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Exam 16: Working Capital Management

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Question 21

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If a firm's suppliers stop offering discounts,then its use of trade credit is more likely to increase than to decrease other things held constant.

A) True
B) False

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Question 22

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A firm constructing a new manufacturing plant and financing it with short-term loans,which are scheduled to be converted to first mortgage bonds when the plant is completed,would want to separate the construction loan from its current liabilities associated with working capital when calculating net working capital.

A) True
B) False

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Question 23

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A revolving credit agreement is a formal line of credit.The firm must generally pay a fee on the unused balance of the committed funds to compensate the bank for the commitment to extend those funds.​

Edison Inc.has annual sales of $37,595,000,or $103,000 a day on a 365-day basis.The firm's cost of goods sold are 75% of sales.On average,the company has $9,000,000 in inventory and $8,000,000 in accounts receivable.The firm is looking for ways to shorten its cash conversion cycle.Its CFO has proposed new policies that would result in a 20% reduction in both average inventories and accounts receivable.She also anticipates that these policies would reduce sales by 10%,while the payables deferral period would remain unchanged at 35 days.What effect would these policies have on the company's cash conversion cycle? Do not round intermediate calculations.Round to the nearest whole day.

Firms generally choose to finance temporary current assets with short-term debt because

One of the effects of ceasing to take trade credit discounts is that the firm's accounts payable will rise,other things held constant.

Margetis Inc.carries an average inventory of $750,000.Its annual sales are $10 million,its cost of goods sold are 75% of annual sales,and its receivables collection period is twice as long as its inventory conversion period.The firm buys on terms of net 30 days,and it pays on time.Its new CFO wants to decrease the cash conversion cycle by 6 days,based on a 365-day year.He believes he can reduce the average inventory to $635,450 with no effect on sales.By how much must the firm also reduce its accounts receivable to meet its goal in the reduction of its cash conversion cycle? Do not round your intermediate calculations.

Which of the following statements is CORRECT?

Aggarwal Inc.buys on terms of 2/10,net 30,and it always pays on the 30th day.The CFO calculates that the average amount of costly trade credit carried is $425,000.What is the firm's average accounts payable balance? Assume a 365-day year.

The calculated cost of trade credit can be reduced by paying late.

Zervos Inc.had the following data for last year (in millions) .The new CFO believes (1) that an improved inventory management system could lower the average inventory by $4,000, (2) that improvements in the credit department could reduce receivables by $2,000,and (3) that the purchasing department could negotiate better credit terms and thereby increase accounts payable by $2,000.Furthermore,she thinks that these changes would not affect either sales or the costs of goods sold.If these changes were made,by how many days would the cash conversion cycle be lowered? Do not round your intermediate calculations. ​

Since receivables and payables both result from sales transactions,a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio.

A line of credit can be either a formal or an informal agreement between a borrower and a bank regarding the maximum amount of credit the bank will extend to the borrower during some future period,assuming the borrower maintains its financial strength.

Other things held constant,which of the following will cause an increase in net working capital?

The cash budget and the capital budget are handled separately,and although they are both important,they are developed completely independently of one another.

Setting up a lockbox arrangement is one way for a firm to speed up the collection of payments from its customers.

A firm buys on terms of 2/8,net 45 days,it does not take discounts,and it actually pays after 63 days.What is the effective annual percentage cost of its non-free trade credit? (Use a 365-day year. )

A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption that both cash receipts and cash payments occur uniformly over the month but in reality payments are concentrated at the beginning of each month.

If a firm sells on terms of 2/10,net 30 days,and its DSO is 28 days,then the fact that the 28-day DSO is less than the 30-day credit period tell us that the credit department is functioning efficiently and there are no past due accounts.​

Other things held constant,which of the following would tend to reduce the cash conversion cycle?