Chapter 14--Working Capital Policy Chapter 14--Working Capital Policy Student: ___________________________________________________________________________ 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. True False 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. True False 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. True False 4. The best and most comprehensive picture of a firm's liquidity position is obtained by examining its cash budget. True False 5. A high current ratio insures that a firm will have the cash required to meet its needs. True False 6. The inventory conversion period is calculated by dividing inventory by the cost of goods sold per day. True False 7. The cash conversion cycle is the sum of the inventory conversion period, the receivables collection period, and the payables deferral period. True False
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. True False 9. The sale of inventory at cost for cash will increase the current assets for a firm. True False 10. The sale of common stock for cash will increase the current assets for a firm. True False 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. True False 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. True False 13. Net working capital is A. current liabilities. B. current assets. C. current liabilities plus current assets. D. current assets minus current liabilities. E. current liabilities minus current assets. 14. 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.
15. 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
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