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ch16 - Chapter 16 Managing Working Capital TRUE-FALSE...

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Chapter 16 Managing Working Capital TRUE-FALSE QUESTIONS F 1. Working capital is essentially a firm’s current assets and consists of cash, accounts receivable, inventories, plant and equipment. T 2. Fixed capital would be defined as the firm’s fixed assets, which include plant, equipment and property. T 3. The operating cycle measures the time it takes between ordering materials and collecting cash from receivables. F 4. The accounts payable period is the time between a firm’s paying its suppliers for inventory and collecting cash from inventories. F 5. Increases in the cash conversion cycle will lower the firm’s short-term financing needs. F 6. The inventory conversion period is calculated by inventory divided by costs of goods sold. T 7. The operating cycle is the inventory conversion period plus the accounts receivable period. F 8. If the average payment period is longer, then the cash conversion cycle will be longer. T 9. If the cash conversion cycle is shorter, then the firm’s investment in inventories and receivables will be smaller. F 10. By multiplying the average sales per day times the inventory conversion period, the inventories investment amount can be determined. T 11. The size of the accounts payable is affected by the level of the firm’s cost of goods sold and the average payment period. F 12. The accounts payable period would be added to the operating cycle to get the cash conversion cycle.
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F 13. Activities that decrease the cash conversion cycle will increase the firm’s need to obtain financing. T 14. More efficient management of working capital assets will lessen the firm’s needs for financing. T 15. A cash budget is a tool the treasurer uses to forecast future cash flows and estimate future short-term borrowing needs. F 16. To construct a cash budget, two sets of information are needed: estimated cash inflows and estimated cash outflows. T 17. The estimated cash inflows are affected by the sales forecast and customer payment patterns. F 18. A level production plan has problems, such as idle plant and laid-off workers during slow sales months and production bottlenecks during busy times. F 19. The transaction motive for holding cash is the demand for cash needed to take advantage of unusual cash discounts for needed materials. T 20. The cash conversion cycle measures a firm’s financing gap in terms of time. F 21. Because commercial paper rates are typically below U.S. Treasury bill rates, they are a valuable short-term financing source for high quality business firms. F 22. The inventory period may be calculated as sales divided by inventories. F 23. The account receivable period may be calculated as accounts receivable divided by sales. T 24. The account receivable period may be calculated as accounts receivable divided by daily sales.
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