in
payables.
32. Every component of working capital has two dimensions: time and money.
33. The goal of the cash conversion period is convert paid-for inventory and accounts receivables into cash
as quickly as possible.
34. The goal of the cash conversion period is to have as few days as possible in the process so as to be able
to finance other activities with working capital.
35. The management of a small firm’s long-term assets is called capital budgeting.
36. Capital budgeting primarily involves short-term decisions on the part of management.
37. Carrie’s decision to research a new product for her children’s party business is considered an example
of a capital budget decision.
38. Capital budgeting analysis helps managers make decisions about inventory investments.
39. A shortcoming of the accounting return on investment technique is that it is based on accounting
profits rather than cash flows received.
40. Accounting profits are identical to actual cash flows.
41. A advantage of the accounting return on investment technique is that it ignores the time value of
money.
42. Use of the accounting return on investment technique answers the question, “How long will it take to
recover the original investment outlay?”
43. The payback period technique measures how long it will take to recover the initial cash outlay and the
total amount of interest unearned over the payback period as an opportunity cost.
44. The payback period technique does not consider the time value of money.
45. Discounted cash flow techniques take into consideration that cash received today is more valuable than
cash received at a later date.
46. A firm’s cost of capital is simply the interest rate it must pay on its loans.
47. The internal rate of return method estimates the rate of return that can be expected from a
contemplated investment.
48. The extensive use of discounted cash flow tools by a small firm probably has more to do with the
nature of the small firm itself than it does with the owner’s desire to be perceived as a community–
minded business person..
49. A firm will have difficulty attracting investors if investments in the firm have internal rates of return
below an investor’s required rate of return.
50. Historically, few small business owners have relied on any type of quantitative analysis in making
capital budgeting decisions.
51. The under-capitalization and liquidity problems of a small firm can directly affect the decision-making
process, and survival often becomes the top priority.
MULTIPLE CHOICE
1. Working capital management
a.
deals with assigning cash values to employees.
b.
is not important to small businesses.
c.
involves managing short-term assets and sources of financing.
d.
involves managing long-term assets and liabilities.
2. Pearl has been asked by her boss to manage the company’s working capital. This means Pearl is now
in charge of:
a.
cash, fixed assets, and inventory.
b.
cash, accounts receivable, inventory, and accounts payable.
c.
cash, accounts receivable, and fixed assets.
d.
accounts receivable, accounts payable, and long-term investments.
3. The second step in the working capital cycle process is to
a.
order inventory.
b.
purchase or produce inventory for sale.
c.
receive inventory.
d.
sell the inventory for cash or credit.
4. The third day in the working capital time line is
a.
accounts payable are paid.
b.
collect accounts receivable.
c.
inventory is sold on credit.
d.
pay accounts payable.
5. The cash conversion period is the time between
a.
cash payment for inventory and collection of accounts receivable.
b.
placement of an order and cash payment for it.
c.
receipt of inventory and cash payment for it.
d.
sale of inventory and cash collection of accounts receivable.
6. Which statement is true about firms with a cash culture?
a.
Cash policies are not their first priority.
b.
They are less likely to have good vendor terms.
c.
Their metrics are murky.
d.
They need less working capital.
7. Lester is watching the bank balance decline throughout the month and hopes his company won’t run
out of money before it runs out of month. Lester is concerned about the net cash flow, which is:
a.
is the difference between cash inflows and outflows.
b.
is the difference between revenues and expenses.
c.
is the same as net profit.
d.
is the same as working capital plus inventory.
8. Cash deposits during a month less checks written during the same period equal
a.
net cash flow.
b.
net profit.
c.
net working capital.
d.
operating profit.
9. Net cash flow and net profit are
a.
opposites.
b.
different.
c.
identical.
d.
identical after adjustment for depreciation.
10. Louise has just sold merchandise to a small craft shop and has given the shop 30 days to pay the
invoice. She is at the beginning of:
a.
the life cycle of receivables
b.
the cash conversion period.
c.
the working capital management cycle.
d.
the inventory management cycle.
11. The number of days, on average, that a firm is extending credit to its customers is called
a.
cash conversion period
b.
days in inventory.
c.
days sales outstanding.
d.
cash flow cycle.
12. Accounts receivable financing
a.
allows small businesses to extend credit to customers.
b.
delays the time a company receives money from receivables.
c.
means borrowing money against the firm’s accounts receivable.
d.
is not a suggested practice due to the cost.
13. Accounts receivable financing might include
a.
using a bank, lender, or other finance company.
b.
lending money against receivables and aging accounts receivable.
c.
providing cash discounts and charging interest on delinquent accounts.
d.
giving a customer more time to pay.
14. Lucinda has decided to use a _______________ to speed up the processing of invoice payments.
a.
customer box.
b.
deposit box.
c.
lock box.
d.
mail box.
15. Tres has received a large contract and has taken a loan to buy inventory. Considering the timing of the
loan, Tres may be ____________ to complete the contract.
a.
selling short
b.
pledging receivables
c.
mortgaging
d.
factoring
16. Inventory is called an “evil” because:
a.
it ties up funds that are not actively productive.
b.
supply and demand can not be managed precisely with daily operations and is subject to
deterioration.
c.
it reduces cash when it is sold.
d.
it deteriorates so therefore a certain percent is lost to spoilage and waste.
17. Madeleine would like to know how long it takes, on average, from the time inventory is received until
it is sold. Madeleine is interested in the:
a.
days in credit.
b.
days in inventory.
c.
days in payables.
d.
days sales outstanding.
18. Nadine would like to improve the management of inventory in her company. One of her first
activities should be to:
a.
discount current items.
b.
discover how long items have been there.
c.
organize current items by skew number.
d.
purchase new items.
19. Which statement is true concerning inventory management programs?
a.
A yearly inventory for accounting purposed should be sufficient for most small
businesses.
b.
Keeping stock for “just in case” is suggested for customer satisfaction and is needed for
inventory.
c.
Software programs supplemented by a required physical inventory will assist in inventory
control.
d.
Slow moving items in a company’s inventory are limited concerns since they can be
marked down and sold.
20. Why do small business managers tend to overbuy inventory?
a.
They forecast greater demand than is realistic
b.
Vendor’s insist that prices may be going down.
c.
They don’t want to disappoint vendors and suppliers.
d.
Maximizing inventory is a good way to decrease taxes.
21. Accounts payable ____ cash available for the firm when payment is made.
a.
increase the amount of