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Exam 15: Working Capital Management

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Question 61

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The cash conversion cycle (CCC) combines three factors: The inventory conversion period, the receivables collection period, and the payables deferral period, and its purpose is to show how long a firm must finance its working capital. Other things held constant, the shorter the CCC, the more effective the firm's working capital management.

A) True
B) False

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Question 62

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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.

A) True
B) False

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Question 63

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Accruals arise automatically from a firm's operations and are "free" capital in the sense that no explicit interest must normally be paid on accrued liabilities.

A firm buys on terms of 3/15, net 45. It does not take the discount, and it generally pays after 60 days. What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?

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

Which of the following is NOT commonly regarded as being a credit policy variable?

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.

Which of the following statements is NOT CORRECT?

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

Cass & Company has the following data. What is the firm's cash conversion cycle? Inventory conversion period $=$ 50 days Receivables collection period $=$ 17 days Payables deferral period $=$ 25 days

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

A lockbox plan is most beneficial to firms that

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) and cause a deterioration in its cash position.

The four primary elements in a firm's credit policy are (1) credit standards, (2) discounts offered, (3) credit period, and (4) collection policy.

The relative profitability of a firm that employs an aggressive working capital financing policy will improve if the yield curve changes from upward sloping to downward sloping.

Romano Inc. has the following data. What is the firm's cash conversion cycle? Inventory conversion period $= \quad 38$ days Receivables collection period $= \quad 19$ days Payables deferral period $= \quad 20$ days

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 receipts are concentrated at the beginning of each month.

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

The longer its customers normally hold inventory, the longer the credit period supplier firms normally offer. Still, suppliers have some flexibility in the credit terms they offer. If a supplier lengthens the credit period offered, this will shorten the customer's cash conversion cycle but lengthen the supplier firm's own CCC.

Since depreciation is a non-cash charge, it neither appears on nor has any effect on the cash budget. Thus, if the depreciation charge for the coming year doubled or halved, this would have no effect on the cash budget.