CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
1. Net working capital, defined as current assets minus the sum of payables and accruals, is equal to the current ratio
minus the quick ratio.
a.
True
b.
False
False
2. Net working capital is defined as current assets divided by current liabilities.
a.
True
b.
False
False
3. Net operating working capital is defined as operating current assets minus operating current liabilities..
a.
True
b.
False
True
4. Determining a firm’s optimal investment in working capital and deciding how that investment should be financed are
critical to working capital management.
a.
True
b.
False
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
True
5. An increase in any current asset must be accompanied by an equal increase in some current liability.
a.
True
b.
False
False
6. The concept of permanent current operating 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 operating assets represent a
minimum level of current assets that must be financed.
a.
True
b.
False
True
7. A conservative current operating asset financing approach will result in permanent current assets and some seasonal
current assets being financed using long-term securities.
a.
True
b.
False
True
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
8. 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 operating asset financing strategy because of the inherent risks of using short-
term financing.
a.
True
b.
False
True
9. 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).
a.
True
b.
False
False
10. 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
False
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
11. 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
True
12. Cash 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.
a.
True
b.
False
True
13. Firms hold cash balances in order to complete transactions (both routine and precautionary) that are necessary in
business operations and as compensation to banks for providing loans and services.
a.
True
b.
False
True
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
14. For a firm that makes heavy use of net float, being able to forecast collections and disbursement check clearings is
essential.
a.
True
b.
False
True
Float
15. 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
True
Lockbox
16. The overriding goal of inventory management is to ensure that the firm never suffers a stock-out, i.e., never runs out
of an inventory item.
a.
True
b.
False
False
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
17. The twin goals of inventory management are (1) to ensure that the inventories needed to sustain operations are
available, but (2) to hold the costs of ordering and carrying inventories to the lowest possible level.
a.
True
b.
False
True
18. The average accounts receivable balance is a function of both the volume of credit sales and the days sales
outstanding.
a.
True
b.
False
True
19. If a firm has a large percentage of accounts over 30 days old, this is proof positive that its receivables manager is not
doing a good job.
a.
True
b.
False
False
20. The aging schedule is a commonly used method for monitoring receivables.
a.
True
b.
False
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
True
21. 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
True
22. Changes in a firm’s collection policy can affect sales, working capital, and profits.
a.
True
b.
False
True
23. 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
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
24. Suppose a firm changes its credit policy from 2/10 net 30 to 3/10 net 30. The change is meant to meet competition, so
no increase in sales is expected. The average accounts receivable balance will probably decline as a result of this change.
a.
True
b.
False
True
25. If a firm busy on terms of 2/10 net 30, it should pay as early as possible during the discount period.
a.
True
b.
False
False
26. 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
False
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
27. 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
True
28. 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
True
29. 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
True
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
30. The calculated cost of trade credit can be reduced by paying late.
a.
True
b.
False
True
31. 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
True
32. 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
True
33. “Stretching” accounts payable is a widely accepted, entirely ethical, and costless financing technique.
a.
True
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
b.
False
False
34. Accruals are “free” capital in the sense that no explicit interest must normally be paid on accrued liabilities.
a.
True
b.
False
True
Accruals
35. Accruals are “spontaneous,” but unfortunately, due to law and economic forces, firms have little control over the level
of these accounts.
a.
True
b.
False
True
Accruals
36. The facts (1) that no explicit interest is paid on accruals and (2) that the firm can control the level of these accounts at
will makes them an attractive source of funding to meet working capital needs.
a.
True
b.
False
False
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
37. 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.
a.
True
b.
False
False
38. Short-term financing is riskier than long-term financing since, during periods of tight credit, the firm may not be able
to rollover (renew) its debt. This is especially true if the funds are used to finance long-term assets rather than short-term
assets.
a.
True
b.
False
True
39. One of the advantages of short-term debt financing is that firms can obtain short-term credit more quickly than long–
term credit.
a.
True
b.
False
True
Accruals
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
40. 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.
a.
True
b.
False
True
41. 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.
a.
True
b.
False
False
42. 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
True
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
43. Loans from commercial banks generally appear on balance sheets as notes payable. A bank’s importance is actually
greater than it appears from the dollar amounts shown on balance sheets because banks provide nonspontaneous funds to
firms.
a.
True
b.
False
True
44. A promissory note is the document signed when a bank loan is executed, and it specifies financial aspects of the loan.
a.
True
b.
False
True
45. 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
True
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
46. 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
True
47. 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
True
48. 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
False
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
49. A firm that follows an aggressive current asset 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
True
50. The relative profitability of a firm that employs an aggressive current asset financing policy will improve if the yield
curve changes from upward sloping to downward sloping.
a.
True
b.
False
False
51. 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
True
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
52. The cash conversion cycle (CCC) combines three factors: The inventory conversion period, the average 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
True
53. 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
False
54. 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
True
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
55. 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
False
Difficulty: Moderate
INTE.GENE.16.133 – LO: 21-4
United States – BUSPROG: Reflective Thinking
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Cash and capital budgets
56. 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
False
Difficulty: Moderate
INTE.GENE.16.133 – LO: 21-4
United States – BUSPROG: Reflective Thinking
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Cash budget and depreciation
57. 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
True
Difficulty: Moderate
INTE.GENE.16.135 – LO: 21-6
United States – BUSPROG: Reflective Thinking
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Cash flow synchronization
58. 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
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
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
False
Lockbox
59. 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
False
60. 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
False
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
61. 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
True
62. 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
True
63. Because money has time value, a cash sale is always more profitable than a credit sale.
a.
True
b.
False
False