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Exam 16: Supply Chains and Working Capital Management

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Question 41

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Net operating working capital is defined as operating current assets minus operating current liabilities..

A) True
B) False

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Question 42

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Determining a firm's optimal investment in working capital and deciding how that investment should be financed are critical to working capital management.

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B) False

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Question 43

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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 lockbox plan is most beneficial to firms that

Because money has time value,a cash sale is always more profitable than a credit sale.

Which of the following statements is CORRECT?

If a firm switched from taking trade credit discounts to paying on the net due date,this might cost the firm some money,but such a policy would probably have only a negligible effect on the income statement and no effect whatever on the balance sheet.

Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?

The twin goals of inventory management are (1)to ensure that the inventories needed to sustain operations are available,but (2)to hold the costs of ordering and carrying inventories to the lowest possible level.

On average,a firm collects checks totaling $250,000 per day.It takes the firm approximately 4 days from the day the checks were mailed until they result in usable cash for the firm.Assume that (1)a lockbox system could be employed which would reduce the cash conversion procedure to 2 1/2 days and (2)the firm could invest any additional cash generated at 6% after taxes.The lockbox system would be a good buy if it costs $25,000 annually.

Uncertainty about the exact lives of assets prevents precise maturity matching in an ex post (i.e. ,after the fact)sense even though it is possible to match maturities on an ex ante (expected)basis.

As a rule,managers should try to always use the free component of trade credit but should use the costly component only if the cost of this credit is lower than the cost of credit from other sources.

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

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.

The concept of permanent current operating 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 operating assets represent a minimum level of current assets that must be financed.

Carter & Carter is considering setting up a regional lockbox system to speed up collections.The company sells to customers all over the U.S. ,and all receipts come in to its headquarters in San Francisco.The firm's average accounts receivable balance is $2.5 million,and they are financed by a bank loan at an 11% annual interest rate.The firm believes this new lockbox system would reduce receivables by 20%.If the annual cost of the system is $15,000,what pre-tax net annual savings would be realized?

Data on Nathan Enterprises for the most recent year are shown below,along with the days sales outstanding of the firms against which it benchmarks.The firm's new CFO believes that the company could reduce its receivables enough to reduce its DSO to the benchmarks' average.If this were done,by how much would receivables decline? Use a 365-day year. Sales $110,000 Accounts receivable $16,000 Days sales outstanding (DSO) 53) 09 Benchmark days sales outstanding (DSO) 20) 00

For a firm that makes heavy use of net float,being able to forecast collections and disbursement check clearings is essential.

Synchronization of cash flows is an important cash management technique,as proper synchronization can reduce the required cash balance and increase a firm's profitability.

Famous Farm's payables deferral period (PDP) is 50 days (on a 365-day basis) ,accounts payable are $100 million,and its balance sheet shows inventory of $125 million.What is the inventory turnover ratio?