CHAPTER 14—WORKING CAPITAL POLICY
TRUE/FALSE
1. The fact that no explicit interest cost is paid on accruals and that the firm can exercise considerable control over
their level makes accruals an attractive source of a
...
CHAPTER 14—WORKING CAPITAL POLICY
TRUE/FALSE
1. The fact that no explicit interest cost is paid on accruals and that the firm can exercise considerable control over
their level makes accruals an attractive source of additional funding.
ANS: F DIF: Easy TOP: Accruals
2. Due to advanced technology and the similarity of general procedures, working capital management for
multinational firms is no more complex than it is for domestic firms.
ANS: F DIF: Easy TOP: International working capital management
3. Working capital management is not important for new firms since they will be able to generate positive cash flows
at some time in the future.
ANS: F DIF: Easy TOP: Working capital policy
4. The best and most comprehensive picture of a firm's liquidity position is obtained by examining its cash budget.
ANS: T DIF: Easy TOP: Working capital policy
5. A high current ratio insures that a firm will have the cash required to meet its needs.
ANS: F DIF: Easy TOP: Working capital policy
6. The inventory conversion period is calculated by dividing inventory by the cost of goods sold per day.
ANS: T DIF: Easy TOP: Cash conversion cycle
7. The cash conversion cycle is the sum of the inventory conversion period, the receivables collection period, and
the payables deferral period.
ANS: F DIF: Easy TOP: Cash conversion cycle
8. A firm with a current ratio equal to four will have its current ratio increase if both current assets and current
liabilities increase by the same amount.
ANS: F DIF: Medium TOP: Working capital policy
9. The sale of inventory at cost for cash will increase the current assets for a firm.
ANS: F DIF: Medium TOP: Current assets
10. The sale of common stock for cash will increase the current assets for a firm.
ANS: T DIF: Medium TOP: Current assets
11. A firm's goal should be to lengthen the cash conversion cycle since shorter cash conversion cycles leads firms to
increase their dependence on costly external financing.
ANS: F DIF: Medium TOP: Cash conversion cycle
12. In terms of the cash conversion cycle, a restricted investment policy would tend to reduce the inventory
conversion and receivables collection periods, which would result in a relatively short cash conversion cycle.
ANS: T DIF: Medium TOP: Restricted current asset investment policy
MULTIPLE CHOICE
1. Net working capital is
a. current liabilities.
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b. current assets.
c. current liabilities plus current assets.
d. current assets minus current liabilities.
e. current liabilities minus current assets.
ANS: D DIF: Easy OBJ: TYPE: Conceptual
TOP: Net working capital
13. Which of the following current liabilities are considered when calculating net working capital?
a. Use of short-term debt to finance fixed assets.
b. Commercial paper issued to finance inventory.
c. Current maturities of long term debt.
d. Accounts receivable generated by sales on credit.
e. Inventory purchased with cash.
ANS: B DIF: Easy OBJ: TYPE: Conceptual
TOP: Net working capital
14. The cash conversion cycle is the length of time from the __________ raw materials to manufacture a product until
the __________ of accounts receivable associated with the sale of the product.
a. ordering of; creation
b. ordering of; collection
c. payment for; creation
d. payment for; collection
e. none of the above
ANS: D DIF: Easy OBJ: TYPE: Conceptual
TOP: Cash conversion cycle
15. The average length of time required to convert materials into finished products and sell that product is called the
__________.
a. cash conversion cycle
b. inventory conversion period
c. receivables collection period
d. payables deferral period
e. days sales outstanding
ANS: B DIF: Easy OBJ: TYPE: Conceptual
TOP: Cash conversion cycle
16. The average length of time required to convert a firm's receivables into cash is called the __________.
a. cash conversion cycle
b. inventory conversion period
c. receivables collection period
d. payables deferral period
e. days sales outstanding
ANS: C DIF: Easy OBJ: TYPE: Conceptual
TOP: Cash conversion cycle
17. The average length of time between the purchase of raw material and labor and the payment of cash for them is
called the __________.
a. cash conversion cycle
b. inventory conversion period
c. receivables collection period
d. payables deferral period
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