Exam 16: Working Capital Management

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.

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.

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.

Not taking cash discounts is costly,and as a result,firms that do not take them are usually those that are performing poorly and have inadequate cash balances.

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?

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