Principles Of Managerial Finance, 12e (Gitman) Chapter 14 .
Principles of Managerial Finance, 12e (Gitman)Chapter 14 Working Capital and Current Assets ManagementLearning Goal 1: Understand short-term financial management, net working capital,and the related tradeoff between profitability and risk.1) A firm that is unable to pay its bills as they come due is technically insolvent.Answer: TRUETopic: Basics of Short-Term Financial ManagementQuestion Status: Previous Edition2) Short-term financial management is concerned with management of the firm's current assetsand current liabilities.Answer: TRUETopic: Basics of Short-Term Financial ManagementQuestion Status: Previous Edition3) The goal of short-term financial management is to manage each of the firm's current assetsand current liabilities in order to achieve a balance between profitability and risk thatcontributes to the firm's value.Answer: TRUETopic: Basics of Short-Term Financial ManagementQuestion Status: Previous Edition4) Working capital represents refers to a firm's long term capital.Answer: FALSETopic: Working Capital ManagementQuestion Status: Previous Edition5) In general, the greater a firm's current assets relative to its short-term obligations, the betterable it will be to pay its bills as they come due.Answer: TRUETopic: Working Capital ManagementQuestion Status: Previous Edition6) The more predictable a firm's cash inflows, the more net working capital it will need.Answer: FALSETopic: Working Capital ManagementQuestion Status: Previous Edition7) As the ratio of current assets to total assets increases, the firm's risk increases.Answer: FALSETopic: Working Capital ManagementQuestion Status: Previous Edition8) Because firms are unable to match cash inflows to outflows with certainty, most of themneed current liabilities that more than cover outflows for current assets.Answer: FALSETopic: Working Capital ManagementQuestion Status: Previous Edition1
9) Too much investment in current assets reduces firm profitability, whereas too littleinvestment in current assets increases the risk of not being able to pay debts as they comedue.Answer: TRUETopic: Trade-off Between Profitability and RiskQuestion Status: Previous Edition10) Business risk is the risk of being unable to make the scheduled fixed financing payments ondebt and preferred stock.Answer: FALSETopic: Business RiskQuestion Status: Previous Edition11) Net working capital can be defined as the portion of the firm's current assets financed withlong-term funds.Answer: TRUETopic: Net Working CapitalQuestion Status: Previous Edition12) A firm is said to be technically insolvent when its total assets is less than its total liabilitiesand stockholders' equity.Answer: FALSETopic: Technical InsolvencyQuestion Status: Previous Edition13) An increase in current assets increases net working capital, thereby reducing the risk oftechnical insolvency.Answer: TRUETopic: Technical InsolvencyQuestion Status: Previous Edition14) The effect of a decrease in the ratio of current assets to total assets and the effect of anincrease in the ratio of current liabilities to total assets are increases in the firm's profits and,correspondingly, its risk.Answer: TRUETopic: Trade-off Between Profitability and RiskQuestion Status: Previous Edition15) Net working capital is defined asA) a ratio measure of liquidity best used in cross-sectional analysis.B) the portion of the firm's assets financed with short-term funds.C) current liabilities minus current assets.D) current assets minus current liabilities.Answer: DTopic: Net Working CapitalQuestion Status: Previous Edition2
16) The portion of a firm's current assets financed with long-term funds may be calledA) working capital.B) accounts receivable.C) net working capital.D) inventory.Answer: CTopic: Net Working CapitalQuestion Status: Previous Edition17) In working capital management, risk is measured by the probability that a firm will becomeA) liquid.B) technically insolvent.C) unable to meet long-term obligations.D) less profitable.Answer: BTopic: Working Capital ManagementQuestion Status: Previous Edition18) The conversion of current assets from inventory to receivables to cash provides theof cash used to pay the current liabilities, which represents a(n) of cash.A) outflow; inflowB) use; sourceC) source; useD) inflow; outflowAnswer: CTopic: Working Capital ManagementQuestion Status: Previous Edition19) The goal of working capital management is toA) balance current assets against current liabilities.B) pay off short-term debts.C) achieve a balance between risk and return in order to maximize the firm's value.D) achieve a balance between short-term and long-term assets so that they add to theachievement of the firm's overall goals.Answer: CTopic: Working Capital ManagementQuestion Status: Previous Edition20) Current liabilities can be viewed asA) debts that mature in one year or less.B) debts that mature in more than one year.C) sources of cash inflows.D) none of the aboveAnswer: ATopic: Working Capital ManagementQuestion Status: Previous Edition3
