CHAPTER 21 WORKING CAPITAL MANAGEMENT (Difficulty: E = Easy, M = Medium, and T = Tough) True-False Easy: (21.2) Net working capital Answer: b Diff: E 1 . Net working capital may be defined as current assets minus current liabilities. This also defines the current ratio. a. True b. False (21.2) Net working capital Answer: b Diff: E 2 . Net working capital is defined as current assets divided by current liabilities. a. True b. False (21.2) Working capital Answer: b Diff: E 3 . An increase in a current asset account must be accompanied by a corresponding increase in a liability account. a. True b. False (21.2) Working capital policy Answer: a Diff: E 4 . Determination of a firm's investment in net operating working capital and how that investment is financed are elements of working capital policy. a. True b. False (21.3) Goal of cash management Answer: a Diff: E 5 . Cash is often referred to as a "non-earning" asset. Thus, one goal of cash management is to minimize the amount of cash necessary to conduct business. a. True b. False Chapter 21: Working Capital Management Page 1
Answer: a Diff: E 6 . Firms hold cash balances in order to complete transactions that are necessary in business operations and as compensation to banks for providing loans and services. a. True b. False (21.4) Cash budget Answer: a Diff: E 7 . A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on uniform cash receipts and disbursements, but actual receipts are concentrated at the beginning of each month. a. True b. False (21.4) Cash budget Answer: a Diff: E 8 . Shorter-term cash budgets, in general, are used for actual cash control while longer-term budgets are used primarily for planning purposes. a. True b. False (21.5) Float Answer: a Diff: E 9 . For a firm that makes heavy use of float, being able to forecast its collections and disbursement check clearings is essential. a. True b. False (21.5) Lockbox Answer: a Diff: E 10 . Lockbox arrangements are one way for a firm to speed up its collection of payments from customers. a. True b. False (21.6) Goal of inventory management Answer: b Diff: E 11 . The central goal of inventory management is to provide sufficient incentives to ensure that the firm never suffers a stock-out (i.e., runs out of an inventory item). a. True b. False (21.6) Goal of inventory management Answer: a Diff: E 12 . The principal goal of most inventory management systems is to balance the costs of ordering, shipping, and receiving goods with the cost of carrying those goods, while simultaneously meeting the firm's policy with respect to avoiding running short of stock and disrupting production schedules. Page 2
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