Group 5 A6 T5 10

Group 5 A6 T5 10 - Chapter 22 Working Capital Management...

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Unformatted text preview: Chapter 22: Working Capital Management: Questions: 22-2) What are the two principal reasons for holding cash? Can a firm estimate its target cash balance by summing the cash held to satisfy each of the two reasons? The two primary reasons for holding cash are for (1) transactions and (2) compensating balances. No, the target cash balance is not equal to the sum of the cash holdings for each reason because the same money can often partially satisfy both reasons for a company to hold cash. 22-3) Is it true that when one firm sells to another on credit, the seller records the transaction as an account receivable while the buyer records it as an account payable and that, disregarding discounts, the receivable typically exceeds the payable by the amount of profit on the sale? No, both accounts will record the same transaction amounts 22-4) What are the four elements of a firms credit policy? To what extent can firms set their own credit policies as opposed to having to accept policies that are dictated by the competition? Credit Standards, Credit Periods, Discount Policy and Collection Policy. The firm can set their own credit policy when it does not accept the credit policies of its competitors and the optimal credit policy has an influence on sales and profitability of the company. 22-5) What are the advantages of matching the maturities of assets and liabilities? What are the disadvantages? When dealing with assets, the ability of a firm to understand assets maturity and match that to its liability in financing that asset is maintaining control which will translate into understanding what the useable life of an asset is for a company. A disadvantage may come from a company using short-term financing to fund inventories for sale, even though this financing is short-term it is continuously cycled through based upon the turnover of the inventory in the sales cycle. 22-6) From the standpoint of the borrower, is long-term or short-term credit riskier? Explain. Would it make sense to borrow on a short-term basis if short-term rates were above long-term rates? Short-term credit is riskier due to the fact that a firm is exposed to interest rate fluctuations it could effect their payment in the short-term. As far as borrowing in the short-term if rates were above long-term rates, I do think the only reason a firm would do this if they had a need for the short-term financing no matter what the interest rate or they though the interest rates in the long-term were to go lower....
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This note was uploaded on 10/19/2010 for the course ACCOUNTING 6660 taught by Professor Mcgrath during the Fall '10 term at Troy.

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Group 5 A6 T5 10 - Chapter 22 Working Capital Management...

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