CHAPTER 15: WORKING CAPITAL MANAGEMENT
1.
Net operating working capital, defined as 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
4.
The three alternative current asset investment policies discussed in the text differ regarding the size of current asset
holdings.
a.
True
b.
False
5.
The concept of permanent current assets reflects the fact that some components of current assets do not shrink to
zero even when a business is at its seasonal or cyclical low. Thus, permanent current assets represent a minimum
level of current assets that must be financed.
a.
True
b.
False
6.
A conservative financing approach to working capital will result in permanent current assets and some seasonal
current assets being financed using long-term securities.
a.
True
b.
False
7.
Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term
debt is considered to be an aggressive current asset financing strategy because of the inherent risks of using short-
term financing.
a.
True
b.
False
8.
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) and cause a deterioration in its cash position.
a.
True
b.
False
9.
Other things held constant, if a firm “stretches” (i.e., delays paying) its accounts payable, this will lengthen its cash
conversion cycle (CCC).
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
12.
Inventory management is largely self-contained in the sense that very little coordination among the sales,
purchasing, and production personnel is required for successful inventory management.
a.
True
b.
False
13.
The average accounts receivables balance is a function of both the volume of credit sales and the days sales
outstanding.
a.
True
b.
False
14.
The four primary elements in a firm‘s credit policy are (1) credit standards, (2) discounts offered, (3) credit period,
and (4) collection policy.
a.
True
b.
False
15.
Changes in a firm‘s collection policy can affect sales, working capital, and profits.
a.
True
b.
False
16.
Not taking cash discounts is costly, and as a result, firms that do not take them are usually those that are performing
poorly and have inadequate cash balances.
a.
True
b.
False
17.
If a firm buys on terms of 2/10, net 30, it should pay as early as possible during the discount period to lower its cost
of trade credit.
a.
True
b.
False
18.
Trade credit can be separated into two components: free trade credit, which is credit received after the discount
period ends, and costly trade credit, which is the cost of discounts not taken.
a.
True
b.
False
19.
As a rule, managers should try to always use the free component of trade credit but should use the costly
component only if the cost of this credit is lower than the cost of credit from other sources.
a.
True
b.
False
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
23.
The calculated cost of trade credit for a firm that buys on terms of 2/10, net 30, is lower (other things held constant)
if the firm plans to pay in 40 days than in 30 days.
a.
True
b.
False
24.
One of the effects of ceasing to take trade credit discounts is that the firm’s accounts payable will rise, other things
held constant.
a.
True
b.
False
25.
“Stretching” accounts payable is a widely accepted, entirely ethical, and costless financing technique, which is
particularly useful when suppliers‘ production plants are at full capacity.
a.
True
b.
False
26.
An 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 than the revolving credit
agreement.
a.
True
b.
False
27.
The maturity of most bank loans is short term. Bank loans to businesses are frequently made as 90-day notes which
are often rolled over, or renewed, rather than repaid when they mature. However, if the borrower‘s financial
situation deteriorates, then the bank may refuse to roll over the loan.
a.
True
b.
False
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
31.
Accruals are “spontaneous” funds arising automatically from a firm’s operations, but unfortunately, due to law and
economic forces, firms have little control over the level of these accounts.
a.
True
b.
False
32.
The facts that (1) no explicit interest is paid on accruals and (2) the firm can vary the level of these accounts at will
makes them an attractive source of funding to meet the firm’s working capital needs.
a.
True
b.
False
33.
Uncertainty about the exact lives of assets prevents precise maturity matching in an ex post (i.e., after the fact)
sense even though it is possible to match maturities on an ex ante (expected) basis.
a.
True
b.
False
34.
The maturity matching, or “self–liquidating,” approach to financing involves obtaining the funds for permanent
current assets with a combination of long-term capital and short-term capital that varies depending on the level of
interest rates. When short-term rates are relatively high, short-term assets will be financed with long-term debt to
reduce costs.
a.
True
b.
False
35.
A firm that follows an aggressive working capital financing approach uses primarily short-term credit and thus is
more exposed to an unexpected increase in interest rates than is a firm that uses long-term capital and thus follows
a conservative financing policy.
a.
True
b.
False
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
39.
Long-term loan agreements always contain provisions, or covenants, that constrain the firm‘s future actions. Short-
term credit agreements are just as restrictive in order to protect the interest of the lender.
a.
True
b.
