Question 1

For a retail firm,it is unlikely that the working capital gap would change from period to period as a function of cyclical sales.

Accepted Answer

The working capital gap is the difference between current assets and current liabilities, and it can change from period to period based on the level of sales and the timing of payments. In a retail firm, seasonal or cyclical sales can result in fluctuations in inventory levels, accounts receivable, and accounts payable, which can affect the working capital gap. Therefore, it is likely that the working capital gap would change from period to period as a function of cyclical sales.

Question 2

Managing inventory involves trading off the benefits of availability with various financial concerns such as storage,insurance,and obsolescence.

Accepted Answer

Managing inventory requires balancing the advantages of having adequate supplies on hand with the financial consequences of storing and managing those supplies, including the risk of loss or damage, the cost of insurance, and the risk of obsolescence.

Question 3

The author presents evidence that recently Southwest Airlines had a negative working capital gap.Which of the following reasons is likely to be primarily responsible for this enviable situation.

Accepted Answer

Southwest Airlines receives payment from customers in advance of most flights, which creates a negative working capital gap. This means that Southwest has enough cash on hand to cover its current liabilities, and it does not have to rely heavily on borrowing for short-term financing. Option A is incorrect because the question asks for the primary reason, and borrowing is not the primary reason for the negative working capital gap. Option C is also incorrect because paying for fuel in advance would increase current liabilities rather than decrease them. Option D is incorrect because granting long credit terms would increase accounts receivable and reduce cash flow, thus increasing the working capital gap.

Question 4

Your firm issues 20-year bonds.This type of financing would be most appropriate for which of the following activities?

Accepted Answer

The construction of a new warehouse is a long-term project, which makes the issuance of 20-year bonds an appropriate financing option. Accounts receivable, accounts payable, and inventory are short-term assets and liabilities that do not require long-term financing.

Question 5

Describe what an accounts receivable schedule might look like and why a firm may wish to prepare such a schedule.

Accepted Answer

The answer of Describe what an accounts receivable schedule might...

Question 6

Empirical evidence suggests that retail firms such as Safeway have a shorter working capital gap than a heavy manufacturing firm such as Boeing.

Accepted Answer

Retail firms typically have faster inventory turnover and receive payment from customers quicker than manufacturing firms, leading to a shorter working capital gap. Heavy manufacturing firms, on the other hand, may require longer periods of time to produce and deliver products, as well as a longer period to receive payment from customers.

Question 7

Your firm borrows money from the bank on a short-term note due in 9 months.This type of financing would be most appropriate for which of the following activities?

Accepted Answer

Borrowing money on a short-term note due in 9 months is best suited for supporting accounts receivable, as it helps to bridge the gap between the time when cash inflows are received from customers and the time when payments are due to suppliers. This type of financing is not appropriate for the construction of a new warehouse or financing new equity, as these activities require a long-term financing arrangement. It is also not appropriate for the support of accounts payable, which are short-term liabilities that need to be paid off in a timely manner.

Question 8

Other things equal,it is more desirable to have a larger working capital gap.

Accepted Answer

It is actually more desirable to have a smaller working capital gap. This is because a smaller gap means that the company has less money tied up in inventory, and is therefore more efficient in its use of capital. Additionally, a smaller gap means that the company is less likely to have liquidity problems and can more easily meet its short-term obligations.

Question 9

The average working capital gap seems to differ across industries in the United States.

Accepted Answer

The average working capital gap, which is the difference between current assets and current liabilities, varies across industries due to differences in their working capital needs and cash flow cycles. Some industries require large amounts of upfront investment, while others have shorter cash flow cycles and require less working capital. Therefore, it is true that the average working capital gap differs across industries in the United States.

Question 10

Which of the following statements about inventory control is TRUE?

Accepted Answer

All of the statements about inventory control are true. Too little inventory can result in missed sales opportunities, while too much inventory can increase financing and storage costs, ultimately reducing profitability. Additionally, seasonality in sales may require a firm to hold different levels of inventory throughout the year. Effective inventory control involves finding a balance between these factors to optimize sales and profitability.

