Question 1

In the EOQ model, the total cost is minimized at the point where the order costs and carrying costs are equal.

Accepted Answer

This is a fundamental concept of the Economic Order Quantity (EOQ) model. At the point where the ordering costs and carrying costs are equal, the total cost is minimized. This is because a balance is reached between the cost of placing orders (which increases with frequency) and the cost of holding inventory (which increases with quantity).

Question 2

The aggressive financing strategy is risky due to its minimum level of net working capital, high dependency on short-term sources of funds, and the changing short-term interest.

Accepted Answer

An aggressive financing strategy involves using a minimum level of net working capital and relying heavily on short-term sources of funds. This can be risky because short-term interest rates can fluctuate, and if there is not enough working capital to cover expenses, it can lead to financial difficulties for the company.

Question 3

Since its objective is to minimize inventory investment, a Just-in-Time (JIT) system uses no, or very few, safety stocks.

Accepted Answer

A JIT system aims to produce the exact amount of products needed at the time they are needed, thus minimizing the need for safety stocks. This helps reduce inventory investment and improve efficiency.

Question 4

In international trade when a Canadian company sells a product in France, the Canadian company experiences an exchange rate gain if the franc depreciates against the dollar before the Canadian exporter collects on its accounts receivable.

Accepted Answer

The Canadian company would experience an exchange rate gain if the Canadian dollar appreciates against the euro (not franc, as France uses the euro) before collecting on its accounts receivable.

Question 5

Disbursement float is experienced by the payee and is a delay in the actual withdrawal of funds.

Accepted Answer

The answer of Disbursement float is experienced by the payee...

Question 6

By efficiently managing the firm's operating and cash conversion cycles, the financial manager can maintain a high level of cash investment and thereby contribute toward maximization of share value.

Accepted Answer

The answer of By efficiently managing the firm's operating and...

Question 7

A relaxation of credit standards is expected to affect profits positively due to lower carrying costs whereas tightening credit standards would affect profits negatively as a result of higher carrying costs.

Accepted Answer

Relaxation of credit standards can lead to higher sales and potentially higher profits due to increased customer base, but it also increases the risk of bad debts and carrying costs due to extended credit terms. Tightening credit standards might reduce sales volume but can lead to lower carrying costs and bad debt expenses, potentially stabilizing or improving profits.

Question 8

The reorder point is an inventory management system that compares production needs to available inventory balances and determines when orders should be placed for various items on the firm'sbill of materials.

Accepted Answer

The answer of The reorder point is an inventory management...

Question 9

Too much investment in current assets reduces profitability, whereas too little investment increasesthe risk of not being able to pay debts as they come due.

Accepted Answer

This statement is true as investing too much in current assets such as inventory, accounts receivable, and cash can tie up a company's resources and reduce profitability. However, investing too little in these assets can increase the risk of not being able to pay debts as they come due. Striking a balance between the two is important for a company's financial health.

Question 10

If the firm's credit period is decreased, the sales volume can be expected to increase, the investment in accounts receivable can be expected to increase, and the bad debt expenses can be expected to increase.

Accepted Answer

If the firm's credit period is decreased, customers will have to pay quicker, which may decrease the sales volume. Investment in accounts receivable may decrease since there will be less time for customers to pay. Bad debt expenses may also decrease since customers are paying quicker, reducing the risk of bad debt.

Question 11

The cash management techniques are aimed at minimizing the firm's financing requirements by taking advantage of certain imperfections in the collection and payment system.

Accepted Answer

Cash management techniques, such as delaying payments or accelerating collections, are designed to reduce the amount of financing a firm needs by exploiting inefficiencies in the payment and collection system.

Question 12

The firm's operating cycle (OC) is simply the sum of the average age of inventory (AAI) and the average payment period (APP).

Accepted Answer

The answer of The firm's operating cycle (OC) is simply...

Question 13

In short-term financial management, the goal 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.

Accepted Answer

This statement accurately describes the goal of short-term financial management.

Question 14

In the economic order quantity model, if carrying costs increase while all other costs remain unchanged, the number of orders placed would be expected to increase.

Accepted Answer

If carrying costs increase, the economic order quantity decreases, leading to smaller order sizes and thus more frequent orders to minimize total costs.

Question 15

The average investment in accounts receivable is equal to the firm's total variable cost of annual sales divided by its average collection period.

Accepted Answer

The average investment in accounts receivable is equal to the firm's total accounts receivable divided by its average collection period.

Question 16

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.

Accepted Answer

When a firm's cash conversion cycle is negative, it means that the firm is able to collect cash from customers before it has to pay suppliers for the production inputs. This allows the firm to use the financing provided by the suppliers to support other aspects of the business, such as investing in growth opportunities or paying down debt.

Question 17

In analyzing an applicant's creditworthiness, the credit manager typically gives primary attention to two of the five C's of credit-collateral and condition-since they represent the most basic requirements for extending credit to an applicant.

Accepted Answer

The two C's of credit that are given primary attention by a credit manager are character and capacity, not collateral and condition.

Question 18

If the firm relaxes its credit standards, the volume of accounts receivable increases and so does the firm's carrying cost.

Accepted Answer

When a firm relaxes its credit standards, it allows more customers to purchase on credit, which increases the volume of accounts receivable. However, this also increases the amount of time it takes for the firm to collect payment, resulting in an increase in carrying costs such as interest charges, administrative expenses, and bad debt.

Question 19

Because managing inventory is just like managing any other investment, decisions about the level of inventory should be guided by the effect of inventory levels on sales.

Accepted Answer

Inventory management involves considering costs associated with holding inventory, potential stockouts, and the need for efficient operations, not just the effect of inventory levels on sales.

Question 20

Collection float results from the lapse between the time that a firm deducts a payment from its checking account ledger and the time that funds are actually withdrawn from its accounts.

Accepted Answer

The answer of Collection float results from the lapse between...

Quiz 14: Working Capital and Management of Current Assets