False
40.
A 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.
True
b.
False
41.
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.
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
44.
A 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.
a.
True
b.
False
45.
A 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 receipts are concentrated
at the beginning of each month.
a.
True
b.
False
46.
The cash budget and the capital budget are handled separately, and although they are both important, they are
developed completely independently of one another.
a.
True
b.
False
47.
Since depreciation is a non-cash charge, it neither appears on nor has any effect on the cash budget. Thus, if the
depreciation charge for the coming year doubled or halved, this would have no effect on the cash budget.
a.
True
b.
False
48.
Synchronization of cash flows is an important cash management technique, as proper synchronization can reduce
the required cash balance and increase a firm‘s profitability.
a.
True
b.
False
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
52.
For a zero-growth firm, it is possible to increase the percentage of sales that are made on credit and still keep
accounts receivable at their current level, provided the firm can shorten the length of its collection period
sufficiently.
a.
True
b.
False
53.
A 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.
a.
True
b.
False
54.
Because money has time value, a cash sale is always more profitable than a credit sale.
a.
True
b.
False
55.
If a firm sells on terms of 2/10, net 30 days, and its DSO is 28 days, then the fact that the 28-day DSO is less than
the 30-day credit period tell us that the credit department is functioning efficiently and there are no past due
accounts.
a.
True
b.
False
56.
If a firm switched from taking trade credit discounts to paying on the net due date, this might cost the firm some
money, but such a policy would probably have only a negligible effect on the income statement and no effect
whatever on the balance sheet.
a.
True
b.
False
57.
If a profitable firm finds that it simply must “stretch” its accounts payable, then this suggests that it is
undercapitalized, i.e., that it needs more working capital to support its operations.
a.
True
b.
False
58.
If one of your firm’s customers is “stretching” its accounts payable, this may be a nuisance but it does not represent
a real financial cost to your firm as long as the customer periodically pays off its entire balance.
a.
True
b.
False
59.
The prime rate charged by big money center banks at any one time is likely to vary greatly (for example, as much
as 2 to 4 percentage points) across banks due to banks‘ ability to differentiate themselves and because different
banks operate in different parts of the country.
a.
True
b.
False
60.
A revolving credit agreement is a formal line of credit. The firm must generally pay a fee on the unused balance of
the committed funds to compensate the bank for the commitment to extend those funds.
a.
True
b.
False
61.
Other things held constant, which of the following will cause an increase in net working capital?
a.
Cash is used to buy marketable securities.
b.
A cash dividend is declared and paid.
c.
Merchandise is sold at a profit, but the sale is on credit.
d.
Long-term bonds are retired with the proceeds of a preferred stock issue.
e.
Missing inventory is written off against retained earnings.
62.
Firms generally choose to finance temporary current assets with short-term debt because
a.
matching the maturities of assets and liabilities reduces risk under some circumstances, and also because
short-term debt is often less expensive than long-term capital.
b.
short-term interest rates have traditionally been more stable than long-term interest rates.
c.
a firm that borrows heavily on a long-term basis is more apt to be unable to repay the debt than a firm that
borrows short term.
d.
the yield curve is normally downward sloping.
e.
short-term debt has a higher cost than equity capital.
63.
Helena Furnishings wants to reduce its cash conversion cycle. Which of the following actions should it take?
a.
Increases average inventory without increasing sales.
b.
Take steps to reduce the DSO.
c.
Start paying its bills sooner, which would reduce the average accounts payable but not affect sales.
d.
Sell common stock to retire long-term bonds.
e.
Sell an issue of long-term bonds and use the proceeds to buy back some of its common stock.
64.
A lockbox plan is
a.
used to protect cash, i.e., to keep it from being stolen.
b.
used to identify inventory safety stocks.
c.
used to slow down the collection of checks our firm writes.
d.
used to speed up the collection of checks received.
e.
used primarily by firms where currency is used frequently in transactions, such as fast food restaurants, and
less frequently by firms that receive payments as checks.
65.
A lockbox plan is most beneficial to firms that
a.
have suppliers who operate in many different parts of the country.
b.
have widely dispersed manufacturing facilities.
c.
have a large marketable securities portfolio, and cash, to protect.
d.
receive payments in the form of currency, such as fast food restaurants, rather than in the form of checks.
e.
have customers who operate in many different parts of the country.
66.
Which of the following is NOT commonly regarded as being a credit policy variable?
a.
