Question 1

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

Accepted Answer

True

Question 2

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.

Accepted Answer

True

Question 3

Net working capital is defined as current assets divided by current liabilities.

Accepted Answer

False

Question 4

The four primary elements in a firm's credit policy are (1) credit standards, (2) discounts offered, (3) credit period, and (4) collection policy.

Accepted Answer

The answer of The four primary elements in a firm's...

Question 5

If a firm buys on terms of 2/10, net 30, it should pay as early as possible during the discount period to lower its cost of trade credit.

Accepted Answer

The answer of If a firm buys on terms of...

Question 6

The concept of permanent current assets reflects the fact that some components of current assets do not shrink to zero even when a business is at its seasonal or cyclical low. Thus, permanent current assets represent a minimum level of current assets that must be financed.

Accepted Answer

The answer of The concept of permanent current assets reflects...

Question 7

Inventory management is largely self-contained in the sense that very little coordination among the sales, purchasing, and production personnel is required for successful inventory management.

Accepted Answer

The answer of Inventory management is largely self-contained in the...

Question 8

Shorter-term cash budgets--say a daily cash budget for the next month--are generally used for actual cash control while longer-term cash budgets--say monthly cash budgets for the next year--are generally used for planning purposes.

Accepted Answer

The answer of Shorter-term cash budgets--say a daily cash budget...

Question 9

The average accounts receivables balance is a function of both the volume of credit sales and the days sales outstanding.

Accepted Answer

The answer of The average accounts receivables balance is a...

Question 10

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

Accepted Answer

The answer of Trade credit can be separated into two...

Question 11

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

Accepted Answer

The answer of A conservative financing approach to working capital...

Question 12

Other things held constant, if a firm "stretches" (i.e., delays paying) its accounts payable, this will lengthen its cash conversion cycle (CCC).

Accepted Answer

The answer of Other things held constant, if a firm...

Question 13

Setting up a lockbox arrangement is one way for a firm to speed up the collection of payments from its customers.

Accepted Answer

The answer of Setting up a lockbox arrangement is one...

Question 14

Net operating working capital, defined as current assets minus the difference between current liabilities and notes payable, is equal to the current ratio minus the quick ratio.

Accepted Answer

The answer of Net operating working capital, defined as current...

Question 15

Changes in a firm's collection policy can affect sales, working capital, and profits.

Accepted Answer

The answer of Changes in a firm's collection policy can...

Question 16

The three alternative current asset investment policies discussed in the text differ regarding the size of current asset holdings.

Accepted Answer

The answer of The three alternative current asset investment policies...

Question 17

If a firm takes actions that reduce its days sales outstanding (DSO), then, other things held constant, this will lengthen its cash conversion cycle (CCC) and cause a deterioration in its cash position.

Accepted Answer

The answer of If a firm takes actions that reduce...

Question 18

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

Accepted Answer

The answer of An increase in any current asset must...

Question 19

As a rule, managers should try to always use the free component of trade credit but should use the costly component only if the cost of this credit is lower than the cost of credit from other sources.

Accepted Answer

The answer of As a rule, managers should try to...

Question 20

Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive current asset financing strategy because of the inherent risks of using short-term financing.

Accepted Answer

The answer of Although short-term interest rates have historically averaged...

Quiz 15: Working Capital