Exam 15: Working Capital Management

The working capital cash flow cycle encompasses order and receipt of raw materials,conversion of raw material into inventory,and finally,conversion of inventory into sales and accounts receivable.

You go to three different banks to borrow $10,000 for one year.Each says it will lend you the money at 10 percent,but their terms differ as follows: Bank A: Simple interest Bank B: Add-on interest Bank C: Discounted interest Banks A and C require a single payment at the end of the year.Bank B requires 12 equal monthly payments beginning at the end of the first month.What is the difference between the highest and lowest effective annual rate in this case?

The amount of safety stocks held by a firm generally

Crystal Clear Company purchases 50,000 gallons of distilled water each year.Ordering costs are $100 per order,and the carrying cost,as a percentage of inventory value,is 80 percent.The purchase price to CCC is $0.50 per gallon.Management currently orders the EOQ each time an order is placed.The supplier is now offering a quantity discount of $0.03 per gallon if CCC orders 10,000 gallons at a time.Should CCC take the discount?

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

Inventory management focuses on three basic questions: (1)how many units to hold in stock, (2)how many units of each item to order,and (3)at what point to reorder.

Offering trade credit discounts is costly to a firm and as a result,firms that offer trade discounts are usually those that are performing poorly and need cash quickly.

Which of the following statements is correct?

The average accounts receivables balance is determined jointly by the volume of credit sales and the days sales outstanding.

Cash is often referred to as a "non-earning" asset.Thus,one goal of cash management is to minimize the amount of cash necessary to conduct business.

If a firm's terms are 2/10,net 30 days,and its DSO is 28 days,we can be certain that the credit department is functioning efficiently and the percentage of past due accounts is minimal.

Trade credit can be separated into two components: free trade credit,which involves credit received after the discount period ends,and costly trade credit,which is the cost of discounts not taken.

A lockbox plan is most beneficial to firms that

Net working capital is defined as current assets minus current liabilities.This also defines the current ratio.