Credit period.
b.
Collection policy.
c.
Credit standards.
d.
Cash discounts.
e.
Payments deferral period.
67.
Swim Suits Unlimited is in a highly seasonal business, and the following summary balance sheet data show its
assets and liabilities at peak and off-peak seasons (in thousands of dollars):
Peak
Off-Peak
Cash
$ 50
$ 30
Marketable securities
0
20
Accounts receivable
40
20
Inventories
100
50
Net fixed assets
00
500
Total assets
$690
$620
$ 30
$ 10
50
0
300
300
310
310
$690
$620
From this data we may conclude that
a.
Swim Suits‘ current asset financing policy calls for exactly matching asset and liability maturities.
b.
Swim Suits‘ current asset financing policy is relatively aggressive; that is, the company finances some of its
permanent assets with short-term discretionary debt.
c.
Swim Suits follows a relatively conservative approach to current asset financing; that is, some of its short-
term needs are met by permanent capital.
d.
Without income statement data, we cannot determine the aggressiveness or conservatism of the company’s
current asset financing policy.
e.
Without cash flow data, we cannot determine the aggressiveness or conservatism of the company’s current
asset financing policy.
68.
Which of the following statements is CORRECT?
a.
Net working capital is defined as current assets minus the difference between current liabilities and notes
payable, and any increase in the current ratio automatically indicates that net working capital has increased.
b.
Although short-term interest rates have historically averaged less than long-term rates, the heavy use of
short-term debt is considered to be an aggressive strategy because of the inherent risks associated with using
short–term financing.
c.
If a company follows a policy of “matching maturities,” this means that it matches its use of common stock
with its use of long-term debt as opposed to short-term debt.
d.
Net working capital is defined as current assets minus the difference between current liabilities and notes
payable, and any decrease in the current ratio automatically indicates that net working capital has decreased.
e.
If a company follows a policy of “matching maturities,” this means that it matches its use of short–term debt
with its use of long-term debt.
69.
Other things held constant, which of the following would tend to reduce the cash conversion cycle?
a.
Carry a constant amount of receivables as sales decline.
b.
Place larger orders for raw materials to take advantage of price breaks.
c.
Take all discounts that are offered.
d.
Continue to take all discounts that are offered and pay on the net date.
e.
Offer longer payment terms to customers.
70.
Which of the following actions would be likely to shorten the cash conversion cycle?
a.
Adopt a new manufacturing process that speeds up the conversion of raw materials to finished goods from
20 days to 10 days.
b.
Change the credit terms offered to customers from 3/10, net 30 to 1/10, net 50.
c.
Begin to take discounts on inventory purchases; we buy on terms of 2/10, net 30.
d.
Adopt a new manufacturing process that saves some labor costs but slows down the conversion of raw
materials to finished goods from 10 days to 20 days.
e.
Change the credit terms offered to customers from 2/10, net 30 to 1/10, net 60.
71.
Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?
a.
Payment lags.
b.
Payment for plant construction.
c.
Cumulative cash.
d.
Repurchases of common stock.
e.
Writing off bad debts.
72.
Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?
a.
Payments lags.
b.
Depreciation.
c.
Cumulative cash.
d.
Repurchases of common stock.
e.
Payment for plant construction.
73.
Which of the following statements concerning the cash budget is CORRECT?
a.
Depreciation expense is not explicitly included, but depreciation’s effects are reflected in the estimated tax
payments.
b.
Cash budgets do not include financial items such as interest and dividend payments.
c.
Cash budgets do not include cash inflows from long-term sources such as the issuance of bonds.
d.
Changes that affect the DSO do not affect the cash budget.
e.
Capital budgeting decisions have no effect on the cash budget until projects go into operation and start
producing revenues.
74.
Which of the following items should a company report directly in its monthly cash budget?
a.
Its monthly depreciation expense.
b.
Cash proceeds from selling one of its divisions.
c.
Accrued interest on zero coupon bonds that it issued.
d.
New shares issued in a stock split.
e.
New shares issued in a stock dividend.
75.
Which of the following statements is CORRECT?
a.
Shorter-term cash budgets, in general, are used primarily for planning purposes, while longer-term budgets
are used for actual cash control.
b.
The cash budget and the capital budget are developed separately, and although they are both important to the
firm, one does not affect the other.
c.
