Exam 15: Working Capital Management

Which of the following will not help a firm speed up the timing of when it can obtain the use of funds from checks written to it?

Reston Inc.has expected sales of $17,000,000.While 10 percent of its customers pay cash, the remaining 90 percent pay on credit with 40 percent paying on Day 10, 30 percent paying on Day 20, 15 percent paying on Day 25, and 15 percent paying on Day 30.Assume that the cost of funds invested in receivables is 10 percent.Suppose that the firm's customers begin paying later, such that the new DSO increases to 24 days, that the firm uses a 360-day year, and that the firm's variable cost ratio is 80 percent.What is the additional interest cost to Reston of the additional investment in A/R caused by the delay in payment by its customers?

When the current ratio is ____ than one and current liabilities ____ by the same dollar amount as current assets, the current ratio ____.

A promissory note is the document signed when a bank loan is executed and it specifies financial aspects of the loan, and items such as collateral and other terms and conditions.

Ski Lifts Inc.is a highly seasonal business.The following summary balance sheet provides data for peak and off-peak seasons (in thousands of dollars): From this data, we may conclude that

Wildthing Amusements Company's total assets fluctuate between $320,000 and $410,000, while its fixed assets remain constant at $260,000.If the firm follows a maturity matching or moderate working capital financing policy, what is the likely level of its long-term financing?

Which of the following statements is false?

Which of the following would cause average inventory holdings to decrease, other things held constant?

If the forecasted sales or usage rate is not accurate, the EOQ model may not lead to efficient inventory management.

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

In part because money has time value, cash sales are always more profitable and more valuable than credit sales.

Working capital needs typically decline during recessions and increase during booms in the economy.

Which of the following investments is not likely to be a proper investment for temporarily idle cash?

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?

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

One of the advantages of short-term debt financing is that firms can expand or contract their short-term credit more easily than their long-term credit.

The cash budget focuses on the firm's ability to generate sufficient cash inflows to meet its required cash outflows.

An aggressive method of financing an ongoing construction program would be for a company to sell bonds and equity before it actually needs funds, and to invest the proceeds in marketable securities until they are actually needed.

Permanent current assets reflect the fact that current assets do not shrink to zero even when business is at a seasonal or cyclical low.Thus, permanent current assets represent a minimum level of current assets the firm must finance.

Long-term loan agreements always contain provisions, or covenants, which constrain the firm's future actions.Short-term credit agreements are just as restrictive in order to protect the interests of the lender.