21) The most difficult set of accounts to predict areA) current assets.B) stockholder's equity.C) fixed assets.D) long-term debt.Answer: ATopic: Working Capital ManagementQuestion Status: Previous Edition22) In general, the more net working capital a firm has,A) the greater its risk.B) the lower its risk.C) the less likely are creditors to lend to the firm.D) the lower its level of long-term funds.Answer: BTopic: Working Capital ManagementQuestion Status: Previous Edition23) A(n) in current assets net working capital, thereby the risk oftechnical insolvency.A) decrease; increases; increasingB) increase; decreases; increasingC) increase; increases; reducingD) decrease; decreases; reducingAnswer: CTopic: Working Capital ManagementQuestion Status: Previous Edition24) A(n) in current liabilities net working capital, thereby the risk oftechnical insolvency.A) decrease; increases; increasingB) increase; decreases; increasingC) increase; increases; reducingD) decrease; decreases; reducingAnswer: BTopic: Working Capital ManagementQuestion Status: Previous Edition25) When a portion of the firm's fixed assets are financed with current liabilities, the firmA) has positive net working capital.B) has negative net working capital.C) has excessive amounts of current assets.D) is in a low-risk position.Answer: BTopic: Working Capital ManagementQuestion Status: Previous Edition4
26) The purpose of managing current assets and current liabilities is toA) achieve as low a level of current assets as possible.B) achieve as low a level of current liabilities as possible.C) achieve a balance between profitability and risk that contributes to the firm's value.D) achieve as high a level of current liabilities as possible.Answer: CTopic: Trade-off Between Profitability and RiskQuestion Status: Previous Edition27) Relative to cash flows affecting net working capital, all of the following are true EXCEPTA) cash inflows are generally more predictable than cash outlays.B) cash outlays for current liabilities are relatively predictable.C) the more predictable the cash inflows, the less net working capital a firm needs.D) because most firms are unable to match cash inflows to outflows with certainty, currentassets that more than cover outflows for current liabilities are necessary.Answer: ATopic: Working Capital ManagementQuestion Status: Previous EditionLearning Goal 2: Describe the cash conversion cycle, its funding requirements, and thekey strategies for managing it.1) The cash conversion cycle is the amount of time that elapses from the point when the firminputs materials and labor into the production process to the point when cash is collectedfrom the sale of the resulting finished product.Answer: FALSETopic: Cash Conversion CycleQuestion Status: Previous Edition2) The firm's operating cycle (OC) is simply the sum of the average age of inventory (AAI) andthe average payment period (APP).Answer: FALSETopic: Operating CycleQuestion Status: Previous Edition3) The cash conversion cycle is the total number of days in the operating cycle less the averagepayment period for inputs to production.Answer: TRUETopic: Cash Conversion CycleQuestion Status: Previous Edition4) A negative cash conversion cycle (CCC) means the average payment period (APP) exceedsthe operating cycle (OC).Answer: TRUETopic: Cash Conversion CycleQuestion Status: Previous Edition5
5) The operating cycle is the recurring transition of a firm's working capital from cash toinventories and inventories to receivables and back to cash.Answer: TRUETopic: Operating CycleQuestion Status: Previous Edition6) The aggressive financing strategy is a strategy by which the firm finances its current assetswith short-term funds and its fixed assets with long-term funds.Answer: FALSETopic: Aggressive Financing StrategyQuestion Status: Previous Edition7) The permanent financial need of a firm is the financing requirements for the firm's fixedassets plus the permanent portion of the firm's current assets.Answer: TRUETopic: Permanent Funding RequirementsQuestion Status: Previous Edition8) The conservative financing strategy is a strategy by which the firm finances at least itsseasonal requirements, and possibly some of its permanent requirements, with short-termfunds and the balance of its permanent requirements with long-term funds.Answer: FALSETopic: Conservative Financing StrategyQuestion Status: Previous Edition9) The aggressive strategy operates with minimum net working capital since only thepermanent portion of the firm's current assets is being financed with long-term funds.Answer: TRUETopic: Aggressive Financing StrategyQuestion Status: Previous Edition10) The operating cycle is the amount of time the firm's cash is tied up between payment forproduction inputs and receipt of payment from the sale of the resulting finished product.Answer: FALSETopic: Operating CycleQuestion Status: Previous Edition11) By efficiently managing the firm's operating and cash conversion cycles, the financialmanager can maintain a high level of cash investment and thereby contribute towardmaximization of share value.Answer: FALSETopic: Operating and Cash Conversion CyclesQuestion Status: Previous Edition12) The ability to purchase production inputs on credit allows the firm to partially (or may beeven totally) offset the length of time resources are tied up in the operating cycle.Answer: TRUETopic: Operating CycleQuestion Status: Previous Edition6