Question 11

"The Holiday Store" is a retail firm that is only open in the weeks prior to major American holidays.The rest of the year the store is closed to the public for in-store and on line sales.The store is well-managed and manages to sell a very high percentage of its inventory each holiday season.The store's working capital gap is likely:

Accepted Answer

DThe working capital gap is likely highest in the weeks leading up to times when it opens its doors to the public (C) because the store would be stocking up on inventory and spending on preparations without yet receiving sales revenue. It is also highest when they close their doors following a holiday season (D) because they might have unsold inventory and expenses to cover before revenue from sales is fully collected.

Question 12

Which of the following statements is NOT true?A line-of-credit from a commercial bank:

Accepted Answer

A line of credit from a commercial bank generally needs to be renewed periodically, typically on an annual basis. This ensures that the bank can reassess the borrower's creditworthiness and risk level before extending further credit. Therefore, statement C is not true.

Question 13

A supplier to your firm offers credit terms of 2/15 net 45 however,your firm never takes advantage of the discount but instead always pays full price on day 45.Your finance intern claims that your firm would be better off borrowing money from an existing but little used line of credit at a current annualized rate of 8%,pay the firm providing credit at the end of the discount period (day 15)and to then repay the line of credit 30 days later on day 45.She argues that the cost to your firm would be lower than current practice.What is the effective cost to the firm of not utilizing the discount vs,the cost of borrowing money to take advantage of the discount? Please show your work and provide your answers in percentage terms.

Accepted Answer

The answer of A supplier to your firm offers credit...

Question 14

An interesting fact about commerce in America is that we tend to see very few differences in the age of accounts receivable across industries.

Accepted Answer

The age of accounts receivable can vary significantly across industries due to differences in business practices, credit terms, and the speed at which companies in various sectors typically collect payments from their customers.

Question 15

A major benefit to firms that rely on accounts payable as a source of short-term financing is that it can defer payment of goods and services received.A potential cost is that the firm might be foregoing discounts for early repayment.

Accepted Answer

Accounts payable allows a firm to delay payment for goods and services received, which can provide short-term financing benefits. However, by delaying payment, the firm may miss out on discounts offered for early repayment, which can result in a potential cost.

Question 16

Which of the following is NOT considered a source of short-term financing?

Accepted Answer

A 10-year bond is a form of long-term financing, as it has a maturity period of 10 years. The other options - banker's acceptance, 90-day bank loan, and commercial paper - are all considered sources of short-term financing as they have a maturity period of less than one year.

Question 17

What is LIBOR,how are LIBOR interest rates determined,and for what are they used?

Accepted Answer

The answer of What is LIBOR,how are LIBOR interest rates...

Question 18

The ________ is,in theory,the interest rate offered to a bank's most credit worthy customers.

Accepted Answer

The prime rate is the interest rate offered by banks to their most creditworthy customers, such as large corporations. It is typically used as a benchmark for other interest rates, such as variable rate loans and credit cards. The prime rate is often based on the federal funds rate set by the Federal Reserve, but it can also be influenced by market conditions and competition among banks. Options A and C are not accurate financial terms, and option D is not commonly used in reference to interest rates.

Question 19

The operating cash flow cycle compares the combined age of inventory and receivables with the age of payables in order to identify a funding gap.

Accepted Answer

The operating cash flow cycle, also known as the cash conversion cycle, measures how long it takes for a company to convert its investments in inventory and accounts receivable into cash. The cycle is calculated by subtracting the number of days of payables outstanding from the sum of the number of days of inventory and receivables outstanding. It is used to identify potential funding gaps or liquidity issues.

Question 20

________ is/are the most common form of short-term financing for a small and medium sized firms.

Accepted Answer

Short-term bank loans, or promissory notes, are the most common form of short-term financing for small and medium-sized firms as they are easily accessible and do not require collateral. Commercial paper and banker's acceptances are more commonly used by larger firms, while new common stock is a long-term financing option.

Quiz 5: Managing Day-To-Day Cash Flow