Fin 534

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Monday, March 28, 2011
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(15-1) Net working capital F S Answer: b EASY
1. Net working capital, defined as current assets minus the sum of payables and accruals, is equal to the current ratio minus the quick ratio. a. True
b. False
(15-1) Net working capital F S Answer: b EASY
2. Net working capital is defined as current assets divided by current liabilities.
a. True
b. False
(15-1) Working capital F S Answer: b EASY
3. An increase in any current asset must be accompanied by an equal increase in some current liability.
a. True
b. False
(15-2) Working capital policy F S Answer: a EASY
4. Determining a firm's optimal investment in working capital and deciding how that investment should be financed are elements of working capital policy.
a. True
b. False
(15-3) Permanent current assets F S Answer: a EASY
5. The concept of permanent current assets reflects the fact that some components of current assets do not shrink to zero even when a business is at its seasonal or cyclical low. Thus, permanent current assets represent a minimum level of current assets that must be financed. a. True

b. False
(15-3) Conservative financing F S Answer: a EASY
6. A conservative financing approach to working capital will result in permanent current assets and some seasonal current assets being financed using long-term securities.
a. True
b. False
(15-3) Current asset financing F S Answer: a EASY
7. 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 current asset financing strategy because of the inherent risks of using short-term financing.

a. True
b. False(15-4) Cash conversion cycle F S Answer: b EASY
8. If a firm takes actions that reduce its days sales outstanding (DSO), then, other things held constant, this will lengthen its cash conversion cycle (CCC).
a. True
b. False
(15-4) Cash conversion cycle F S Answer: b EASY
9. Other things held constant, if a firm "stretches" (i.e., delays paying) its accounts payable, this will lengthen its cash conversion cycle (CCC).
a. True
b. False
(15-5) Cash budget F S Answer: a EASY
10. Shorter-term cash budgets--say a daily cash budget for the next month-- are generally used for actual cash control while longer-term cash budgets--say monthly cash budgets for the next year--are generally used for planning purposes.

a. True
b. False
(15-6) Lockbox F S Answer: a EASY
11. Setting up a lockbox arrangement is one way for a firm to speed up the collection of payments from its customers.
a. True
b. False
(15-7) Inventory management F S Answer: b EASY
12. Inventory management is largely self-contained in the sense that very little coordination among the sales, purchasing, and production personnel is required for successful inventory management.

a. True
b. False
(15-8) Receivables balance F S Answer: a EASY
13. The average accounts receivables balance is a function of both the volume of credit sales and the days sales outstanding.
a. True
b. False
(15-8) Credit policy F S Answer: a EASY
14. The four primary elements in a firm's credit policy are (1) credit standards, (2) discounts offered, (3) credit period, and (4) collection policy.
a. True
b. False(15-9) Taking discounts F S Answer: a EASY
15. Not taking cash discounts is costly, and as a result, firms that do not take them are usually those that are performing poorly and have inadequate cash balances.
a. True
b. False
(15-9) Trade credit F S Answer: b EASY
16. If a firm buys on terms of 2/10, net 30, it should pay as early as possible during the discount period.
a. True
b. False
(15-9) Trade credit F S Answer: b EASY
17. Trade credit can be separated into two components: free trade credit, which is credit received after the discount period ends, and costly trade credit, which is the cost of discounts not taken.

a. True
b. False
(15-9) Trade...
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