13) The cash conversion cycle is the difference between the number of days resources are tied upin the operating cycle and the average number of days the firm can delay making paymenton the production inputs purchased on credit.Answer: TRUETopic: Cash Conversion CycleQuestion Status: Previous Edition14) A positive cash conversion cycle means that the firm must obtain financing to support thecash conversion cycle.Answer: TRUETopic: Cash Conversion CycleQuestion Status: Previous Edition15) When a firm's cash conversion cycle is negative, the firm should benefit by being able to usethe financing provided by the suppliers of its production inputs to help support aspects ofthe business other than just the operating cycle.Answer: TRUETopic: Cash Conversion CycleQuestion Status: Previous Edition16) Nonmanufacturing firms are more likely to have positive cash conversion cycles; theygenerally carry smaller, faster-moving inventories and often sell their products for cash.Answer: FALSETopic: Cash Conversion CycleQuestion Status: Previous Edition17) When implementing the cash management strategies, a firm should take care to avoidhaving a large number of inventory stockouts, to avoid losing the use of its cash bycollecting its accounts receivable using high-pressure collection techniques, and to avoiddamaging the firm's credit rating by overstretching accounts payable.Answer: FALSETopic: Cash Conversion Cycle Management StrategiesQuestion Status: Previous Edition18) One aspect of risk associated with the aggressive strategy's maximum use of short-termfinancing is the fact that changing short-term interest rates can result in significantly higherborrowing costs as the short-term debt is refinanced.Answer: TRUETopic: Aggressive Financing StrategyQuestion Status: Previous Edition19) The aggressive financing strategy is a strategy by which the firm finances all projected fundsrequirements with long-term funds and uses short-term financing only for emergencies orunexpected outflows.Answer: FALSETopic: Aggressive Financing StrategyQuestion Status: Previous Edition7
20) The aggressive financing strategy is risky due to its minimum level of net working capital,high dependency on short-term sources of funds, and the changing short-term interest.Answer: TRUETopic: Aggressive Financing StrategyQuestion Status: Previous Edition21) Under conservative financing strategy, short-term financing is used only to finance anemergency, an unexpected outflow of funds, and the variable portion of the firm's currentassets.Answer: FALSETopic: Conservative Financing StrategyQuestion Status: Previous Edition22) The risk of the conservative financing requirements is low because of its high level of networking capital, and the fact that the strategy does not require the firm to use any of itslimited short-term borrowing capacity.Answer: TRUETopic: Conservative Financing StrategyQuestion Status: Previous Edition23) The conservative strategy is less profitable than the aggressive approach because it requiresthe firm to pay interest on unneeded funds.Answer: TRUETopic: Conservative Financing StrategyQuestion Status: Previous Edition24) Only the firm's permanent financing requirement (and not the seasonal requirement) isfinanced with in the aggressive financing strategy.A) long-term sourcesB) short-term sourcesC) retained earningsD) accounts payableAnswer: ATopic: Permanent Funding RequirementsQuestion Status: Previous Edition25) Most firms employ financing strategy.A) an aggressiveB) a conservativeC) a trade-offD) a seasonalAnswer: CTopic: Trade-off Financing StrategyQuestion Status: Previous Edition8
26) The firm's financing requirements can be separated intoA) current liabilities and long-term funds.B) current assets and fixed assets.C) current liabilities and long-term debt.D) seasonal and permanent.Answer: DTopic: Permanent and Seasonal Funding RequirementsQuestion Status: Previous Edition27) The basic strategies for determining the appropriate financing mix areA) seasonal and permanent.B) short-term and long-term.C) aggressive and conservative.D) current and fixed.Answer: CTopic: Aggressive versus Conservative Financing StrategyQuestion Status: Previous Edition28) If a firm uses an aggressive financing strategy,A) it increases return and increases risk.B) it increases return and decreases risk.C) it decreases return and increases risk.D) it decreases return and decreases risk.Answer: ATopic: Aggressive Financing StrategyQuestion Status: Previous Edition29) One major risk a firm assumes in an aggressive financing strategy isA) the possibility that collections will be slower than expected.B) the possibility that long-term funds may not be available when needed.C) the possibility that short-term funds may not be available when needed.D) the possibility that it will run out of cash.Answer: CTopic: Aggressive Financing StrategyQuestion Status: Previous Edition30) The is the time period that elapses from the point when the firm makes the outlayto purchase raw materials on account to the point when payment is made to the supplier ofthe goods.A) cash conversion cycleB) average payment periodC) average age of inventoryD) average collection periodAnswer: BTopic: Average Payment PeriodQuestion Status: Previous Edition9
