Question 1

What is the inventory conversion period for a firm that has inventory of $1.5 million,a tax rate of 35 percent,daily cost of goods sold of $300,000,and profit margin of 12 percent?

Accepted Answer

The answer of What is the inventory conversion period for...

Question 2

The ____ is the average length of time to convert the firm's receivables into cash.

Accepted Answer

Receivables collection period refers to the average length of time a firm takes to collect its receivables, which is the time it takes to convert receivables into cash.

Question 3

The cash conversion cycle is the length of time from

Accepted Answer

The cash conversion cycle measures the time it takes a company to convert its investments in inventory and other resources into cash collections from customers. Therefore, the correct choice is D because it represents the time interval between paying for raw materials and receiving payment for the sale of the finished product, which encompasses most of the working capital cycle. The other choices may be related to the working capital cycle, but they do not accurately describe the cash conversion cycle.

Question 4

The amount of safety stocks held by a firm generally

Accepted Answer

Safety stock levels are influenced by several factors, including the uncertainty of demand forecasts, the costs associated with stockouts (including lost sales and goodwill), and the potential for delays in receiving shipments. As these factors increase, the need for safety stock also increases to buffer against these uncertainties and potential costs. Conversely, as the cost of holding inventory increases, firms might seek to minimize inventory levels, but this does not change the fact that the factors listed in options A, B, and C would still lead to an increase in safety stock levels. Therefore, all the given options correctly describe situations that would generally lead to an increase in the amount of safety stocks a firm holds.

Question 5

Long-term debt which is coming due in the next accounting period is defined as a current liability but is not considered a working capital decision variable.

Accepted Answer

Long-term debt becoming due in the next accounting period is classified as a current liability because it needs to be paid within the year, but it is not considered a working capital decision variable as it does not affect the day-to-day operations of the business. Working capital decision variables include current assets and current liabilities that directly impact a company's ability to meet short-term obligations and efficiently manage its operations.

Question 6

Working capital management involves decisions related to

Accepted Answer

Working capital management involves decisions related to managing current assets and current liabilities. It includes activities such as managing cash, accounts receivable, inventory, and accounts payable to ensure that the company has enough liquidity to meet its short-term obligations. Labor contracts, fixed asset acquisition, and long-term debt are not directly related to working capital management.

Question 7

An increase in a current asset account must be accompanied by a corresponding increase in a liability account.

Accepted Answer

This statement is false. An increase in a current asset account can also be accompanied by an increase in a revenue account (if the increase is due to increased sales or other income) or a decrease in a different asset account (such as cash, if the increase is due to collecting accounts receivable). It does not always require a corresponding increase in a liability account.

Question 8

Net working capital is defined as current assets minus current liabilities.This also defines the current ratio.

Accepted Answer

Net working capital is indeed defined as current assets minus current liabilities, but it does not define the current ratio. The current ratio is calculated by dividing current assets by current liabilities.

Question 9

When the current ratio is ____ than one and current liabilities ____ by the same dollar amount as current assets,the current ratio ____.

Accepted Answer

When the current ratio is less than one, decreasing both current liabilities and current assets by the same dollar amount increases the current ratio because it reduces the denominator by a larger percentage than the numerator, improving the ratio.

Question 10

Permanent current assets reflect the fact that current assets do not shrink to zero even when business is at a seasonal or cyclical low.Thus,permanent current assets represent a minimum level of current assets the firm must finance.

Accepted Answer

Permanent current assets are those current assets that a company must regularly have on hand to continue normal business operations. They are usually funded through long-term sources of capital, such as long-term debt and equity. These assets do not fluctuate with seasonal or cyclical changes in business activity and are considered a minimum level of current assets a company must maintain to operate effectively. Therefore, the given statement is true.

Question 11

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 working capital strategy because of the inherent risks of using short-term financing.

Accepted Answer

The statement is true. While short-term interest rates have generally been lower than long-term rates, relying heavily on short-term debt can be risky due to the potential for interest rate fluctuations and difficulty in obtaining new financing if the short-term debt suddenly cannot be renewed or rolled over.

Question 12

Determination of a firm's investment in current assets and how that investment is financed are elements of working capital policy.

Accepted Answer

Working capital policy involves decisions regarding the investment in current assets and the financing of those assets. This includes determining the appropriate level of inventory, accounts receivable, and cash holdings, as well as deciding which funding sources to use, such as short-term borrowing or equity financing.

Question 13

Net working capital is defined as

Accepted Answer

Net working capital is calculated by subtracting current liabilities from current assets. This gives a measure of the company's liquidity and ability to meet short-term obligations. Option D, "current assets minus current liabilities", represents this calculation accurately.

Question 14

The ____ is the average length of time required to convert materials into finished goods and then to sell those goods.

Accepted Answer

The inventory conversion period represents the average time required to convert raw materials into finished goods and then to sell those goods. It is an important measure of the efficiency of a company's operations, as shorter inventory conversion periods generally indicate that a company is more efficient in managing its supply chain and production processes.

Question 15

The ____ is the average length of time between the purchase of raw materials and labor and the payment of cash for them.

Accepted Answer

The payables deferral period is the average length of time between the purchase of raw materials and labor and the payment of cash for them. It reflects how long a company takes to pay its suppliers.

Question 16

The best way to get a comprehensive picture of a firm's liquidity position is to examine its ____,which forecasts cash inflows and outflows.

Accepted Answer

The best way to get a comprehensive picture of a firm's liquidity position is to examine its cash budget, which forecasts cash inflows and outflows. This budget takes into account all of the cash transactions that are expected to occur during a specific period of time, typically a month or a quarter. By analyzing the cash budget, a firm can determine its expected cash position at the end of the period, and can take steps to manage its liquidity accordingly. Choices A, B, and C are all important measures of liquidity, but they do not provide as comprehensive a picture of a firm's liquidity position as a cash budget.

Question 17

Determining the appropriate amount of total current assets and the amount in specific asset accounts,as well as their financing,are basic elements of working capital policy.

Accepted Answer

The answer of Determining the appropriate amount of total current...

Question 18

Which of the following is a net working capital decision variable in the current period?

Accepted Answer

Purchasing inventory needed to meet current demand on credit is a net working capital decision variable in the current period. It involves managing the level of inventory to ensure that the company has enough to meet current demand while also considering the costs and benefits of holding excess inventory. The other options are related to financing decisions or the use of long-term assets and do not directly impact net working capital in the current period.

Question 19

Net working capital is defined as current assets divided by current liabilities.

Accepted Answer

Net working capital is defined as current assets minus current liabilities, not divided by current liabilities.

Question 20

If the current ratio is equal to four and we double the current liabilities and half the current assets,what will the new current ratio equal?

Accepted Answer

The current ratio is given by current assets divided by current liabilities. If the current ratio is initially 4, then:

Current assets/Current liabilities = 4

If we double the current liabilities and half the current assets, we get:

New current assets = Current assets/2 
New current liabilities = 2 x Current liabilities

So the new current ratio would be:

New current assets/New current liabilities = (Current assets/2)/(2 x Current liabilities) 
= Current assets/(4 x Current liabilities) 
= 1/4

Therefore, the new current ratio would be 1/4 or 0.25, which is equivalent to choice A) 1.

Quiz 15: Working Capital Management