Since depreciation is a non-cash charge, it neither appears on nor has any effect on the cash budget.
d.
The target cash balance should be set such that it need not be adjusted for seasonal patterns and
unanticipated fluctuations in receipts, although it should be changed to reflect long-term changes in the firm‘s
operations.
e.
The typical cash budget reflects interest paid on loans as well as income from the investment of surplus
cash. These numbers, as well as other items on the cash budget, are expected values; hence, actual results
might vary from the budgeted amounts.
76.
Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable
securities?
a.
The firm must make a known future payment, such as paying for a new plant that is under construction.
b.
The firm is going from its peak sales season to its slack season, so its receivables and inventories will
experience a seasonal decline.
c.
The firm is going from its slack season to its peak sales season, so its receivables and inventories will
experience seasonal increases.
d.
The firm has just sold long-term securities and has not yet invested the proceeds in operating assets.
e.
The firm just won a product liability suit one of its customers had brought against it.
77.
Which of the following statement completions is CORRECT? If the yield curve is upward sloping, then the
marketable securities held in a firm’s portfolio, assumed to be held for emergencies, should
a.
consist mainly of long-term securities because they pay higher rates.
b.
consist mainly of short-term securities because they pay higher rates.
c.
consist mainly of U.S. Treasury securities to minimize interest rate risk.
d.
consist mainly of short-term securities to minimize interest rate risk.
e.
be balanced between long- and short-term securities to minimize the adverse effects of either an upward or
a downward trend in interest rates.
78.
Which of the following statements is most consistent with efficient inventory management? The firm has a
a.
below-average inventory turnover ratio.
b.
low incidence of production schedule disruptions.
c.
below-average total assets turnover ratio.
d.
relatively high current ratio.
e.
relatively low DSO.
79.
Which of the following statements is CORRECT?
a.
A firm that makes 90% of its sales on credit and 10% for cash is growing at a constant rate of 10%
annually. Such a firm will be able to keep its accounts receivable at the current level, since the 10% cash
sales can be used to finance the 10% growth rate.
b.
In managing a firm‘s accounts receivable, it is possible to increase credit sales per day yet still keep accounts
receivable fairly steady, provided the firm can shorten the length of its collection period (its DSO)
sufficiently.
c.
Because of the costs of granting credit, it is not possible for credit sales to be more profitable than cash
sales.
d.
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.
e.
Other things held constant, if a firm can shorten its DSO, this will lead to a higher current ratio.
80.
Which of the following statements is CORRECT?
a.
Other things held constant, the higher a firm‘s days sales outstanding (DSO), the better its credit department.
b.
If a firm that sells on terms of net 30 changes its policy to 2/10, net 30, and if no change in sales volume
occurs, then the firm‘s DSO will probably increase.
c.
If a firm sells on terms of 2/10, net 30, and its DSO is 30 days, then the firm probably has some past due
accounts.
d.
If a firm sells on terms of net 60, and if its sales are highly seasonal, with a sharp peak in December, then its
DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be
lower in January than in July.
e.
If a firm changed the credit terms offered to its customers from 2/10, net 30 to 2/10, net 60, then its sales
should increase, and this should lead to an increase in sales per day, and that should lead to a decrease in the
DSO.
81.
Which of the following statements is CORRECT?
a.
Trade credit is provided only to relatively large, strong firms.
b.
Commercial paper is a form of short-term financing that is primarily used by large, strong, financially stable
companies.
c.
Short-term debt is favored by firms because, while it is generally more expensive than long-term debt, it
exposes the borrowing firm to less risk than long-term debt.
d.
Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate.
e.
Commercial paper is typically offered at a long-term maturity of at least five years.
82.
Which of the following statements is NOT CORRECT?
a.
Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate.
b.
Accruals are “free” in the sense that no explicit interest is paid on these funds.
c.
A conservative approach to working capital management will result in most if not all permanent assets being
financed with long–term capital.
d.
The risk to a firm that borrows with short-term credit is usually greater than if it borrowed using long-term
debt. This added risk stems from the greater variability of interest costs on short-term debt and possible
difficulties with rolling over short-term debt.
e.
Bank loans generally carry a higher interest rate than commercial paper.
83.
Which of the following statements is CORRECT?
a.
Under normal conditions, a firm‘s expected ROE would probably be higher if it financed with short-term
rather than with long-term debt, but using short-term debt would probably increase the firm‘s risk.
b.
