Which of the following statements about current asset management is most correct

Chapter 8:   Overview of Working Capital Management

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T03 - Working Capital Finance

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T03 - Working Capital Finance[1]

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working capital management

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Terms in this set (25)

Which one of the following statements is NOT true?
Gross working capital is the funds invested in a company's current liabilities.
Net working capital (NWC) refers to the difference between current assets and current liabilities.
Working capital efficiency refers to the length of time between when a working capital asset is acquired and when it is converted into cash.
Working capital management involves making decisions regarding the use and sources of current assets.

a

Which one of the following statements is NOT true?
The higher the cash balance, the better the ability of the firm to meet its short-term financial obligations.
The lower the cash balance, the better the ability of the firm to meet its short-term financial obligations.
The level of the cash balance has no bearing on the firm's ability to meet its short-term financial obligations.
None of the above.

b

The cash conversion cycle
A) shows how long the firm keeps its inventory before selling it.
B) begins when the firm invests cash to purchase the raw materials that would be used to produce the goods that the firm manufactures.
C) begins when the firm uses its cash to purchase raw materials and ends when the firm collects cash payments on its credit sales.
D) estimates how long it takes on average for the firm to collect its outstanding accounts receivable balance.

b

Which one of the following statements is NOT true?
The cash conversion cycle begins when the firm invests cash to purchase the raw materials that would be used to produce the goods that the firm manufactures.
The cash conversion cycle begins when the firm uses its cash to purchase raw materials and ends when the firm collects cash payments on its credit sales.
To measure the cash conversion cycle, we need another measure called the days' payables outstanding.
The cash conversion cycle ends not with the finished goods being sold to customers and the cash collected on the sales; but when you take into account the time taken by the firm to pay for its purchases.

b

The operating cycle
begins when the firm receives the raw materials it purchased that would be used to produce the goods that the firm manufactures.
begins when the firm uses its cash to purchase raw materials and ends when the firm collects cash payments on its credit sales.
To measure operating cycle we need another measure called the days' payables outstanding.
ends not with the finished goods being sold to customers and the cash collected on the sales; but when you take into account the time taken by the firm to pay for its purchases.

a

Which ONE of the following statements is true when managing working capital accounts?
A) Maintain minimal raw material inventories without causing manufacturing delays.
B) Use as little labor as possible to manufacture the product while producing a quality product.
C) Delay paying accounts payable as long as possible without suffering any penalties.
D) All of the above are true.

d

The flexible current asset investment strategy
has a high percent of current assets to sales.
calls for management to invest large amounts in cash, marketable securities, and inventory.
leads to high levels of accounts receivable.
All of the above.

d

Which one of the following is NOT true about the flexible current asset investment strategy?
The strategy promotes a liberal trade credit policy for customers.
The flexible strategy calls for management to invest large amounts in cash, marketable securities, and inventory.
The flexible strategy is perceived be a high-risk and high-return course of action for management to follow.
The strategy's downside is the high inventory carrying cost.

c

A restrictive current asset investment strategy calls for
current assets kept to a minimum.
the firm barely investing in cash and inventory.
tight terms of sale intended to curb credit sales and accounts receivable.
All of the above

d

The restrictive strategy is a high-risk, high-return alternative to the flexible strategy because of
financial shortage costs.
production shortage costs.
human resources shortages costs.
None of the above.

a

Which ONE of the following statements is true?
Financial shortage costs arise mainly from illiquidity—shortage of cash or a lack of marketable securities to sell for cash.
Operating shortage costs result from lost production and sales.
Operating shortage costs can be substantial, especially if the product markets are competitive.
All of the above.

d

Operating shortage costs that result from lost production and sales are caused by
A) not holding enough raw materials in inventory.
B) running out of finished goods.
C) restrictive sale policies.
D) All of the above.

d

Which ONE of the following statements about working capital tradeoff is true?
A) Financial managers need to balance shortage costs against carrying costs to find an optimal strategy.
B) If carrying costs are larger than shortage costs, then the firm will maximize value by adopting a more restrictive strategy.
C) If shortage costs dominate carrying costs, the firm will need to move toward a more flexible policy.
D) All of the above

d

Which one of the following statements about working capital trade-off is NOT true?
Financial managers need to balance shortage costs against carrying costs to find an optimal strategy.
If carrying costs are smaller than shortage costs, then the firm will maximize value by adopting a more restrictive strategy.
If shortage costs dominate carrying costs, the firm will need to move toward a more flexible policy.
Management will try to find the level of current assets that minimizes the sum of the carrying costs and shortage costs.

b

The aging schedule
shows the breakdown of the firm's accounts receivable by their date of sale.
identifies and then tracks delinquent accounts and to see that they are paid.
are an important financial tool for analyzing the quality of a company's receivables.
All of the above.

d

Which ONE of the following statements is true?
The economic order quantity (EOQ) mathematically determines the minimum total inventory cost.
The EOQ takes into account reorder costs and inventory carrying costs.
The optimal order size is determined by the EOQ model.
All of the above

d

Which one of the following statements is NOT true?
The economic order quantity (EOQ) mathematically determines the minimum total inventory cost.
The EOQ ignores reorder costs and inventory carrying costs.
The optimal order size is determined by the EOQ model.
All of the above.

b

Which one of the following statements about just-in-time inventory management policy is NOT true?
A) It calls for the exact day-by-day, or even hour-by-hour raw material needs to be delivered by the suppliers.
B) If the supplier fails to make the needed deliveries, then production shuts down.
C) A big disadvantage in this system is that there are high raw inventory costs.
D) It eliminates obsolescence or loss to theft.

c

Which one of the following statements about collection time is NOT true?
Collection time, or float, is the time between when a customer makes a payment and when the cash becomes available to the firm.
Collection time can be broken down into three components.
Delivery time or mailing time is not part of the float.
Processing delay is part of the collection time.

c

Which ONE of the following statements about matching maturity strategy is true?
All working capital is funded with short-term borrowing.
As the level of sales varies seasonally, short-term borrowing fluctuates between some minimum and maximum level.
All fixed assets are funded with long-term financing.
All of the above.

d

Which ONE of the following statements about short term funding strategy is true?
A) All working capital and a portion of fixed assets are funded with short-term debt.
B) This strategy lowers the cost under some interest rate scenarios.
C) It forces the firm to continually refinance the funding of the long-term assets in a changing interest rate environment.
D) All of the above.

d

Which one of the following statements is NOT true?
Firms using matching maturity strategy fund all working capital needs with long-term borrowing.
Long-term financing strategy relies on long-term debt to finance both capital assets and working capital.
All working capital and a portion of fixed assets are funded with short-term debt when firms use the aggressive funding strategy.
Firms using a matching maturity strategy fund all working capital needs with short-term borrowing.

a

Which one of the following statements is NOT true?
Accounts payable (trade credit), bank loans, and commercial paper are common sources of short-term financing.
An informal line of credit is a verbal agreement between the firm and the bank, allowing the firm to borrow up to an agreed-upon upper limit.
An informal line of credit is also known as "revolving credit."
A formal line of credit is also known as "revolving credit."

c

Which of the following is the equation for net working capital?
Total assets - total liabilities
Current assets - current liabilities
Current assets/current liabilities
Total assets/total liabilities

b

79. Which of the following is a short-term financing instrument?
A) Accounts payable
B) Bank loans with a maturity of less than 1 year
C) Commercial paper
D) All of the above

d

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What is current asset management?

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