Working Capital
A firm purchased raw materials on June1st on credit, paid for the materials on June 10th, finished producing and sold the finished product on June 20th, and received payment on June 27th. How many days was the cash cycle?
17
A firm purchased raw materials on June1st on credit, paid for the materials on June 10th, finished producing and sold the finished product on June 20th, and received payment on June 27th. How many days was the operating cycle?
27
A firm purchased raw materials on April 1st on credit, paid for the materials on April 15th, finished producing and sold the finished product for cash on May 15th. How many days was the cash cycle?
30
A firm purchased raw materials on April 1st on credit, paid for the materials on April 15th, finished producing and sold the finished product for cash on May 15th. How many days was the operating cycle?
45
A firm purchased raw materials on April 1st on credit, paid for the materials on April 15th, finished producing and sold the finished product on May 15th, and received payment on May 30th. How many days was the cash cycle?
45
A firm purchased raw materials on April 1st on credit, paid for the materials on April 15th, finished producing and sold the finished product on May 15th, and received payment on May 30th. How many days was the operating cycle?
60
Which of the following is the main benefit of holding inventory?
Ability to meet the demands of customers
Suppose a firm was provided an option to purchase $100 of raw materials according to a 2/15 net 45 discount policy. What is the 30-day interest rate in percent in annual terms on this effective loan? (round to the nearest hundredth: .00).
Answer: 27.86 (100-98)/98 = .020408 (1+.020408)^(365/30) - 1 = 1.278643 -1 = .278643 or 27.86%
Suppose a firm was provided an option to purchase $100 of raw materials according to a 3/15 net 45 discount policy. What is the 30 day interest rate in percent on this effective loan? (round to the nearest hundredth: .00).
Answer: 3.09 .03*100 = $3. (100-97)/97 = 3.09%
Suppose a firm was provided an option to purchase $100 of raw materials according to a 3/15 net 45 discount policy. What is the 30 day interest rate in percent in annual terms on this effective loan? (round to the nearest hundredth: .00).
Answer: 44.86 Answer: .4486 .03*100 = $3. (100-97)/97 = 3.09% (1.0309)(365/30)-1 =.4486 or 44.86% The calculation requires a 1 to be added when taking it to additional powers and the 1 is subtracted from the result to get the effective rate.
The two types of float discussed in the topic are Collection Float and Receivables Float.
Answer: False The two types of float discussed in the topic are Collection Float and Disbursement Float.
What balance sheet accounts is working capital management most concerned with?
Cash account Accounts receivable Accounts payable Inventory
What should a company do to manage its working capital?
Collect quickly and pay slowly.
Company A offers trade credit of 2% 10 / net 30, and Company B offers trade credit at net 30. What can be said about the credit policies of each company?
Company A can attract more customers.
Company A wishes to keep 20% of its assets as cash. Company B keeps its cash balance at 5% of assets. Which of the following statements applies?
Company B invests in more working current assets.
Company A's inventory is larger than Company B's. Both companies are competitors and are about the same size. What does this difference mean from a working capital management standpoint?
Company B might have higher inventory turnover.
When establishing a credit policy, firms should consider what?
Credit standards Credit terms The likelihood of customers to pay
Which of the following is NOT an important part of managing accounts receivables?
Determining optimal inventory levels
A commonly used method to shorten float time is discount policy.
F
A discount policy 2/10 net 30 means that a discount of 2% is applied to the 10% of the total bill that is due in 30 days.
F
A discount policy is a policy that provides a discount to customers if they pay for the products on the payment due date.
F
A firm should always choose to pay cash and avoid credit purchases of raw materials.
F
A working capital increase caused by an increase in inventory will be a cash inflow for the firm.
F
Accounts payable will be affected when a firm sells finished products to customers on credit.
F
An advantage of selling products on credit is that the firm receives the money earlier, which provides a greater time value.
F
Buying inventory with cash might be beneficial because doing so allows firms to hold onto their cash longer.
F
Collection float is defined as the amount of time it takes for a firm's payment to become an actual outflow.
F
Firms should hold as much inventory as can possibly be stored.
F
Holding inventory does not present any type of opportunity costs.