Conservative firms generally use no short-term debt and thus have zero current liabilities.
c.
A short-term loan can usually be obtained more quickly than a long-term loan, but the cost of short-term debt
is normally higher than that of long-term debt.
d.
If a firm that can borrow from its bank at a 6% interest rate buys materials on terms of 2/10, net 30, and if it
must pay by Day 30 or else be cut off, then we would expect to see zero accounts payable on its balance
sheet.
e.
If one of your firm‘s customers is “stretching“ its accounts payable, this may be a nuisance but it will not
have an adverse financial impact on your firm if the customer periodically pays off its entire balance.
84.
Which of the following statements is NOT CORRECT?
a.
A company may hold a relatively large amount of cash and marketable securities if it is uncertain about its
volume of sales, profits, and cash flows during the coming year.
b.
Credit policy has an impact on working capital because it influences both sales and the time before
receivables are collected.
c.
The cash budget is useful to help estimate future financing needs, especially the need for short-term working
capital loans.
d.
If a firm wants to generate more cash flow from operations in the next month or two, it could change its
credit policy from 2/10, net 30 to net 60.
e.
Managing working capital is important because it influences financing decisions and the firm’s profitability.
85.
Which of the following statements is CORRECT?
a.
Depreciation is included in the estimate of free cash flows (FCF = EBIT(1 − T) + Depreciation − [Capital
expenditures + ΔNOWC]), hence depreciation is set forth on a separate line in the cash budget.
b.
If cash inflows from collections occur in equal daily amounts but most payments must be made on the 10th
of each month, then a regular monthly cash budget will be misleading. The problem can be corrected by
using a daily cash budget.
c.
Sound working capital policy is designed to maximize the time between cash expenditures on materials and
the collection of cash on sales.
d.
If a firm wants to generate more cash flow from operations in the next month or two, it could change its
credit policy from 2/10, net 30 to net 60.
e.
If a firm sells on terms of net 90, and if its sales are highly seasonal, with 80% of its sales in September, then
its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be
lower in October than in August.
86.
Which of the following statements is CORRECT?
a.
Accruals are an expensive but commonly used way to finance working capital.
b.
A conservative financing policy is one where the firm finances part of its fixed assets with short-term capital
and all of its net working capital with short-term funds.
c.
If a company receives trade credit under terms of 2/10, net 30, this implies that the company has 10 days of
free trade credit.
d.
One cannot tell if a firm has a conservative, aggressive, or moderate current asset financing policy without
an examination of its cash budget.
e.
If a firm has a relatively aggressive current asset financing policy vis-à-vis other firms in its industry, then its
current ratio will probably be relatively high.
87.
Halka Company is a no-growth firm. Its 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?
a. $260,642
b. $274,360
c. $288,800
d. $304,000
e. $320,000
88.
Cass & Company has the following data. What is the firm’s cash conversion cycle?
Inventory conversion period = 50 days
Receivables collection period = 17 days
Payables deferral period = 25 days
a.
31 days
b.
34 days
c.
38 days
d.
42 days
e.
46 days
89.
Romano Inc. has the following data. What is the firm’s cash conversion cycle?
Inventory conversion period = 38 days
Receivables collection period = 19 days
Payables deferral period = 20 days
a.
33 days
b.
37 days
c.
41 days
d.
45 days
e.
49 days
90.
Whittington Inc. has the following data. What is the firm’s cash conversion cycle?
Inventory conversion period = 41 days
Receivables collection period = 31 days
Payables deferral period = 38 days
a.
31 days
b.
34 days
c.
37 days
d.
41 days
e.
45 days
91.
Inmoo Company’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?
a.
63 days
b.
67 days
c.
70 days
d.
74 days
e.
78 days
92.
Singal Inc. is preparing its cash budget. It expects to have sales of $30,000 in January, $35,000 in February, and
$35,000 in March. If 20% of sales are for cash, 40% are credit sales paid in the month after the sale, and another
40% are credit sales paid 2 months after the sale, what are the expected cash receipts for March?
a. $24,057
b. $26,730
c. $29,700
d. $33,000
e. $36,300
93.
Dyl Pickle Inc. had credit sales of $3,500,000 last year and its days sales outstanding was DSO = 35 days. What
was its average receivables balance, based on a 365-day year?
a. $335,616
b. $352,397
c. $370,017
d. $388,518
e. $407,944