Exam 16: Supply Chains and Working Capital Management

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

Funds from short-term loans can generally be obtained faster than from long-term loans for two reasons: (1)when lenders consider long-term loans they must make a more thorough evaluation of the borrower's financial health,and (2)long-term loan agreements are more complex.

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.

A conservative current operating asset financing approach will result in permanent current assets and some seasonal current assets being financed using long-term securities.

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.

The cash conversion cycle (CCC)combines three factors: The inventory conversion period,the average 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.

An increase in any current asset must be accompanied by an equal increase in some current liability.

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 tells us that the credit department is functioning efficiently and there are no past-due accounts.

Which of the following actions would be likely to shorten the cash conversion cycle?

Refer to the data for Hardwig,Inc.What's the difference in the projected ROEs under the restricted and relaxed policies?

Refer to the data for Hardwig,Inc.Assume now that the company believes that if it adopts a restricted policy,its sales will fall by 15% and EBIT will fall by 10%,but its total assets turnover,debt ratio,interest rate,and tax rate will all remain the same.In this situation,what's the difference between the projected ROEs under the restricted and relaxed policies?

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.

Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable securities?

Shulman Inc.has the following data,in thousands.Assuming a 365-day year,what is the firm's cash conversion cycle? Annual sales = $45,000 Annual cost of goods sold = $30,000 Inventory = $4,500 Accounts receivable = $1,800 Accounts payable = $2,500

Fireside Inc.has the following data.What is the firm's cash conversion cycle? Inventory conversion period = 38 days Average collection period = 19 days Payables deferral period = 20 days

Accruals are "spontaneous," but unfortunately,due to law and economic forces,firms have little control over the level of these accounts.

Which of the following statements is CORRECT?

Andrews Corporation buys on terms of 2/8,net 45 days,it does not take discounts,and it actually pays after 58 days.What is the effective annual percentage cost of its non-free trade credit? (Use a 365-day year. )

When deciding whether or not to take a cash discount,the cost of borrowing from a bank or other source should be compared to the cost of trade credit to determine if the cash discount should be taken.

Which of the following statement completions is CORRECT? If the yield curve is upward sloping,then the marketable securities held in a firm's portfolio,assumed to be held for emergencies,should