Question 1

An increase in the current liabilities to total assets ratio has the effects of __________on profits and__________on risk.

Accepted Answer

The answer of An increase in the current liabilities to...

Question 2

A firm has annual operating outlays of $1,800,000 and a cash conversion cycle of 60 days. If thefirm currently pays 12 percent for negotiated financing and reduces its cash conversion cycle to 50days, the annual savings is __________.

Accepted Answer

The cash conversion cycle reduction from 60 to 50 days saves 10 days of financing. The daily cost of financing is ($1,800,000 * 12%) / 360 = $6,000. Thus, the savings for 10 days is $6,000 * 10 = $6,000.

Question 3

A decrease in the current liabilities to total assets ratio has the effects of__________ on profits and__________on risk.

Accepted Answer

The answer of A decrease in the current liabilities to...

Question 4

Net working capital is defined as

Accepted Answer

Net working capital is defined as current assets minus current liabilities. It represents the amount of short-term assets that are readily available to cover short-term liabilities. It is an indicator of a company's liquidity and may also be used to assess the company's ability to fund its daily operations.

Question 5

__________is a method of consciously anticipating the mail, processing, and clearing time involved with the payment process.

Accepted Answer

Playing the float is a method where businesses or individuals take advantage of the time it takes for checks to clear, by anticipating the mail, processing, and clearing time involved with the payment process.

Question 6

In the ABC system of inventory management, the __________method or system could be utilized to control C items.

Accepted Answer

The ABC system of inventory management categorizes inventory into three groups based on their value or importance - A, B, and C. C items are the least valuable or important items in terms of cost or usage. Red-line method is commonly used for controlling C items in inventory management. In this method, a line is drawn on the inventory card to indicate the level at which the item needs to be reordered. Once the inventory level reaches the red-line, a replenishment order is placed to avoid stockouts. This method is simple and cost-effective for managing inventory of low-value items. Option B) Economic Order Quantity (EOQ) is a method used to calculate the optimum order quantity for inventory items, which is more suited for managing A and B items. Option C) Just-in-Time (JIT) is a lean production technique that aims to minimize inventory levels, which may not be suitable for managing inventory of low-value C items. Option D) Material Requirements Planning (MRP) is a computer-based inventory management system that plans and controls material flow based on demand, which is more suitable for managing A and B items.

Question 7

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

Accepted Answer

Increasing the credit period typically leads to higher sales volume as customers have more time to pay. This results in a higher investment in accounts receivable and potentially higher bad debt expenses due to increased risk of non-payment.

Question 8

The conservative financing strategy results in financing all projected funds requirements with __________funds and use of __________funds in the event of an unexpected cash outflow.

Accepted Answer

The conservative financing strategy emphasizes long-term financing to cover all projected fund requirements and unexpected cash outflows. This is in contrast to the aggressive financing strategy, which relies heavily on short-term financing. The other options (A, C, and D) do not accurately describe the conservative financing strategy.

Question 9

Sound cash management techniques would support

Accepted Answer

The cash conversion cycle measures the time it takes for a company to convert its investment in inventory and other resources into cash flow from sales. Minimizing the cash conversion cycle is one of the key goals of sound cash management techniques. This involves minimizing collection float (the time between when a customer makes a payment and when the funds are available to use), maximizing disbursement float (the time between when a payment is made and when the funds are actually deducted from the account), and maximizing operating cash (the amount of cash a business has available for day-to-day operations). Therefore, the best choice is D.

Question 10

The __________is the time period that elapses from the point when the firm uses the raw materials in manufacturing a finished good to the point when the finished good is sold.

Accepted Answer

The answer of The __________is the time period that elapses...

Question 11

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

Accepted Answer

If the firm's credit period is decreased, customers will have less time to pay their bills, which may result in decreased sales volume. The investment in accounts receivable will also decrease since there will be fewer outstanding customer bills. Finally, bad debt expenses can be expected to decrease because customers have less time to default on their payments, reducing the risk of bad debt.

Question 12

The firm's financing requirements can be separated into

Accepted Answer

The firm's financing requirements are often categorized into seasonal and permanent needs, where seasonal refers to short-term fluctuations and permanent refers to long-term, ongoing needs.

Question 13

The three basic types of inventory are all of the following EXCEPT

Accepted Answer

The three basic types of inventory are finished goods, work-in-process, and raw materials. Capital goods are not considered inventory as they refer to long-term assets used in production such as machinery and equipment.

Question 14

If the firm's cash discount period is increased, the sales volume can be expected to__________ , thebad debt expenses can be expected to__________ , and the profit per unit can be expected to ___________.

Accepted Answer

Increasing the cash discount period encourages more customers to pay early, potentially increasing sales volume. It also reduces bad debt expenses as more customers pay on time. However, offering discounts can decrease profit per unit.

Question 15

A firm has an average age of inventory of 60 days, an average collection period of 45 days, and an average payment period of 30 days. The firm's cash conversion cycle is__________ days.

Accepted Answer

Cash conversion cycle = Inventory conversion period + Receivables collection period - Payables payment period
= 60 + 45 - 30
= 75 days

Question 16

In the EOQ model,__________ costs are the fixed clerical cost of writing a purchase order, processing the paper work, and verifying the invoice.

Accepted Answer

The costs associated with writing and processing purchase orders are order costs.

Question 17

When the creditworthiness of a customer is established, the firm will grant that customer

Accepted Answer

When a firm establishes the creditworthiness of a customer, they will grant that customer a line of credit, allowing them to make purchases on credit up to a certain limit. A credit rating refers to the customer's overall creditworthiness, while a credit policy outlines the terms under which credit is granted. A credit position is not a commonly used term in credit management.

Question 18

The portion of a firm's current assets financed with long-term funds may be called

Accepted Answer

Net working capital is the portion of a firm's current assets that is financed with long-term funds, calculated as current assets minus current liabilities.

Question 19

$\text { Flum Packages, Inc. }$

$\begin{array}{lrlr}\text { Assets }&&\text { Liabilities \& Equity }\
\hline\text { Current assets } & \$ 10,000 & \text { Current Liabilities } & \$ 5,000 \
\text { Fixed assets } & 20,000 & \text { Long-term debt } & 12,000 \
& & \text { Equity } & 13,000\&---&&---\\text { Total }&\$30,000&\text { Total }&\$30,000
\end{array}$
The company earns 5 percent on current assets and 15 percent on fixed assets. The firm's current liabilities cost 7 percent to maintain and the average annual cost of long-term funds is 20 percent.
-If the firm was to shift $7,000 of fixed assets to current assets, the firm's net working capital would__________, the annual profits on total assets would__________and the risk of not being able to meet current obligations would__________, respectively

Accepted Answer

The answer of $\text { Flum Packages, Inc. }$

\(\begin{array}{lrlr}\text {...

Question 20

The __________is the time period that elapses from the point when the firm makes the outlay to purchase raw materials on account to the point when payment is made to the supplier of the goods.

Accepted Answer

The average payment period measures the amount of time it takes for a company to pay its creditors after a purchase has been made on account. It is calculated by dividing accounts payable by the average daily credit purchases. This time period is important for the company to manage its working capital and maintain good relationships with its suppliers.

Quiz 14: Working Capital and Management of Current Assets

An increase in the current liabilities to total assets ratio has the effects of on profits andon risk.