31) When managing inventories, a good strategy is to increase inventory turnover by doing thefollowing EXCEPTA) increase raw materials turnover.B) shorten the production cycle.C) produce low-cost short cycle goods.D) increase finished goods turnover.Answer: CTopic: Inventory TurnoverQuestion Status: Previous Edition32) The basic strategies that should be employed by the business firm in managing cash includeall of the following EXCEPTA) paying accounts payable as late as possible without damaging the firm's credit rating.B) turning over inventory as quickly as possible, avoiding stockouts.C) operating in a fashion that requires maximum cash.D) collecting accounts receivable as quickly as possible without damaging customerrapport.Answer: CTopic: Managing the Cash Conversion CycleQuestion Status: Previous Edition33) The of a firm is the amount of time that elapses from the point when the firmmakes an outlay to purchase raw materials to the point when cash is collected from the saleof the finished good.A) cash turnoverB) cash conversion cycleC) average age of inventoryD) average collection periodAnswer: BTopic: Cash Conversion CycleQuestion Status: Previous Edition34) The of a firm is the amount of time that elapses from the point when the firminputs material and labor into the production process to the point when cash is collectedfrom the sale of the finished product that contains these production inputs.A) cash conversion cycleB) average age of inventoryC) operating cycleD) average collection periodAnswer: CTopic: Operating CycleQuestion Status: Previous Edition10
35) A firm has an average age of inventory of 90 days, an average collection period of 40 days,and an average payment period of 30 days. The firm's operating cycle is days.A) 110B) 130C) 120D) 70Answer: BTopic: Operating Cycle (Equation 14.1)Question Status: Previous Edition36) A firm has an operating cycle of 120 days, an average collection period of 40 days, and anaverage payment period of 30 days. The firm's average age of inventory is days.A) 80B) 50C) 90D) 70Answer: ATopic: Average Age of Inventory (Equation 14.1)Question Status: Previous Edition37) A firm has a cash conversion cycle of 80 days, an average collection period of 25 days, andan average age of inventory of 70 days. Its operating cycle is days.A) 95B) 105C) 60D) 130Answer: ATopic: Operating Cycle (Equation 14.1)Question Status: Previous Edition38) A firm has an average age of inventory of 60 days, an average collection period of 45 days,and an average payment period of 30 days. The firm's cash conversion cycle isdays.A) 15B) 45C) 75D) 135Answer: CTopic: Cash Conversion Cycle (Equation 14.2 and 14.3)Question Status: Previous Edition39) A firm has a cash conversion cycle of 120 days, an average collection period of 25 days, andan average payment period of 50 days. The firm's average age of inventory is days.A) 45B) 95C) 125D) 145Answer: DTopic: Average Age of Inventory (Equation 14.2 and 14.3)Question Status: Previous Edition11
40) A firm purchased raw materials on account and paid for them within 30 days. The rawmaterials were used in manufacturing a finished good sold on account 100 days after theraw materials were purchased. The customer paid for the finished good 60 days later. Thefirm's cash conversion cycle is days.A) 10B) 70C) 130D) 190Answer: CTopic: Cash Conversion Cycle (Equation 14.2 and 14.3)Question Status: Previous Edition41) The is the time period that elapses from the point when the firm uses the rawmaterials in manufacturing a finished good to the point when the finished good is sold.A) cash turnoverB) cash conversion cycleC) average age of inventoryD) average collection periodAnswer: CTopic: Average Age of InventoryQuestion Status: Previous Edition42) The is the time period that elapses from the point when the firm sells a finishedgood on account to the point when the receivable is collected.A) cash conversion cycleB) average payment periodC) average age of inventoryD) average collection periodAnswer: DTopic: Average Collec
Principles of Managerial Finance, 12e (Gitman) Chapter 14 W orking Capital and Current Assets Management Learning Goal 1: U nderstand short-term financial management, net working capital, and the related tradeoff between profitability and risk. 1) A firm that is unable to pay its bills as they come due is technically insolvent. Answer: T RUE Topic: B asics of Short-Term Financial Management .
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The roles of the finance function in organisations 4. The role of ethics in the role of the finance function Ethics is the system of moral principles that examines the concept of right and wrong. Ethics underpins an organisation’s sustained value creation. The roles that the finance function performs should be carried out in an .File Size: 888KBPage Count: 10Explore furtherRole of the Finance Function in the Financial Management .www.managementstudyguide.c Roles and Responsibilities of a Finance Department in a .www.pharmapproach.comRoles and Responsibilities of a Finance Department .www.smythecpa.comTop 10 – Functions of Business Finance in an Organizationwikifinancepedia.com23 Functions and Duties of Accounting and Finance .accountantnextdoor.comRecommended to you b
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