Answer Choices:
a. A crucial factor an expansive but commonly used way to finance working capital.
b. A conservative financing policy is one where the firm finances part of its fixed assets with short-term capital and all of its net working capital with short-term funds.
c. If a company receives trade credit under terms of 2/10, net 30, this implies that the company has 10 days of free trade credit.
d. One cannot tell if a firm has a conservative, aggressive, or moderate current asset financing policy without an examination of its cash budget.
e. If a firm has a relatively aggressive current asset financing policy vis-à-vis other firms in its industry, then its current ratio will probably be relatively high.
Answer: c c. If a company receives trade credit under terms of 2/10, net 30, this implies that the company has 10 days of free trade credit.
Question: 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.
Answer Choices:
a. True
b. False
Answer: a. True
Question: 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.
Answer Choices:
a. True
b. False
Answer: b. False
Question: Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?
Answer Choices:
a. Payments lags.
b. Depreciation.
c. Cumulative cash.
d. Repurchases of common stock.
e. Payment for plant construction.
Answer: b. Depreciation.
Question: Which of the following actions would be likely to shorten the cash conversion cycle?
Answer Choices:
a. Adopt a new manufacturing process that speeds up the conversion of raw materials to finished goods from 20 days to 10 days.
b. Change the credit terms offered to customers from 3/10, net 30 to 1/10, net 50.
c. Begin to take discounts on inventory purchases; we buy on terms of 2/10, net 30.
d. Adopt a new manufacturing process that saves some labor costs but slows down the conversion of raw materials to finished goods from 10 days to 20 days.
e. Change the credit terms offered to customers from 2/10, net 30 to 1/10, net 60.
Answer: a. Adopt a new manufacturing process that speeds up the conversion of raw materials to finished goods from 20 days to 10 days.
Question: For a zero-growth firm, it is possible to increase the percentage of sales that are made on credit and still keep accounts receivable at their current level, provided the firm can shorten the length of its collection period sufficiently.
Answer Choices:
a. True
b. False
Answer: a. True
Question: Long-term loan agreements always contain provisions, or covenants, that constrain the firm’s future actions. Short-term credit agreements are just as restrictive in order to protect the interest of the lender.
Answer Choices:
a. True
b. False
Answer: b. False
Question: Halka Company is a no-growth firm. Its sales fluctuate seasonally, causing total assets to vary from $320,000 to $410,000, but fixed assets remain constant at $260,000. If the firm follows a maturity matching (or moderate) working capital financing policy, what is the most likely total of long-term debt plus equity capital?
Answer Choices:
a. $260,642
b. $274,360
c. $288,800
Answer: a a. $260,642
Question: Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?
Answer Choices:
a. Payment lags.
b. Payment for plant construction.
c. Cumulative cash.
d. Repurchases of common stock.
e. Writing off bad debts.
Answer: e. Writing off bad debts.
Question: Which of the following statements is CORRECT?
Answer Choices:
a. Net working capital is defined as current assets minus the difference between current liabilities and notes payable, and any increase in the current ratio automatically indicates that net working capital has increased.
b. 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 strategy because of the inherent risks associated with using short-term financing.
c. If a company follows a policy of “matching maturities,” this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt.
d. Net working capital is defined as current assets minus the difference between current liabilities and notes payable, and any decrease in the current ratio automatically indicates that net working capital has decreased.
e. If a company follows a policy of “matching maturities,” this means that it matches its use of short-term debt with its use of long-term debt.
Answer: b. 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 strategy because of the inherent risks associated with using short-term financing.
Question: 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.
Answer Choices:
a. True
b. False
Answer: a. True
Question: Which of the following statements is CORRECT?
Answer Choices:
a. Other things held constant, the higher a firm’s days sales outstanding (DSO), the better its credit department.
b. If a firm that sells on terms of net 30 changes its policy to 2/10, net 30, and if no change in sales volume occurs, then the firm’s DSO will probably increase.
c. If a firm sells on terms of 2/10, net 30, and its DSO is 30 days, then the firm probably has some past due accounts.
d. If a firm sells on terms of net 60, and if its sales are highly seasonal, with a sharp peak in December, then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be lower in January than in July.
e. If a firm changed the credit terms offered to its customers from 2/10, net 30 to 2/10, net 60, then its sales should increase, and this should lead to an increase in sales per day, and that should lead to a decrease in the DSO.
Answer: c. If a firm sells on terms of 2/10, net 30, and its DSO is 30 days, then the firm probably has some past due accounts.