F
One of the reasons why firms should hold cash is that higher cash holdings provide confidence to shareholders.
F
Proper management of a firm's working capital will require careful management of notes payable.
F
The amount of the reserve balance is always determined by the firm.
F
The cash required to run the daily operations of the firm is sometimes referred to as "Free" cash.
F
The current liabilities account that is most affected by the management of working capital is notes payable.
F
The reserve balance is defined as the amount of cash a company needs to meet its obligations.
F
When setting credit standards, the firm should allow for standards that provide some sort of credit to all of its customers.
F
Working capital management involves determining which long-term investment projects will be profitable.
False
Working capital management is useful in determining the amount of cash required to obtain the optimal debt-to-equity ratio.
False
All of the following are reasons firms would not want to carry too much cash on the balance sheet
Holding cash is subject to opportunity costs Firms may have to forego projects that could add value Hinders firm from maximizing shareholder value
Which of the following characterizes collection float?
Increased float indicates slower processing time.
Which of the following is not an important part of managing accounts receivables?
Managing disbursement float
In regards to accounts payable balances, which of the following is true? Increased accounts payable means faster collections. Paying off A/P as soon as possible is good policy. Higher accounts payable is better than a lower balance. Paying off A/P on the last day due is good policy.
Paying off A/P on the last day due is good policy.
Which of the following ways can inventory be identified?
Raw material Works-in-progress Finished goods
Which of the following is an important part of managing accounts receivables?
Setting Credit terms
Which types of costs are not associated with holding inventory?
Storage costs Holding costs Opportunity costs
Which types of costs are associated with holding inventory?
Storage costs Purchasing costs Holding costs
A commonly used method for shortening the float time is electronic check processing.
T
A disadvantage of buying products on credit is that accounts payable will have to be more closely managed.
T
A discount policy 2/10 net 30 means that a discount of 2% is applied if a payment is received within 10 days and that the total bill is due in 30 days.
T
A discount policy provides a discount to customers for paying for products before the payment due date.
T
A firm with sound working capital management will carefully consider the float time of payments.
T
Accounts payable will be affected when a firm chooses to purchase raw materials on credit.
T
An advantage of selling products on credit is the increased convenience for customers.
T
An important part of managing accounts receivables is setting a collection policy regarding credit sales.
T
Cash policies could result in a loss of business because customers lack the freedom and flexibility of buying products on credit.
T
Cash policies make it easier to manage accounts receivable and accounts payable.
T
Collection float is defined as the time it takes for a firm to be able to use the payments from its customers.
T
Disbursement float involves the amount of time it takes for a payment to become an actual outflow.
T
If firm A has a shorter cash cycle than firm B, then, holding everything else constant, firm A will hold less cash than firm B.
T
Inventory is defined as materials that are required in the production of a finished good.
T
One of the reasons why firms should hold cash is for liquidity reasons.
T
One of the reasons why firms should not hold too much cash is that cash is low risk and subsequently low return.
T
Proper management of a firm's working capital will require careful management of accounts payable.
T
The longer a firm's cash cycle the more cash the firm is required to hold in order to operate on a daily basis.
T
The operating balance is defined as the amount of cash the firm needs to pay its immediate bills.
T
The reserve balance is the amount of cash the firm should hold as a safety net.
T
The two types of credit policies discussed in the topic are cash-only policies and discount policies.
T
The type of costs associated with a firm holding too much cash is opportunity costs.
T
When an increase in inventory causes an increase in working capital, the firm will experience a cash outflow.
T
When setting credit standards, the firm should determine the types of customers that qualify for credit.
T
What are not the benefit of holding inventory?
Tax shields A reduction in current liabilities An increase in fixed assets Lower opportunity costs
Suppose a firm made a payment for some products produced by your firm. The check was mailed today. Collection float is:
The amount of time it takes for the company to have the check deposited and available at the bank.
What is the cash cycle?
The amount of time to regenerate cash
Which of the following principles is related to working capital management?
The cash cycle Selling on credit Buying on credit
What is a reason firms should NOT carry cash?
The opportunity cost to holding cash is low
Why is float important to understand?
To time cash expenditures
Working capital management is the management of cash required to meet the day-to-day operations of the firm.
True
