Chapter 15: Managing Working Capital

Multiple Choice

1. What is the function of the operating cycle? a. It measures the distance between divisions in an organization. b. It measures the time between receiving raw materials and collecting cash from receivables. c. It measures the time between a firm’s paying its suppliers for inventory and collecting cash from customers. d. It measures a firm’s operating and cash conversion cycles using information from a firm’s income statement and balance sheet.

Answer: b Level: difficult Section: Operating Cycle

2. Which of the following measures the time that it takes from the firm paying its suppliers for inventory and collecting the cash from customers on the sale of a finished product? a. operating cycle b. inventory period c. cash conversion cycle d. accounts receivable period

Answer: c Level: medium Section: Operating cycle

3. A manager can estimate the length of a firm’s operating and cash conversion cycles using information from the firm’s ______and ______. a. income statement; receivable period b. inventory controls; bank statements c. account payable; accounts receivable d. income statement; balance sheet

Answer: d Level: medium Section: Operating Cycle

4. A ______details the periodic cash inflows and cash outflows of firm over some time frame. a. cash outflow b. cash budget c. cash buffer d. cash inflow

Answer: b Level: easy Section: Cash Budgets

5. An increase in sales generally leads to increases in the amount of all of these accounts except for a. depreciation b. inventory c. accounts receivable d. accounts payable

Answer: a Level: difficult Section: Cash Conversion Cycle

6. A manager can estimate cash inflows by which two factors? a. sales forecast; customer payments patterns b. income statement; sales forecast c. sales forecast; future cash flows d. investment risk; customer payment patterns

Answer: a Level: medium Section: Cash Budgets

7. A manager can estimate the monthly net cash flow after they list all of the expected ______and ______. a. forecasted data; cash outflows b. cash inflows; cash outflows c. forecasted data; cash inflows d. cash inflows; determinant data

Answer: b Level: easy Section: Constructing the Cash Budget

8. The management of current assets involves all of the following except a. the administration of cash and marketable securities b. accounts receivable c. inventories d. past due accounts

Answer: d Level: easy Section: Management of Current Assets

9. A typical firm attempts to ______their cash holdings because under current law, a business does not earn interest on their funds in a checking account. a. deplete b. maximize c. minimize d. eliminate

Answer: c Level: medium Section: Management of Current Assets

10. An effective manager manages their receivables by focusing on all of the following except a. conducting a credit analysis b. setting credit terms c. carrying out the collection efforts d. accounts payable

Answer: d Level: easy Section: Accounts Receivable Management

11. A manager that implements a credit analysis is not only involved with the appraising the creditworthiness of quality of a potential customer but also emphasizes ______. a. the five P’s of product implementation. b. the five C’s of credit analysis. c. the five E’s of effective management practices. d. the five G’s of good and ethical behavior.

Answer: b Level: easy Section: Accounts Receivable Management

12. What is the purpose of a credit bureau? a. a bureau that allows potential business owners to establish a new business b. a bureau that allows an entrepreneur to purchase a business license c. not to provide a service to a nonprofit business entity d. to obtain credit information about business firms and individuals Answer: d Level: medium Section: Accounts Receivable Management

13. Which of the following is true about trade credit? a. The credit is extended on purchases to a firm’s customers. b. It is the credit that a trade business can obtain to operate its business. c. The purchaser sets the terms of the credit. d. The credit appears as accounts receivable on the balance sheet of the seller.

Answer: a Level: difficult Section: Credit Terms and Collection Efforts

14. Good inventory management involves keeping inventor down to minimize costs while also trying to have enough inventory on hand to prevent a. merchandise becoming obsolete. b. stock outs and lost sales. c. too many shipments or reorders. d. competition from buying up all the supply.

Answer: b Level: difficult Section: Inventory Management

15. Which of the following is not a benefit of the B2B portal? a. It lowers procurement costs. b. It lowers supply-chain costs. c. It lowers the communication between business entities. d. It provides a way for firms to sell excess inventory costs.

Answer: c Level: easy Section: Technology and Working Capital Management