Working Capital Management
True
An increase in current assets increases net working capital, thereby reducing the risk of technical insolvency.
False
As the ratio of current assets to total assets increases, the firm's risk increases.
False
Because firms are unable to match cash inflows to outflows with certainty, most of them need current liabilities that more than cover outflows for current assets.
False
Business risk is the risk of being unable to make the scheduled fixed payments associated with debt, leases, and preferred stock financing as they come due.
False
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.
True
In EOQ model, the average inventory is defined as the order quantity divided by 2.
True
In general, the more a firm's current assets cover its shortterm obligations, the better able it will be to pay its bills as they come due.
True
In the ABC system of inventory management, the red-line method or system could be utilized to control C items.
True
In the EOQ model, the total cost is minimized at the point where the order costs and carrying costs are equal.
True
Net working capital can be defined as the portion of the firm's current assets financed with longterm funds.
True
Since its objective is to minimize inventory investment, a JustinTime (JIT) system uses no, or very little, safety stocks.
False
The ABC system is an inventory management technique for determining the optimal order quantity for an item of inventory.
True
The ability to purchase production inputs on credit allows the firm to partially (or may be even totally) offset the length of time resources are tied up in the operating cycle.
False
The aggressive financing strategy is a strategy by which the firm finances its current assets with shortterm funds and its fixed assets with longterm funds.
True
The aggressive financing strategy is risky due to its minimum level of net working capital, high dependency on shortterm sources of funds, and the changing shortterm interest.
True
The aggressive strategy operates with minimum net working capital since only the permanent portion of the firm's current assets is being financed with longterm funds.
False
The cash conversion cycle is the amount of time that elapses from the point when the firm inputs materials and labor into the production process to the point when cash is collected from the sale of the resulting finished product.
True
The cash conversion cycle is the difference between the number of days resources are tied up in the operating cycle and the average number of days the firm can delay making payment on the production inputs purchased on credit.
True
The cash conversion cycle is the total number of days in the operating cycle less the average payment period for inputs to production.
False
The cash inflows-that is, the conversion of the current assets to more liquid forms-are relatively predictable but the cash outlays for current liabilities are difficult to predict.
False
The conservative financing strategy is a strategy by which the firm finances at least its seasonal requirements, and possibly some of its permanent requirements, with short-term funds and the balance of its permanent requirements with long-term funds.
True
The conservative strategy is less profitable than the aggressive approach because it requires the firm to pay interest on unneeded funds.
False
The economic order quantity (EOQ) is the order quantity which minimizes the carrying costs per unit per period.
True
The effect of a decrease in the ratio of current assets to total assets and the effect of an increase in the ratio of current liabilities to total assets are increases in the firm's profits and, correspondingly, its risk.
False
The firm's operating cycle (OC) is simply the sum of the average age of inventory (AAI) and the average payment period (APP).
False
The more predictable its cash inflows, the more net working capital a firm needs.
True
The operating cycle is the recurring transition of a firm's working capital from cash to inventories and inventories to receivables and back to cash.
True
The permanent financial need of a firm is the financing requirements for the firm's fixed assets plus the permanent portion of the firm's current assets.
False
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's bill of materials.
False
The reorder point is the point at which the firm receives orders.
True
The risk of the conservative financing requirements is low because of its high level of net working capital, and the fact that the strategy does not require the firm to use any of its limited shortterm borrowing capacity.
True
The short term financial management is concerned with management of the firm's current assets and current liabilities.
False
Under conservative financing strategy, shortterm financing is used only to finance an emergency, an unexpected outflow of funds, and the variable portion of the firm's current assets.
False
When implementing the cash management strategies, a firm should take care to avoid having a large number of inventory stockouts, to avoid losing the use of its cash by collecting its accounts receivable using highpressure collection techniques, and to avoid damaging the firm's credit rating by overstretching accounts payable.
False
A firm is said to be technically insolvent when its total assets is less than its total liabilities and stockholders' equity.
True
A firm that is unable to pay its bills as they come due is technically insolvent.
True
A negative cash conversion cycle (CCC) means the average payment period (APP) exceeds the operating cycle (OC).
False
Nonmanufacturing firms are more likely to have positive cash conversion cycles; they generally carry smaller, fastermoving inventories and often sell their products for cash.
True
Safety stocks are extra inventories that can be drawn down when actual lead times and/or usage rates are greater than expected.
True
Too little current liability financing reduces profitability, whereas too much of this financing increases the risk of not being able to pay debts as they come due.
True
Too much investment in current assets reduces profitability, whereas too little investment increases the risk of not being able to pay debts as they come due.
True
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.
True
One aspect of risk associated with the aggressive strategy's maximum use of short-term financing is the fact that changing short-term interest rates can result in significantly higher borrowing costs as the short-term debt is refinanced.
True
A positive cash conversion cycle means that the firm must obtain financing to support the cash conversion cycle.
False
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.
True
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.
True
In the 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.
False
Operating cycle is the amount of time the firm's cash is tied up between payment for production inputs and receipt of payment from the sale of the resulting finished product.
False
The aggressive financing strategy is a strategy by which the firm finances all projected funds requirements with long-term funds and uses short-term financing only for emergencies or unexpected outflows.
False
Working capital represents the portion of the firm's investment that circulate from one form to another in the longterm conduct of business.